It therefore stands to lose money if there is a realised loss that is not absorbed by more junior creditors. Any such loss is later recouped by the Deposit Insurer via a levy on the surviving insured banks. It is important to underline that for banks funded by insured deposits, some of the costs of failure will fall on their peers. Over time, I suspect that that will increase pressure for a funded deposit-guarantee scheme with risk-based levies. That avoids defaulting banks getting off scott free, and has banks contributing to the deposit insurance system when times are good rather than only when under pressure. I realise that I am telling this conference of deposit insurance agency experts things you already know! I am doing so because they are highly relevant to where I am going on the development of resolution strategies for coping with the failure of the world’s largest and most complex banks, and how Deposit Insurance might fit into that endeavour. Resolution regimes for systemically important firms The objective is, of course, to get to a position where public money is never used to provide solvency support for a failing bank, however large or complex. To be clear, this is emphatically not just about preserving payments and transactions-deposit services.
It has become fairly common to say that such groups should be resolved on a regional basis, ie broken up. Maybe. But even if that is correct, “break it up” hardly amounts to resolution plan. What happens to the broken-up parts? Under a “breakup” strategy, a plan is needed for all of the parts, both distressed and undistressed. That can’t be a free for all. Indeed, it is worth underlining that, under the FSB Standard,3 it is the responsibility of the home authorities of the group to ensure that a group-wide resolution plan exists. There is no ducking that. It removes an ambiguity that has quietly haunted banking authorities for decades, including in the UK. Imagine an international commercial banking group whose operations in various jurisdictions are both big and complex. Good subsidiaries might be sold or floated off. But that won’t be possible for the bankrupt parts of the group. The realisation of the assets via a standard liquidation of those subsidiaries would be liable to destroy a lot of value, creating disorder that could spill over to other jurisdictions and possibly globally. Such subsidiaries need to be  3  4  FSB Standard Key Attribute 11.8. BIS central bankers’ speeches  resolved. That could be via bail-in of their bondholders and other creditors. But what happens if there are not enough bonds in issue to absorb all of the losses and recapitalise the operation? A way of cutting through that would be for each Deposit Insurer to be bailed in.