Financial crisis: Deposit insurance and related financial safety net aspects

Abstract

Government provision of a financial safety net for banks and other financial institutions has been a key element of the policy response to the current financial crisis. In the process, the design of many safety net elements, such as deposit insurance, has been redrawn in many jurisdictions. In particular, governments extended existing guarantees and introduced new ones. While these measures did not address the root causes of the lack of confidence, they were nevertheless helpful in avoiding a further accelerated loss of confidence, thus buying valuable time.

Fund Management and Systemic Risk - Lessons from the Global Financial Crisis

“…They also reduce the (relative) weight of and thus systemic importance of banks in credit intermediation (Davis 2000). Unlike banks, they do not tend to take on excessive risk due to mispriced safety nets (Schich 2008). 3 Other asset managers than FMs may also, and have in different shapes and degrees, contributed to systemic risk through the channels covered in this article.…”

Policyholder Protection Schemes

“…31 The combination of co-insurance and low coverage levels may have resulted in the "run"-like depositor behaviour in the United Kingdom. This has resulted in the abolition or de-emphasis of co-insurance among OECD member countries in deposit insurance (Schich, 2008).…”

“…In response to the difficulties financial systems experienced in the past crisis and the exit from temporary measures, there has been a general increase in maximum payout coverage for deposit insurance (Figure 2, Schich, 2008).…”

“…The OECD has already carried out work on deposit insurance (Schich, 2008) and occupational pension protection funds (Stewart, 2007).…”

The promptness of European Deposit Protection Schemes to face banking failures

“…18 Moreover, despite the fact that the International Monetary Fund has endorsed a limited form of deposit protection as a best practice, 19 it is well known that the presence of a DPS could encourage risk-taking by the banks, thus introducing moral hazard. 20,21 As outlined in the work of Lee and Kwok, most of the existing literature on deposit insurance tend, in general, to be confined to a discussion of the reform proposals and risk-related premium assessment methodologies. 22,23 The present article is more oriented to discussing practical issues arising from the procedures adopted by EU DPSs in facing banking difficulties, such as the procedures to be followed in case of intervention, the extent of resources available to EU DPSs and their potential capability to cope with banking failures of given sizes.…”