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Role Played by Deposit Role Played by Deposit Insurance in Insurance in

Global Financial CrisisGlobal Financial Crisis

IADI- Africa Region Committee IADI- Africa Region Committee Conference on Conference on

Benefits of Deposit Insurance in AfricaBenefits of Deposit Insurance in Africa

Arusha, TanzaniaArusha, Tanzania30 July 201030 July 2010

Vijay DeshpandeOffice of International AffairsFDIC- USA

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OutlineOutline

I.I. Key missions and mandates of Deposit Key missions and mandates of Deposit Insurance Systems (DIS)Insurance Systems (DIS)

II.II. Overview of Global Financial CrisisOverview of Global Financial Crisis

III.III. DIS Response to the crisisDIS Response to the crisis

IV.IV. Lessons LearnedLessons Learned

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I. Mandates/MissionsI. Mandates/Missions

Protect (small) Protect (small) depositorsdepositors

Contribute to financial Contribute to financial stabilitystability

Preserve confidence in Preserve confidence in the banking systemthe banking system

44Copyright 1931 by The Chicago Tribune

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I. Mandates/Missions I. Mandates/Missions (cont…)(cont…)

Also:Also:• Promote competitionPromote competition• Promote economic developmentPromote economic development• Limit moral hazardLimit moral hazard• Promote market disciplinePromote market discipline

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Key Assumptions or PrerequisitesKey Assumptions or Prerequisites

Coordination, communication, cooperation, and Coordination, communication, cooperation, and information sharing among all safety-net players.information sharing among all safety-net players.

Ministry of Finance

Central Bank

Deposit Insurance Organization

Bank Supervisor/ Regulator

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II. II. Global Financial Crisis: 2008-2010Global Financial Crisis: 2008-2010 (Systemic Crisis)(Systemic Crisis)

Typical scenarios- varied by countriesTypical scenarios- varied by countries• Stressed residential and commercial real estate marketsStressed residential and commercial real estate markets• Rising number of problem institutions and failed banks Rising number of problem institutions and failed banks • Weak financial/ banking sector: liquidity crisis; high Weak financial/ banking sector: liquidity crisis; high

charge-offs; credit losses; credit unavailabilitycharge-offs; credit losses; credit unavailability• Drain on DI systems and depletion of DI fundsDrain on DI systems and depletion of DI funds

Overall: lack of public trust in financial Overall: lack of public trust in financial sector and risk of instability.sector and risk of instability.

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Causes of Recent Bank Failures in the U.S.Causes of Recent Bank Failures in the U.S.

Significant commercial real estate concentrationSignificant commercial real estate concentration Rapid growth fueled by non-core depositsRapid growth fueled by non-core deposits Poor liquidity managementPoor liquidity management Underfunded loan and lease loss reserveUnderfunded loan and lease loss reserve Inappropriate incentive compensation programsInappropriate incentive compensation programs Sub-prime lendingSub-prime lending

Inadequate risk management controls and Inadequate risk management controls and insufficient board/senior management oversightinsufficient board/senior management oversight

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US ExperienceUS Experience

1.1. Temporary increase in DI from $100,000 to Temporary increase in DI from $100,000 to $250,000 (until 31 Dec. 2013)$250,000 (until 31 Dec. 2013)

2.2. FDIC’s Temporary Liquidity Guarantee ProgramFDIC’s Temporary Liquidity Guarantee Program Transaction Account Guarantee ProgramTransaction Account Guarantee Program

• Primarily business checking accountsPrimarily business checking accounts• Full coverage (guarantee) of non interest-bearing deposit Full coverage (guarantee) of non interest-bearing deposit

transaction accountstransaction accounts

Debt Guarantee ProgramDebt Guarantee Program• Help support banking system liquidityHelp support banking system liquidity• Provided guarantees on senior unsecured debt with fixed Provided guarantees on senior unsecured debt with fixed

principle amountsprinciple amounts

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US Experience (cont…)US Experience (cont…)3.3. Extensive Public Awareness StrategyExtensive Public Awareness Strategy

Press releases to media/publicPress releases to media/public Public and congressional testimonyPublic and congressional testimony Active consumer educationActive consumer education FDIC Chairman Sheila Bair in the newsFDIC Chairman Sheila Bair in the news

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Impact of FDIC ActionsImpact of FDIC Actions Helped restore stability and liquidity in the banking Helped restore stability and liquidity in the banking

systemsystem Provided additional deposit security in the face of rising Provided additional deposit security in the face of rising

bank failuresbank failures Stabilized large transaction accounts as a critical source Stabilized large transaction accounts as a critical source

of bank funding- thus avoiding many potential failuresof bank funding- thus avoiding many potential failures Facilitated the insurance and refinancing of bank debt Facilitated the insurance and refinancing of bank debt

and helped moderate funding ratesand helped moderate funding rates

In other words, helped restore and In other words, helped restore and maintain public confidencemaintain public confidence

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III. DIS III. DIS ResponsesResponses to the crisis to the crisis Temporary Increases in coverageTemporary Increases in coverage

• US, Switzerland, Australia, New Zealand…US, Switzerland, Australia, New Zealand…

Permanent Increases in coveragePermanent Increases in coverage• Belgium, Czech Republic, Indonesia, Poland, UK…Belgium, Czech Republic, Indonesia, Poland, UK…

Full Depositor GuaranteeFull Depositor Guarantee• Austria, Germany, Hong Kong, Malaysia, Thailand…Austria, Germany, Hong Kong, Malaysia, Thailand…

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DIS Responses to the crisis (cont…)DIS Responses to the crisis (cont…) Initiation of Fundamental Depositor Protection Initiation of Fundamental Depositor Protection

ReformsReforms• European Commission- New directiveEuropean Commission- New directive• Many others focusing on:Many others focusing on:

• Primarily business checking accountsPrimarily business checking accounts• Full coverage (guarantee) of non interest-bearing deposit Full coverage (guarantee) of non interest-bearing deposit

transaction accountstransaction accounts• Adequacy of coverage levelsAdequacy of coverage levels• Payout capabilitiesPayout capabilities• Resolution authorityResolution authority• Risk-based differential premiumsRisk-based differential premiums• Ex-ante fundingEx-ante funding• Enhanced coordination and information sharingEnhanced coordination and information sharing

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IV. Lessons LearnedIV. Lessons Learned

Adequate DI coverage Adequate DI coverage ++

Timely (“prompt”) Payout Timely (“prompt”) Payout Processes Processes

++Adequate funding Adequate funding

mechanism mechanism ++

Public Awareness and Public Awareness and communicationscommunications

== Financial stabilityFinancial stability

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Thank you!!Thank you!!

For Questions or Comments:For Questions or Comments:vdeshpande@fdic.govvdeshpande@fdic.gov