Whereas bank runs can bankrupt a bank, leading to all the depositors’ savings disappearing in a flash of mania:
And whereas savings destruction sharply reduces economic activity and poses an extreme hazard to national populations:
And whereas (1) banks are central to modern payments systems and (2) protections for firms or certain asset classes in specific circumstances do not necessarily protect savers from having their life’s work wiped out in an instant:
Be it enacted by the World Assembly, as follows:
-
All member nations are encouraged to establish a deposit insurance scheme that meets or exceeds the protective standards given by the Deposit Insurance Fund. All depository institutions are encouraged to enrol, and all such institutions with demand accounts are required to enrol, in the Deposit Insurance Fund.
-
There shall be established a Deposit Insurance Fund, hereinafter referred to as the Fund, with the following mandates. “Insured depository institutions” (IDI) are those institutions the Fund insures.
-
IDIs must pay premiums in proportion to the amount and risk of Fund-insured deposits. Extra premiums may be levied against what the Fund believes are systemically important institutions. IDIs receive a certificate and the ability to advertise that their deposits are insured by the Fund. Institutions not insured by the Fund may not make fraudulent claims that they are so insured.
-
If an IDI declares bankruptcy or is judged by the Fund to be critically undercapitalised, the Fund shall resolve it. The deposits insured by the Fund shall be determined ex ante by an insurance limit. That limit shall apply separately for each account-holder and be set roughly between two and three times that member nation’s median household income, with adjustments made by the Fund after taking that member nation’s advice.
-
The Fund shall resolve IDIs using one of the following options with the least cost to the Fund: (i) It may pay out to the depositors of such an institution their insured deposits. (ii) It may sell such an institution, or parts thereof, to another IDI, with some proportion of expected losses shared by the Fund, set at the Fund’s discretion. (iii) It may advance liquidity support to such an institution if the Fund believes that the institution is systemically important. (iv) It may administer the IDI until such time that it is able to take other action cost-efficiently.
-
In all cases where the Fund closes an insolvent IDI, it must (i) make reimbursements to depositors forthwith and (ii) liquidate the unsold assets and liabilities in receivership, distributing proceeds to stakeholders per section 3 infra.
-
The Fund shall collect and supervise the collection of financial and legal information to determine the risk of failure and therefore, appropriate premiums to be levied on IDIs. It may release to the public non-sensitive information that it believes useful in furthering depositor discipline or improving transparency of the banking sector.
-
The Fund may require IDIs to pre-pay premiums, in exchange for credit against future premiums, within a reasonable time window. When the Fund does not have the money necessary to secure its mandate and is unable to raise it from IDIs without severely weakening remaining institutions, it may borrow from IDIs or incur amortised non-callable fixed-rate liabilities secured against future General Fund assessments.
-
The Fund shall distribute monies raised at the liquidation of an IDI in the following order: (a) the Fund itself, but only to reimburse liquidation expenses, (b) insured depositors if they have not yet been fully reimbursed, (c) uninsured depositors, and (d) all other stakeholders according to the bankruptcy procedures of the relevant jurisdiction. The Fund may issue an advance dividend for insured depositors against a conservatively-estimated value of the receivership.
-
The Fund shall have the power to create and enforce regulations needed to ensure that it can efficiently and effectively carry out its mandate. Member nations must enforce and IDIs comply with such regulations. IDIs shall send to the Fund standardised consolidated reports of income and condition at regular intervals on standards specified by the Fund. After considering a cost-benefit analysis, the Fund or superseding institutions shall issue regulations establishing minimum reserve requirements, capital adequacy requirements, liquidity requirements, and corporate governance standards in IDIs. Such regulations must be periodically reevaluated.
-
The Fund shall release consolidated reports of income and condition at the close of each quarter and liaise with deposit insurance programmes within member nations to provide guidance and assistance in fulfilling mandates concurrent with those of the Fund.