INTERRELATIONSHIPS AMONG SAFETY-NET PARTICIPANTS 

Abstract 

Deposit insurance is one component of many countries’ financial safety net, which also 

includes prudential regulation and supervision, and the lender-of-last-resort function. In 

many countries, a department of the government—generally, the ministry of finance or the 

treasury—also plays an important role in the financial safety net. The interrelationships 

among these players can vary significantly and are the outgrowth of the institutional, 

economic and financial situation of a country, as well as of its history. 

In order to design an effective deposit insurance system and to contribute to an effective 

financial safety net, smooth cooperation and goodwill among a country’s financial safetynet participants are essential. Information sharing and coordination are particularly 

relevant, and explicit arrangements should be designed to avoid or minimise potential 

conflicts among safety-net participants. The more complex the safety-net institutional setup is, the more relevant the “interrelationships issue” becomes. The need for coordinated 

actions by safety-net participants is particularly important when the need to handle bank 

failures arises. There also needs to be a strong accountability regime in place. 
 

 

 

 

 

 

 

INTERRELATIONSHIPS AMONG SAFETY-NET PARTICIPANTS 

The following paper represents the work of the Subgroup on Interrelationships among 

Safety-Net Participants.1 Every country has a safety net that underpins the financial 

system. This safety net usually includes the central bank, a department of the government 

such as the ministry of finance or the treasury, an entity responsible for prudential 

regulation and supervision, and, in many cases, a deposit insurer or a deposit insurance 

agency. The paper focuses on: 1) how the institutional set-up of a country’s safety net 

influences the interrelationships among the various agencies involved; 2) information 

sharing between safety-net participants; and 3) the need for coordination among safety-net 

participants. 

Interrelationships and the Institutional Set-Up of a Country’s Safety Net 

Deposit insurance is one component of many countries’ financial safety net, which also 

includes prudential regulation and supervision, and the lender-of-last-resort function. In 

many countries, including those countries represented in the Subgroup, a department of the 

government—generally, the ministry of finance or the treasury—also plays an important 

role in the financial safety net. For example, officials from the ministry of finance or 

treasury are key players when a crisis-management situation may necessitate the use of 

government resources. 

The interrelationships among the safety-net participants can vary significantly. These 

interrelationships are the outgrowth of the institutional, economic and financial situation of 

a country, and of its history. Irrespective of the specific structure of a country’s financial 

safety net, however, smooth cooperation and goodwill among the various components are 

key to an effective deposit insurance system. A well-designed safety net is integral to a 

smooth-functioning financial system and contributes to economic stability. 

A need for coordination exists in any institutional set-up, as three different 

instrumentsdeposit insurance, lender of last resort and supervisionare used, each with 

its own criteria, to achieve the common objective of banking-system stability. However, 

the nature and the extent of the problem vary with the specific institutional set-up a country 

has adopted. 

When a single agent—generally the central bank—acts simultaneously as lender of last 

resort, banking supervisor and deposit insurer, the interrelationships issue is an internal 

matter and thus should be capable of being dealt with and resolved relatively simply. The 

smooth resolution of potential conflicts is dependent on an adequate accountability regime 

among the departments that are responsible for each mandate. 

1

 The Subgroup is comprised of representatives from Italy (coordinator), Argentina, Chile, France, Jamaica 

and Japan. 
 

 

 

 

 

 

 

When, however, the functions of lender of last resort, banking supervisor and deposit 

insurer are allocated to separate agencies, the interrelationships issue may be more 

complex, as each agency is held accountable for discharging its own mandate.2 As a 

consequence, various issues related to information sharing, allocation of powers and 

responsibilities, and coordination among the different functions need to be clearly and 

explicitly addressed in order to promote and maintain the credibility of the safety net. 

There are no specific rules or guidelines to address and, possibly, resolve the 

interrelationships issue described above. Possible solutions by their very nature must be 

country-specific. Moreover, even within the same country, the safety-net institutional setup and, therefore, the characteristics of the relationships among the various agencies evolve 

in response to changes in the country’s financial system. 

When a country decides to implement an independent deposit insurance system, or to 

reform an existing deposit insurance system, it is important that any “interrelationships 

issues” that may arise should be addressed.3 This task is made easier if policymakers 

consider and are guided by what would be in the best interest of the general public. 

Information Sharing: Interrelationships and the Deposit Insurer’s Information Needs 

Information sharing among safety-net participants is essential to an effective deposit 

insurance system. Indeed, in order to discharge their mandates effectively, deposit insurers 

and other safety-net participants should have access to an adequate flow of information. 

