Liability insurance is a fundamental part of banking regulation of today, but despite being accepted as best practice now, it did not expand out of the US until the second half of the 20th century. This column discusses economic and political explanations for the spread of liability insurance availability, and finds that a political explanation reflects the empirical evidence well. Liability insurance was preferable to other policies despite being inefficient, due to its use as political leverage.
Charles Calomiris, Matthew Jaremski, 01 June 2016
Daniel Gros, 12 February 2016
The Eurozone’s ‘Banking Union’ created a system of banking supervision and a common institution to restructure troubled banks. There remain two issues, however, that need to be addressed: banks are holding too much debt of their own sovereign, and deposit insurance is only backstopped at the national level. This column argues that these issues need to be addressed simultaneously for economic and political reasons. Specifically, periphery and core countries hold opposing positions on remedies to the respective problems. A combination of the two makes economic sense and could represent an acceptable political compromise.
Xavier Vives, 17 March 2015
The 2007–08 crisis revealed regulatory failures that had allowed the shadow banking system and systemic risk to grow unchecked. This column evaluates recent proposals to reform the banking industry. Although appropriate pricing of risk should make activity restrictions redundant, there may nevertheless be complementarities between these two approaches. Ring-fencing may make banking groups more easily resolvable and therefore lower the cost of imposing market discipline.
Dirk Niepelt, 21 January 2015
Recent experience with the zero lower bound on nominal interest rates, and the use of high-denomination notes by criminals and tax evaders, have led to revived proposals to phase out cash. This column argues that abolishing cash may be neither necessary nor sufficient to overcome the zero lower bound problem, and would severely undermine privacy. Allowing the public to hold reserves at central banks could reduce the need for deposit insurance, although the transition to the new regime and the effects on credit supply must be carefully considered.
Olivier Blanchard, 03 October 2014
Before the 2008 crisis, the mainstream worldview among US macroeconomists was that economic fluctuations were regular and essentially self-correcting. In this column, IMF chief economist Olivier Blanchard explains how this benign view of fluctuations took hold in the profession, and what lessons have been learned since the crisis. He argues that macroeconomic policy should aim to keep the economy away from ‘dark corners’, where it can malfunction badly.
Asli Demirgüç-Kunt, Edward Kane, Luc Laeven, 04 August 2014
As governments are struggling to construct a global financial safety net, they must take into consideration the lessons from the recent crisis. To help in this task, this column presents findings from an updated database on deposit insurance arrangements from around the world through 2013. The number of countries with explicit deposit insurance programmes has continued to increase but differences across countries are observed. Although it is too early to draw conclusions about the reliability of further insurance deposit expansion as a tool for managing a future crisis, insurance fulfilled its primary purpose – it prevented open runs on bank deposits.
Anne Sibert, 02 April 2013
Depositors in Eurozone banks are facing a steep learning curve on just exactly what deposit insurance means. This column points out that the precedents set in Cyprus and Iceland show that deposit insurance is only a legal commitment for small bank failures. In systemic crises, these are more political than legal commitments, so the solvency of the insuring government matters. A Eurozone-wide deposit-insurance scheme would change this.
This reposted column corrects an error, due to the editor, that was in the first posting.
Frank Westermann, 16 October 2012
With confidence in the Eurozone at an all time low, the problem of large-scale capital flight has come to the fore. This column argues that a common deposit insurance scheme as outlined in proposals for a banking union within the Eurozone would by itself not provide a solution to the problem.
Daniel Gros, Dirk Schoenmaker, 24 September 2012
As the EZ takes its first steps towards banking union, this column warns that such an approach – with banking supervision first and resolution and deposit insurance postponed to some undefined later stage – will lead to an unstable banking union. It adds that a strong European supervisor and a credible European resolution and deposit insurance authority should be introduced as part of the package.
Willem Buiter, 05 March 2008
This second column on the Treasury Committee’s report on lessons from Northern Rock discusses the institutional arrangements needed to cope should a bank of non-trivial size fail.