Contingency planning: A practitioner's guide drawing from lessons learned from dealing with bank failures

Abstract

A key responsibility for a depositor protection organisation is to be in a position, as soon as it begins operating, to reimburse depositors when a bank fails. A basic requirement is for the deposit insurer to know when a bank failure is going to happen. But not all deposit protection agencies know when that is going to happen given the nature of their mandates, roles and responsibilities. If, for example, the agency is a pay-box, then it might be told by the bank supervisor that a pay out is required without any advance warning. Depositor protection organisations with broader mandates might have more advance warning and even play a key role in determining whether a troubled bank that accepts deposits might be closed. In these latter circumstances, more time can be given for advance preparations. When a bank fails it is often regarded as a crisis and indeed, banking problems can lead to very expensive overhauls of a country banking system. The purpose of this paper is to set out some practical considerations regarding the advance planning that deposit protection agencies should consider doing in order to fulfil their mandates — particularly with respect to reimbursing depositor claims in a timely fashion after a bank failure.