The mandatory separation of DGS and resolution funding
A major design flaw in the EU framework for crisis management?
Sven Stevenson - EFDI Annual Meeting and Conference
Bucharest, 22-23 september 2014
1. Introduction
• Resolution Funds (BRRD)
• Resolution funds cannot be integrated with DGS
• Use of resolution funds strictly limited; cannot directly be used to absorb
losses or recapitalize institutions
• Minimum target size of fund: 0,8% of covered deposits
• Deposit Guarantee Schemes (BRRD/DGSD)
• DGS can contribute to resolution (under a NCWO principle); no least-cost
requirement
• DGS can contribute to ‘alternative measures’ to prevent bank failure
• Minimum target size of fund: 0,8% of covered deposits
Disclaimer: The views expressed in this presentation are the views of the author and do not
necessarily reflect the views or policies of De Nederlandsche Bank
Definition of resolution funding arrangements
• “A resolution funding arrangement is a permanent mechanism
to finance specific measures needed to support the orderly
resolution of a financial institution , when necessary to
maintain financial stability, through mandatory contributions
by all institutions that are eligible for support from the
arrangement, based on a predetermined calculation method.”
• The definition disentangled: • Permanency
• Usability of arrangement limited to a specific set of supportive measures
• Financial stability
• Mandatory membership and financed by sector
• Reciprocity
• Note that a DGS can satisfy this definition
Usability of arrangements
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Usability of RFA vs DGS
Purpose Resolution Power Role for RFA Possible for DGS? (in EU)
Idiosyncratic
failure of a non-
systemic bank
Transfer of assets
and liabilities: P&A Cover gap between value of assets and liabilities Yes (see BRRD)
Idiosyncratic
failure of a
systemic bank
Transfer of assets
and liabilities: P&A
Cover gap between value of assets and liabilities
Guarantee transferred assets
Yes (see BRRD)
No
Transfer of assets
and liabilities: AMC
Guarantee liabilities of the AMC
Provide loans and/or capital to AMC
No
No
Bridge institution
Guarantee liabilities of the Bridge Institution
Provide loans and/or capital to Bridge Institution
No
Indirectly possible
(but more restricted)
Bail-in
Contribute to bail-in in place of exempted creditors
Compensate creditors in case of violation of NCWO
Yes (but only for
covered deposits)
No
Systemic crisis
(not to be made
explicit)
Not applicable
(can be used for
recovery or on a
precautionary basis)
Finance bank recapitalization program
Guarantee assets and/or liabilities
Provide loans and/or capital to AMC
Yes (see DGSD)
Yes (see DGSD)
No
Observations
• There is a strong overlap between what would be the function of a RFA and a
DGS (i.e., a DGS is a RFA)
• Usability of a RFA might be a little broader than the usability of DGS when it
comes to the resolution of systemic banks
• Ambiguous role for RFA in a systemic crisis
• Strong arguments in favour of integration resolution funding and deposit
insurance in one scheme
• Function of resolution authority (and the RFA) dovetails with that of the deposit
insurer: the objectives fit together
• Possible overlap in usability of arrangements
• Economies of scale and scope when integrated
• ‘Least cost principle’ for use of DGS funding can drive the appropriate resolution
strategy
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Issue for discussion
Does the EU handicap itself by requiring a
mandatory separation of funds?
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