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About this book

This book provides a comprehensive overview of funding arrangements for explicit deposit insurance schemes. Responding to international guidelines and best practice, it discusses policy decisions and operational challenges which deposit insurers face in the financial management of ex-ante deposit insurance funds. Numerous examples are provided, and solutions offered on sources and uses of funds, focusing on target and optimal funding.

Coverage includes:

the role that modern deposit insurance schemes play in ensuring financial stability

how to design the main deposit insurance features in order to maximize compliance with international standards

the different types of funding and financial planning for deposit insurance

methods for setting the target fund size level

optimal deposit insurance fundingchallenges faced by the European Union members following new deposit insurance and bank resolution directives.

The book concludes by providing a comprehensive overview of funding issues and recommendations for deposit insurance schemes in the European Union.

Table of Contents

Frontmatter

1. Deposit Insurance at a Glance

Abstract
This chapter presents the role that the modern explicit deposit insurance scheme (DIS) plays in ensuring financial stability of any country, especially since 2008, when many national jurisdictions enhanced the key features of their established DISs in order to preserve public trust. Given its historical evolution, the DIS’s mandate and powers have developed significantly but its primary goal remained the same, to enable depositors to have fast access to their funds deposited at failing banks. It discusses the origins of the DIS, different types and mandates, significance of the FDIC and the current role of the modern DIS within the financial stability safety net and in the bank resolution process.
Djurdjica Ognjenovic

2. Key Design Features of an Explicit DIS

Abstract
The DIS’s mandate and powers define its main features, enabling countless design options. When developing a new DIS or when restructuring the existing DIS, authorities study international standards and guidelines addressed in the Core Principles for Effective Deposit Insurance Systems (Core Principles) and decide on each component of the DIS.
This chapter explores DIS’s possible legal structure, institutional setup and governance issues, public policy objectives, how to decide on the coverage level and the coverage scope, typical sources of the DIS’s funding, formalized information exchange with other safety-net authorities, time frame and procedures for payout, minimum functions, staffing and internal organization, accounting and reporting requirements and other policy considerations on individual DIS’s features. It also discusses how to ensure and implement maximum level of compliance with the Core Principles and best practices.
Djurdjica Ognjenovic

3. Challenges of Funding a DIS

Abstract
The most challenging issue for any DIS is to establish and manage a credible and robust DIF which would enable fast payout of covered deposits in case of a bank failure and enhance depositors’ confidence. Deposit insurers face funding challenges on a daily basis when analyzing the sufficiency of funds and assessing risks.
This chapter introduces the concept of an ex ante DIF and explains different types and sources of funding for the DIS. It provides examples how to determine the annual level of regular premium and what emergency funding options are at disposal to the DIS when facing liquidity and solvency issues. It explains the differences between linear and risk-based premium and methods of applying risk assessment techniques when conducting regular financial planning and cash flow projection of its funding needs and options.
Djurdjica Ognjenovic

4. Target Funding

Abstract
Target funding is focused on the establishment of the desired level of an ex ante DIF over a medium-term time frame. It is a measure for the DIS’s desired payout capacity and sufficiency. Deposit insurers face challenges when choosing a method for setting and adjusting the target fund size level. If a decision on the target fund size level is made arbitrarily, it ignores the actual riskiness of banks and undermines its potential usage for funding optimization.
This chapter introduces the concept of target funding and explains how target funding improves financial management practices and increases awareness on the DIF’s adequacy. It explains the difference among the applied methodologies and discusses how adjustment on annual regular premium should be used in parallel with the approved target fund size methodology.
Djurdjica Ognjenovic

5. Optimized Funding

Abstract
Optimized funding enables deposit insurers to establish an adequately funded ex ante DIF over a medium and longer time frame using regular adjustment of target funding in accordance to the DIS’s risk exposure and thus regular adjustment of the DIS funding to its needs. Deposit insurers use financial planning, target funding and risk assessment in iterations of a comprehensive financial planning cycle to ensure optimized funding.
This chapter explains optimized funding and the use of established target funding for the purpose of assessing the sufficiency of DIFs. It explores cases when the DIS faces liquidity and solvency issues due to the DIF’s inadequacy. It explains how to assess the sufficiency of funding for restoring liquidity and solvency and build long-term DIS credibility.
Djurdjica Ognjenovic

6. Deposit Insurance in the European Union

Abstract
Member countries face many challenges in institutional design and implementation of the DGSD (Directive 2014/49/EU) onto national legislation. In addition, the BRRD (Directive 2014/59/EU) prescribes a complex set of rules for problem and failing banks’ recovery and resolution process, in addition to normal insolvency proceedings and with the use of private funds for the public interest of preserving financial stability.
This chapter provides an overview of the development of legislative framework on deposit insurance for European Union member countries. It explores new imposed DIS’s rules on the coverage level and scope, shortened payout time frame, risk-based funding, use of DIS’s funds, minimum target fund size level, improved cross-border cooperation and better informed depositors. It explains the EBA’s methodology on differential premium system and the proposal for the regulation on establishment of the European DIS (EDIS).
Djurdjica Ognjenovic

7. Funding Deposit Insurance Schemes in the European Union

Abstract
The European Union imposed strict rules to its member countries on funding and the use of DIS’ funds for the purpose of financing deposit payout and bank resolution. The DGSD (Directive 2014/49/EU) prescribes maximum harmonization on the creation of the ex ante DIF at a minimum of 0.8 per cent of covered deposits by mid-2024 through the collection of regular risk-based annual premium from the banks. The use of the DIS’ funds is limited onto payout of depositors and financing bank resolution whereas, conditionally, DIS’ funds may be used for alternative measures in order to prevent bank failure.
This chapter provides examples how to use DIS’ funds in a challenging situation when a DIS faces insufficient liquidity. It discusses use of DIS’ funds for alternative measures under the state aid rules and explains rules on a mutual borrowing between two or more national deposit insurance schemes on a voluntary basis.
Djurdjica Ognjenovic

Backmatter

Additional information

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