Depositor preference and deposit insurance schemes: challenges for regulatory convergence and regulatory coordination in Asia

Our recent article, which we co-authored with Angus Chan, examines the main challenges for achieving regulatory convergence and coordination for depositor preference rules and explicit deposit insurance schemes at the regional level in Asia. An examination of the challenges in this area reveals the inherent political difficulties in reconciling the need to maintain national regulatory and fiscal sovereignty with the need to formulate an effective cross-border regulatory response for addressing the systemic risks arising out of closer regional banking integration in Asia.

The article commences with an overview of depositor preference rules and deposit insurance schemes and their current state of implementation in the various jurisdictions in Asia. It also discusses the potential cross-border issues that these depositor protection mechanisms raise and how the international developments following the 2008–09 financial crisis have sought to address such issues. The primary way of addressing such issues is through formal coordination and information-sharing arrangements between the relevant home and host jurisdiction deposit insurance authorities, where there is a ‘material presence’ of foreign banks in a jurisdiction.

The core of the article examines the challenges for using various international cooperation mechanisms to achieve convergence and regulatory coordination for these depositor protection measures at the regional level in Asia. We borrow from the analytical framework provided by Dirk Schoenmaker’s ‘financial trilemma’ concept by positing that only two of the following three foundational policy objectives are capable of being achieved concurrently: (1) regional financial stability; (2) a regionally integrated banking market; and (3) national sovereignty and control over financial policies (including depositor protection mechanisms).

Our analysis suggests that under the presently prevailing conditions in the Asia region, regulatory convergence cannot be used to ensure that the depositor preference rules and deposit insurance schemes in the region effectively address the financial stability risks posed by increased intra-regional cross-border banking activities. This observation has the most immediate application for the ASEAN Banking Integration Framework (ABIF) as the ABIF ultimately aims for a semi (and not fully) integrated regional banking sector.

This points to a need to consider the role that regulatory coordination might play. The international cooperation mechanisms in this context would be aimed at facilitating coordination and information-sharing by improving public and market transparency on the scope and limits of depositor preference rules and deposit insurance schemes. The three most relevant international cooperation mechanisms are the exchange of information between jurisdictions facilitated by an underlying memorandum of understanding, the use of intergovernmental organisations and the adoption of domestic requirements to address international coordination issues.

The main challenge of using these methods for achieving regulatory coordination in the present context is that they cannot overcome the consequences of an absence of any formal political commitment to ex ante regional costs-sharing and burden-sharing at a regional level for depositor protection mechanisms.

As a result, we suggest that engagement on regional financial stability issues remains an intergovernmental activity predominantly involving the voluntary exchange of information aimed at avoiding market uncertainty from the cross-border interaction of domestic depositor protection mechanisms. These processes do not engage or address the distributional costs-sharing and burden-sharing consequences necessary for maximising regional financial stability.

The ‘financial trilemma’ perspective suggests that prioritising the preservation of national regulatory sovereignty with the concurrent pursuit of regional financial stability (as is the likely direction of the second phase of the ABIF) necessarily involves the loss of the full economic benefit of a regionally integrated banking system and that a sub-optimal level of financial stability will result.

Andrew Godwin is an Associate Professor at Melbourne Law School, University of Melbourne.

Ian Ramsay is the Harold Ford Professor of Commercial Law at Melbourne Law School, University of Melbourne.