Sibling Rivalry in the Financial Safety Net: Governance Arrangements for Bank Resolution and Deposit Insurance
Technical Notes and Manuals, February 10, 2025
Source details
- Canonical URL
- Sibling Rivalry in the Financial Safety Net: Governance Arrangements for Bank Resolution and Deposit Insurance
Other formats
Bibliographic details
- Authors: Atilla Arda, Jan Nolte
- Published: February 10, 2025
- Series: Technical Notes and Manuals
- DOI: https://doi.org/10.5089/9798400293795.005
Summary and purpose
- Examines governance structures essential for effective bank resolution and deposit insurance functions.
- Emphasizes the interconnectedness of bank resolution and deposit insurance in safeguarding depositors and maintaining financial stability, drawing lessons from vulnerabilities exposed during the 2008-09 global financial crisis.
- Discusses institutional choices between integrating functions within existing agencies or creating new entities.
- Identifies potential conflicts of interest among resolution authorities, deposit insurance systems, central banks, supervisory agencies, and the financial sector.
- Explores best practices and case studies, including Denmark’s integrated framework, to inform policies that enhance cooperation and resilience in financial safety nets.
Key findings
- Bank resolution and deposit insurance are closely linked functions with aligned objectives: protecting depositors and maintaining financial stability.
- Institutional arrangement choices matter: integrating deposit insurance within resolution authorities can support more effective cooperation among authorities.
- Potential conflicts of interest exist across safety net participants (resolution authorities, deposit insurers, central banks, supervisors, and the financial sector) and can impede decisive crisis action if governance is weak.
- Autonomy, operational independence, and accountability are critical governance attributes for both resolution and deposit insurance functions.
- Strong legal protections for officials in charge of resolution and deposit insurance are necessary to enable decisive crisis management actions.
Governance arrangements analyzed
- Integration versus separation:
- Integrating both functions within existing agencies.
- Establishing new, separate entities for resolution and deposit insurance.
- Institutional design considerations:
- Clear allocation of responsibilities among resolution authorities, deposit insurers, central banks, and supervisory agencies.
- Mechanisms to manage and mitigate conflicts of interest between safety-net participants.
- Frameworks to ensure operational independence while maintaining accountability and coordination.
Case studies and best practices
- Denmark’s integrated framework is highlighted as an example demonstrating the potential benefits of integrating the deposit insurance function within the resolution authority to promote effective cooperation among authorities.
- Best practices focus on legal clarity, coordination protocols, and structural arrangements that align incentives across entities involved in crisis management.
Policy recommendations
- Establish and reinforce robust governance frameworks that ensure:
- Autonomy of resolution and deposit insurance functions.
- Operational independence in crisis decision-making.
- Clear accountability mechanisms to legitimate oversight.
- Provide strong legal protections for individuals leading resolution and deposit insurance to enable decisive action during crises.
- Consider integrating deposit insurance within resolution authorities where this supports cooperation and operational effectiveness, drawing on relevant country experiences such as Denmark.
- Design institutional arrangements that explicitly address conflicts of interest among safety-net participants and the financial sector.
Subject classifications and keywords
- Subjects: Bank resolution, Bank resolution framework, Deposit insurance, Financial crises, Financial safety nets, Financial sector policy and analysis, Financial sector stability
- Keywords: autonomy, bank resolution, Bank resolution framework, crisis management, crisis preparedness, deposit insurance, deposit insurance agency, deposit insurance fund, deposit insurance system, deposit insurer, financial crisis, Financial safety nets, Financial sector stability, financial stability, Global, governance, governance arrangement, independence
Content in this bundle
- Appendix 1–2: International Standards on Bank Resolution and Deposit Insurance