Counting the cost of payout: constraints for deposit insurers in funding bank failure management

In the liquidation of a failed bank, the deposit insurer often pays out insured depositors. However, orderly bank failure management may benefit from the use of deposit insurance funds to help finance measures such as transfers of deposits and any viable business to another bank, as an alternative to payout. To protect the deposit insurance fund from excessive depletion, such financial support is usually subject to quantitative constraints, typically least cost requirements or caps on the amount that the deposit insurer can provide in a single case. In some frameworks, those constraints can be overridden in systemic cases. This paper analyses such quantitative constraints in a sample of 13 jurisdictions, and finds significant variations in their design, stringency and the availability of systemic exceptions. A key difference relates to jurisdictions' methodologies for calculating the cost of payout, which may predispose the framework towards certain outcomes in a choice between payout and alternative measures. On the basis of these observations, the paper offers conclusions that may help policymakers benchmark their approach to the use of deposit insurance funds in bank failure management.

JEL classification: G21, G28, G33

Keywords: deposit insurance, bank liquidation, bank insolvency, payout, least cost, depositor preference