ENSURING BANKING STABILITY

1
ENSURING BANKING STABILITY

• Prof. Harald Benink
• RSM Erasmus University
• November 16 2007

2
EUROPE AS TREND SETTER

• Internal market program
• Europe as an increasingly integrated
  liberalized financial market
• Model for the evolving banking regulatory
  structure in developed countries
• EMU and enlargement are enhancing this process
  further

3
EVOLUTION OF BANK CAPITAL/ASSET RATIOS (1847-2001)
4
EVOLUTION OF NON-FINANCIAL CAPITAL /ASSET RATIOS
(1978-2002)
5
REDUCTION IN BANK CAPITAL/ASSET RATIOS

• Increasing diversification of banks in the late
  1800s and early 1900s
• No real banking crises in Europe in the 1930s
• Dominance of large banks and cartel banking in
  Europe too big too fail (explicit and implicit
  guarantees)

6
THREATS TO BANK SOLVENCYIN EUROPE

• Greater competition among EU banks
• Competition from non-banks enabled by ICT
  technology
• Losses by no-longer-protected undiversified banks
  (existing and new ones)

7
PROPOSAL FOR ENSURING BANKING STABILITY

• Limitation of deposit insurance to deposits
• Protect the deposit insurance fund and taxpayers
  from losses by requiring over-collateralization
  or relatively high level of capital
• Structured early intervention and resolution

8
LIMITATION OF DEPOSIT INSURANCE TO DEPOSITS

• Account must be repaid at par and offer explicit
  interest payments that do not exceed a relatively
  small amount above the comparable Treasury rate
• Make it administratively easier to distinguish
  deposits from other (uninsured) investment
  accounts

9
COLLATERALIZED DEPOSITS

• Over-collateralize deposits with obligations for
  which default and interest-rate risk can be
  calculated daily
• Very small probability that immediately
  obtainable market value of the collateral is less
  than the amount of insured deposits

10
RELATIVELY HIGH CAPITAL

• Relatively high regulatory capital requirement
• Equity capital and debt capital
• Debt can count as capital if it is explicitly
  and credibly uninsured and may not be redeemed
  except from funds that are obtained from new
  issues that replace the debt capital

11
RELATIVELY HIGH CAPITAL (continued)

• Capital requirement should be substantial for
  instance 15
• Daily or reliable market values for most banking
  assets are not available
• Most bank assets are not very liquid
• Most banks have substantial amounts of debt which
  could serve as debt capital

12
STRUCTURED EARLY INTERVENTION AND RESOLUTION

• Establishment of capital/asset zones
• Highest zone (above 15) limited overall
  supervision
• Falling below 15 greater supervision and
  requirement to submit business plan
• Falling below 10 direct monitoring and
  supervision
• Falling below 5 take over the bank