Bananaistan wrote:OOC: You're talking about deposit guarantee schemes. Per 2.c(iii) & 2.f (2nd sentence) this proposal is not merely a deposit guarantee scheme. It would help if you'd debate the proposal that you have actually written.
Apparently what the EU wants to do and what the FDIC does is not a deposit insurance scheme. Curiously, then, you'd be surprised to know that the FDIC, which is a deposit guarantee scheme, has all of that authority. For reference, the noted clauses are—
The Fund may resolve an IDI in one of the following manners with the least cost to the Fund: ... (iii) It may advance liquidity support to such an institution if the Fund believes that the institution is a systemically important. ...
The Fund may require IDIs to pre-pay premiums, in exchange for credit against future premiums, within a reasonable time window. Where the Fund is unable to adequately insure depositors, it may borrow from the World Assembly General Fund the necessary money to achieve its mandate.
For supra para 1, see
Crisis and Response chapter 3. For supra para 2, see that same chapter and also
https://www.fdic.gov/regulations/laws/r ... -1600.html. Then, one might find that the EU Commission also believes that having a financial backstop is integral to having a credible deposit insurance scheme. I quoted the portion above already, talking about a backstop. But the conclusion to the report also says—
Finally, experience shows that Deposit Guarantee Schemes and resolution bodies need a backstop. The European Stability Mechanism, after treaty changes, could perform this function, once corresponding legal questions are addressed. This integrated setup will be both more functional and effective in reducing moral hazard, free-riding behaviour and institutional capture.
Or also consider that the JEP article I quoted in January says—
The liquidity of an unfunded deposit insurance enterprise can derive instead from an unfettered line of credit with the national treasury, from reinsurance contracts written with reliable outside insurers and from the power to collect special assessments from its client base.
Whether or not substantial reserves are held, it must be made clear that funds that ultimately cover bank losses will come principally from surviving banks. Tax- payer assistance should be expected only in the special case of a verifiable systemic crisis. Convincing the banking industry that it cannot routinely dump insurance losses on taxpayers will encourage healthy banks to support high-quality regulation and to monitor other banks. Conversely, to the extent that emergency funding is expected to be provided from government revenues, market discipline is compro- mised and financial fragility increased. Asli Demirgüç-Kunt and Edward J. Kane, Deposit Insurance around the Globe: Where Does It Work?, 16 Journal of Economic Perspectives 175, 193 (2002).
One may also note that I designed the mechanism in this proposal informed by survey of the literature: that's why the funds are borrowed and not transferred.
Bananaistan wrote:Edit: Even if it was just a deposit guarantee scheme, I'd still oppose ICly because it risks taxpayers in fiscally prudent and regulatory sound countries paying for the excesses of other countries.
Regarding the risk concerns. If on regulatory incentives, asked and answered.
viewtopic.php?p=35156528#p35156528This is the problem of moral hazard: when insurance exists against negative outcomes, parties will take more risk. To control the exposure of taxpayers to moral hazard, the insurer must involve itself or surrogate parties in monitoring and disciplining banks. The balance of benefits and costs engendered by individual deposit insurance will vary with the ability of the insurer to reduce the chance of risk taking and with how the actions of the insurer interact with the informational and contracting environments of individual countries.
And that is why the insurer is given the authority to involve itself in monitoring and disciplining banks.
If on cost-sharing, preempted. "If your disad's impact is that nations share costs, the magnitude of the impact would be non-existent after accounting for risk-adjusted premiums. Then, on top of that, any residual impact would be massive outweighed by depositor benefits."
Aclion wrote:Well one impact is that member states no longer have the incentive to prevent bank runs that they would if they were responsible for covering them.
Didn't see this before Banana's post. But, however that is, that impact was already answered before it was raised. See
viewtopic.php?p=36396652#p36396652:
If your disad's impact is that nations share costs, the magnitude of the impact would be non-existent after accounting for risk-adjusted premiums. Then, on top of that, any residual impact would be massive outweighed by depositor benefits. If your disad's impact is that nations no longer will invest time and money into building their own DI programmes when the WA one would take centre stage, then warrant why that is more important than the efficiency gains. If your disad is that member nations will no longer regulate as heavily because they no longer assume risk, the impact is non-existent after accounting for the regulatory authority section.
Then in my next response to Kelssek:
The last one is the most plausible one, I think, along with the strongest impact at the systemic level. In fact, I would say that it would be a very decent opposition argument if the regulatory authority section didn't exist. But more broadly, if you'd like a more broad grant of regulatory authority, then I'll be happy to consider proposals to that effect. I would caution, however, that this proposal is so close to the character limit that an examination of bank regulation would probably best be in a separate resolution.
Also, "given that uninsured depositors and residual claimants would not be protected, political incentives for bank regulation do not simply go away" (
viewtopic.php?p=36397147#p36397147).