FSB KEY ATTRIBUTES FOR EFFECTIVE RESOLUTION REGIMES: IMPLICATIONS

FOR DEPOSIT INSURERSDavid Walker: Canada Deposit Insurance Corporation

Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis

November 13-16, 2011: Jodhpur, India

Presentation outline

1) IADI and the FSB Resolution Steering Group: background

2) Key Attributes for Effective Resolution Regimes Main areas impacting deposit insurers Core Principles and the Key Attributes

3) Conclusion and next steps

FSB Resolution Steering Group

a) Created in 2010 to oversee resolution-related work

b) Coordinates program to set out key attributes for resolution regimes, avoid losses to taxpayers, and protect vital economic functions.

c) IADI joined as a member in early-2011• IADI representative on Steering Group• Sub-group of Guidance Group established to

provide comments and input

Key Attributes of Effective Resolution Regimes for Financial Institutions

Purpose of ‘Key Attributes’:

1) Set out the core elements that the FSB considers to be necessary for an effective resolution regime

2) Allow authorities to manage the failure of large, complex and internationally active financial institutions in a way that:a) minimises systemic disruptionb) avoids recourse to public funds that expose taxpayers to the risk

of loss

Essential Features of Key Attributes1) Scope2) Resolution authority and powers3) Set-off, netting, collateralization, segregation of client assets,

Safeguards4) Funding of firms in resolution 7) Legal framework conditions for cross-border cooperation8) Crisis Management Groups (CMGs)9) Institution-specific cross-border cooperation agreements10) Recovery and resolution planning11) Resolvability assessments12) Access to information and information sharing13) Legal framework conditions for cross-border cooperation

Main areas directly impacting deposit insurance systems

1) “…[Resolution regimes should] protect the interests of retail customers, in coordination with the relevant schemes and arrangements for the protection of depositors, insurance policy holders and retail investors where applicable…”

2) “Establish a temporary bridge institution to take over and continue operating certain critical functions and viable operations of a failed firm…”

Main areas directly impacting deposit insurance systems

3) “…Effect the closure and orderly wind-down (liquidation) of the whole or part of a failing firm with timely payout or transfer of insured deposits and prompt (for example, within seven days) access to transaction accounts and to segregated client funds)…”

4) “…The legal framework governing set-off rights, contractual netting and collateralisation agreements and the segregation of client assets should be clear, transparent and enforceable during a crisis or resolution of firms, and should not hamper the effective implementation of resolution measures…”

Main areas directly impacting deposit insurance systems

5) “…Jurisdictions should have in place privately-financed deposit insurance or resolution funds, or a funding mechanism for ex post recovery from the industry of the costs of providing temporary financing to facilitate the resolution of the firm…”

6) “…The statutory mandate of a resolution authority

should empower and strongly encourage the authority wherever possible to act to achieve a cooperative solution with foreign resolution authorities…”

Main areas directly impacting deposit insurance systems

7) “…Carry out bail-in within resolution as a means to achieve or help achieve continuity of essential functions either:

I. by recapitalising the entity hitherto providing these functions that is no longer viable, or, alternatively

II. by capitalising a newly established entity or bridge institution to which these functions have been transferred following closure of the non-viable firm (the residual business of which would then be wound up and the firm liquidated)

Supporting guidance

Annexes provide more technical guidance in implementing the Key Attributes with respect to:

1) Essential elements of institution-specific cooperation agreements (Annex I) ― Deposit insurers need to be “at the table”

2) Resolvability assessments and Recovery and resolution plans (Annex III)― Critical information for deposit insurers

3) Temporary stay on early termination rights (Annex IV)

BCBS-IADI Core Principles & Key Attributes

• Principle 11 - Funding– Stresses industry as source of funding– Need for wide range of ex-ante or ex-post tools

• Principle 15 – Early detection and timely intervention and resolution – Deposit insurer should be part of a framework within the financial system

safety net that provides for the early detection and timely intervention and resolution of troubled banks

• Principle 16 – Effective resolution processes– Reimburse depositors promptly and minimise resolution costs and disruption

of markets…– Deposit insurer or other relevant financial system safety-net participant should

have the authority to establish a bridge institution…

IADI Core Principles & Failure Resolution

• Principle 17 – Reimbursing depositors– Give depositors prompt access to their insured

funds– Deposit insurer should be notified or informed

sufficiently in advance…and be provided with access to depositor information in advance

Conclusions and Next Steps

• FSB work on resolution critical for IADI and deposit insurers

• Stresses need for deposit insurers to be well connected to all aspects of the resolution framework – Information, tools, contingency planning etc

• IADI working on updating its own guidance on resolution for 2012

• IADI, FSB and other IFCs working together to ensure future guidance is well coordinated