Table Of ContentPALGRAVE MACMILLAN STUDIES IN
BANKING AND FINANCIAL INSTITUTIONS
SERIES EDITOR: PHILIP MOLYNEUX
Deposit
Insurance
Schemes
Funding, Policy and Operational Challenges
Djurdjica Ognjenovic
Palgrave Macmillan Studies in Banking and
Financial Institutions
Series Editor
Philip Molyneux
Bangor University
Bangor, United Kingdom
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Djurdjica Ognjenovic
Deposit Insurance
Schemes
Funding, Policy and Operational Challenges
Djurdjica Ognjenovic
Zagreb, Croatia
Palgrave Macmillan Studies in Banking and Financial Institutions
ISBN 978-3-319-51142-9 ISBN 978-3-319-51143-6 (eBook)
DOI 10.1007/978-3-319-51143-6
Library of Congress Control Number: 2017933086
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Foreword
The funding deposit insurance scheme (DIS) is one of the most important
elements in creating and maintaining a credible safety net and enabling
DIS to fulfill its role when deposits become unavailable due to bank fail-
ure. When funding is not designed properly, the financial capacity of the
DIS is weak and its available funds are non-proportional to its liabilities,
resulting in either temporary liquidity gaps or severe insolvency. Deposit
insurers around the globe often complain regarding the legal limitations
related to funding and the scarcity of timely information which limit
their repayment effectiveness. To a certain extent it is all true.
The financial management practice in the deposit insurance author-
ity is equally important. If risk awareness, financial planning and fund
investment policies are poor, the DIS may face insufficiency of available
financial resources when needed.
For policy makers, it is crucial to design DIS features based on an
international guidance enabling funding from all available sources in an
efficient manner. For deposit insurance practitioners, funding is the topic
of utmost priority on a daily basis and professionally, the most challeng-
ing issue to be resolved.
Surprisingly or not, deposit insurance has become a topic of great
interest and discussion among the policy makers, academics and prac-
titioners almost entirely due to events and consequences related to the
recent international financial crisis in 2008 and onward.
v
vi Foreword
This is, therefore, a crucial moment to re-investigate whether deposit
insurers are ready to assume the biggest role ever in the support of stron-
ger national and international financial safety nets. Are DISs today more
financially robust than earlier? Is their financial capacity stronger than
before? Can all new rules, guidelines, procedures and operational changes
prevent undercapitalization of DISs in the future?
Preface
The main motive for writing this book was to provide a comprehensive
overview on DISs, with a focus on funding a DIS from policy and opera-
tional perspectives, gained over more than 20 years of practical experi-
ence in countries all over the world, and to answer questions of how
to establish and maintain a credible deposit insurance fund (DIF) that
would be able to contribute to the stability of the financial sector, regard-
less of its mandate, in the most efficient way.
All deposit insurance authorities manage large sums of money, col-
lected within a relatively predictable timeframe aiming to ensure suffi-
cient liquidity in case of unforeseeable events such as bank failure. The
challenging dynamics and changes in the financial infrastructure, espe-
cially within the EU, force DISs to undertake legal and institutional
changes and transform themselves into more robust financial safety net
players. Are they ready?
On a daily basis, deposit insurance authorities, regardless of their man-
date, worry about the funding and ask themselves the same questions:
• Are there sufficient financial resources in the DIF?
• How to ensure liquidity if needed and where?
• Should a target fund be established?
• What would be the optimal size of a DIF?
vii
viii Preface
How to fulfill the mandate efficiently and more cost-effectively?
The book addresses all these questions and provides examples and
solutions on specific issues and topics related to establishment, financial
management and optimal DIS funding. The book discusses challenges
currently faced by the European Union (EU) members in their attempts
to comply with an improved EU regulatory framework on deposit insur-
ance and bank resolution.
In order to provide recommendations and enable every national juris-
diction to apply identical methodological and analytical steps, examples
are prepared using theoretical banking sector data in the same manner
as it would be done in the real-case scenario. The same methodology
can be applied in any DIS in any geographical area, with a small or large
banking sector, with a narrow or broad mandate and regardless of a DIS’s
institutional development and legal form.
The book is divided into seven chapters, where chapters 1 and 2 address
major policy issues on funding and key DIS design features.
Chapters 3, 4 and 5 are focused on operational challenges related to
funding a DIS on a daily basis, which the deposit insurance practitio-
ners face in their everyday work and in collaboration with other safety
net players, with a major focus on target funding and ideally optimal
funding.
Chapters 6 and 7 of the book address issues related to the challenges
faced by EU member countries when complying with EU regulatory
framework on deposit insurance and bank resolution.
For simplicity and in order to avoid confusion arising from regulatory
differences existing in different jurisdictions, as well as in the terminology
used in the available literature, the following terms will be used in this
book, in the context of deposit insurance and bank resolution:
Bank is any deposit-taking credit institution licensed and supervised
by the national supervisory authority that collects deposits from the pub-
lic and is the subject of deposit insurance.
Problem bank is a bank that is identified as such by the supervisory
authority due to breaches of prudential norms or its unsound financial
condition where one or more supervisory measures are or will be pre-
scribed, and the condition of which may be rehabilitated or may result
in failure over time.
Prefac e ix
Failing bank is a bank undergoing insolvency proceedings or other form
of resolution process due to severe financial conditions and non- viability
of its business under the going-concern basis and whose depositors are
entitled to receive covered deposits compensation from the deposit insur-
ance authority under the existing DIS framework.
