The document discusses emergency policy measures taken by governments during the 2008 financial crisis to address bank failures and restore confidence in the financial system. These measures included expanding retail deposit insurance, guaranteeing wholesale bank liabilities, injecting capital into banks, and purchasing troubled assets. The policies aimed to address issues like lack of confidence, uncertainty, frozen credit markets, and bank undercapitalization. However, the broad guarantees introduced moral hazard and funding issues. They also complicated existing deposit insurance systems. Governments must address the root causes of confidence problems to prevent future crises.

4. Changes to deposit insurance as part of comprehensive
Emergency Policy Measures
The policy interventions
weren't effective
Emergency Policy Measures
Addressing bank undercapitalization by
injecting capital or purchasing specific
The bankruptcy
assets
ensuring continued bank funding
through the provision of guarantees
Bank run
(either retail or wholesale)

5. Country
Choices
Policy
Measures
Target
Problem
Expansion of retail deposit insurance
Lack of Confidence
Lack of confidence
in banks on part of
general public
Expanded
retail deposit
insurance
Uncertainty on
part of banks
about peers
Guarantee of
wholesale
liabilities
Frozen Credit Market
Interbank
market not
functional
Purchase assets
including ‘toxic’
bank asset
Banks
undercapitalized
Bank capital
injections

6. Emergency Policy Measures
Europe
United States
• On 5 October Treasury establishes two-year guarantee program for money
•United States2008, the German governmenttemporarily guarantees allprivate
On 30 September, the Irish government issued a guarantee on every deposits,
deposit account; “the state guarantees private deposits in Germany” according to banks,
covered bonds, senior
market fund investors, and dated subordinated debt held in the six biggest its
spokesman. legislation also temporarily allows the United States deposit
with guarantee scheduled to terminate in September 2010.
• The new
• On 6 October, the (FDIC) to borrow unlimited that a blanket guarantee has been
• Several agency Government of Iceland stated funds from the Treasury.
insurancecountries, including Belgium, Greece, Luxembourg, Netherlands,
extended covering all deposits in domestic commercial and savings banks and their
Portugal and Spain House of deposit insurance to for 100,000.
• On 3 October, theeach raiseRepresentatives votedEUR the Emergency
branches in Iceland.
• On 3 October, the Financial 2008, which included the raising of the effect on
announced
Economic Stabilization Act ofStability Authority put forward athat (withceilingbank
• On 20 October 2008, the Austrian National Council
100-billion-euro
from Tuesday 7which included temporarily to USD limit changesdepositor per to
the FDIC deposit insurance USD 100,000providing unlimited deposit insurance bank
rescue package, October) the deposit protection 250,000 per to GBP 50,000
from GBP 35,000 per until guarantees on loans between chancellor of the
on a temporary basis person per authorized bank. Thebanks. From 2010, insurance
savers and undertaking legal end 2009.
exchequerwould have a by newspapers toinjects USD statements suggesting that
• On 23 November, the US of EUR 100,000.
on deposit is reported limit government have made 20 billion of cash into
the government might be government implicit 100 was raising its bank on all
Citigroup in exchange for a USD 27an announced it per cent guaranteedeposit to
• On 5 November, the Swiss offering billion preferred equity stake, and agrees
guaranteeinloans andfrom 30,000on that has not made a legally binding pledge.
deposits
failing securities Swiss francs..
guaranteetoa100,000 bank, although he company’s books worth USD 306 billion.

7. Emergency Policy Measures
Raising the maximum levels of coverage
Reducing the role of co-insurance arrangements
Taking steps to ensure timely access to insured deposits
Extending coverage to a wider range of deposits

8. Raising the maximum levels of coverage

10. Reducing the role of co-insurance arrangements

11. Taking steps to ensure timely access to insured deposits
Bank Failure [Insolvency]
Bankruptcy
Procedures
Very Slow
Efficient Resolution
Speed
Specialist expertise
The interest of depositors

12. Bankruptcy Procedures
On-Time Access
Late Time
Limitation

13. Extending coverage to a wider range of deposits

14. Emergency Policy Measures
Raising the maximum levels of coverage
Reducing the role of co-insurance arrangements
Taking steps to ensure timely access to insured deposits
Extending coverage to a wider range of deposits

16. It may not have been clear how the (explicit or implicit)
unlimited coverage would relate to the deposit insurance
arrangements that were already in place.

17. Challenges raised by recent policy measures
Moral
[
]
Hazard
Funding Issues
Issues raised by the coexistence of different levels of
depositor protection
Addressing the root causes of confidence problems may
become even more crucial

18. Funding Issues

20. Overlap of deposit insurance and lender-of-last-resort functions
Issues raised by expansion of guarantees and introduction
of new ones during Fall 2008
Timely opportunity to review the operation of financial
safety nets

22. Banking Crises Worldwide