Dalvinder Singh

A new standard for deposit insurance and government guarantees after the crisis

Purpose - The purpose of this paper is to explore the arrangements that have been used in the present crisis and their relative success and to look to the post-crisis situation. Design/methodology/approach - The paper examines and explains the crisis and the roles of deposit insurance and government guarantees. It deals with coverage, funding, institutional structure, speed of payout, incentives, accountability and, in particular, considers how such systems should function in a world of cross-border institutions. Findings - The paper suggests how such principles and standards should be set either through International Association of Deposit Insurers or some more efficient means to complement an international approach to financial stability being addressed by the Basel institutions. Originality/value - There is no widely accepted standard over what the reformed financial system safety net should look like with respect to the protection of deposits and the wider guaranteeing of creditors and other stakeholders. This paper, therefore, makes an attempt to fill that gap.

Preface: It Has Been ‘A Hard Day’s Night’

The subtitle to this part of the book could have been – What have we learned since the demise of Lehman Brothers? The question, however, could not actually have been that short as we would have needed to add something about the number of investment banks that had to convert to become US holding companies, the renationalization of Fannie Mae and Freddie Mac, the death and then resurrection of AIG, the collapse of the Icelandic banking system, the overhauls of fi nancial regulation in the UK, US and much of Europe, the Greek debt tragedy, and of course, we would need to list the extraordinary measures that governments took around the world to prop up their banking systems through explicit guarantees that contributed to the ballooning of government fi scal defi cits. Instead, we think that The Beatles’ 1964 tune A Hard Day’s Night is more appropriate. While some of us might remember the lyrics better than others, the words go a long way in describing the recent global fi nancial crisis. For some, people have been ‘. . . working like a dog’, or not working at all, trying to save their homes from a short sale or foreclosure. For others, they are fi nally seeing conditions in fi nancial markets improving as low interest rates and quantitative easing are helping to boost the real economy and improving bank profi tability; leading managers and traders to long for a return to large bonuses and the prospects of acquiring bargainpriced vacation homes in exotic locations. Perhaps it is not much more than a natural evolution of the capitalist system. By and large, policymakers and regulators have not been ‘. . . sleeping like a log . . .’ (as the song goes), as many of them have awoken with what seems to be a terrible hangover. Some of those morningsafter were brought about through bank managers taking excessive risks or an evaporation of confi dence, while others are suff ering after following advice or the spin of people like Bernie Madoff , R. Allen Stanford and Marc Dreier – fraud artists who were not ‘playing by the rules’.1 As well, central bankers had