Regulatory changes to bank liability structures: implications for deposit insurance design

Abstract

“Tiered” depositor (or deposit insurer) preference as exists in Australia and has been recently introduced in the EU and UK calls into question the merits of ex ante fees for explicit, limited deposit insurance under such arrangements. This paper illustrates how, under such arrangements, the “fair price” of deposit insurance and risks to the deposit insurer are reduced to near zero unless virtually all bank non-equity funding is insured deposits. It is also argued that other regulatory changes affecting bank liability structures and resolution arrangements reinforce that effect, while introduction of “resolution funds” calls into question the rationale for a separate deposit insurance fund. While increased use of collateralised financing complicates resolution arrangements and raises other risks for financial stability, its impact on a “fair price” for deposit insurance under tiered preference is minimal.