The need for information on the part of the deposit insurer varies significantly according to 

its institutional mandate and its powers. In a simple paybox system, for example, the 

deposit insurer should have the necessary information to be able to reimburse depositors 

whenever necessary, including information on the amount of insured deposits held by 

individual depositors. 

For its part, a risk-minimising deposit insurer has greater needs for information because of 

its broader mandate. It must be able to assess the financial condition both of the industry 

and of individual insured institutions, as well as to anticipate the financial troubles of 

individual institutions and to deal with them effectively when they arise. Thus, depending 

on its mandate, a risk-minimising deposit insurer may need both macro-level—industry 

information—and micro-level information—information on individual institutions. 

2

 The different functions of the safety net are not necessarily allocated to three or more separate agencies. For 

instance, in Italy and in Jamaica the financial institutions’ supervisory authority is a separate department of 

the central bank; in Chile the central bank is also the authority responsible for paying-off depositors when a 

bank fails. Argentina’s institutional set-up evolved from a single-agent framework to the current framework 

of three separate agencies. 

3

 For example, the paper on powers discusses that the roles and responsibilities of the deposit insurer vis-a-vis

other safety-net participants could be spelled out in legislation before the establishment or the reform of the 

deposit insurance system. The objectives of such legislation include ensuring that adequate information 

sharing among safety-net participants occurs and all parties are held accountable for their actions. 
 

 

 

 

 

 

 

 

 

 

 

Industry information encompasses macroeconomic conditions, main financial trends, as 

well as information about important policy consultations that may have a significant effect 

on insured institutions. In turn, information on individual institutions is crucial in order for 

the deposit insurer to evaluate the soundness of each member institution. 

In the case of failing institutions, a deposit insurer should have access as soon as possible to 

specific information, including the amount of insured deposits and their size distribution at 

the institution so that the deposit insurer can estimate its liquidity requirements, resource 

needs and possible risk exposure. The deposit insurer also needs information regarding the 

estimated total value of the institution’s assets and the time frame for the liquidation 

process, given that the value of the institution’s assets depends on the time necessary to 

liquidate them. This kind of information, however, often is difficult to collect and evaluate 

even by the supervisor, especially when a strong disclosure regime is not in place or 

institutions’ records and accounting rules are not transparent. 

The supervisory authority is usually the primary source of information for the deposit 

insurer for several reasons. First, and most important, the supervisory authority in most 

countries has the authority to examine depository institutions. Second, laws in many 

countries normally require depository institutions to submit periodic, accurate prudential 

reports to the supervisory authority. Moreover, supervisors often are allowed to obtain any 

additional information necessary to carry out their institutional mandate. Because of its 

specific powers and responsibilities, the supervisory authority often is the only safety-net 

agency able to assess accurately and ensure the quality of the information provided by 

financial institutions. A high-quality information set is fundamental for the deposit insurer 

if it is to carry out its institutional mandate effectively. 

Depending on the breadth of their individual mandates, deposit insurers may need to 

supplement information provided by supervisors with information directly collected from 

insured institutions. For example, if a deposit insurance system has an ex-ante fund, 

information must be received on the level of insured deposits on which premiums are 

based. In order to ensure that the deposit insurer obtains the information it needs to fulfil 

its mandate while minimising reporting requirements on its membership, it is important to 

coordinate effectively the collection and sharing of information between the deposit insurer 

and the other safety-net participants. One approach is to have the supervisory authority act 

as the primary collector of information required for supervisory and deposit-insurance 

purposes. However, the deposit insurer should still be able to access supplemental 

information from its members as the deposit insurer will need, from time to time, 

information directly pertaining to its operations and not related to safety-and-soundness 

issues.4 

Obviously, deposit insurers should be able to access easily all the information publicly 

disclosed by member institutions. The effectiveness of a deposit insurance system is 

4

 This information could include, for purposes of verification, the level of deposits held for premium 

assessments and information on specific products and their insurability. 
 

 

 

 

 

 

 

 

 

 

clearly enhanced if laws and regulation provide for a strong information-disclosure regime, 

which is characterised by a high degree of transparency of banks’ financial statements and 

accounting rules. 

It is important that information be accessed by deposit insurers on a timely basis, in order to 

ensure that an effective system of ongoing evaluation both of the industry and of individual 

institutions is in place. It is essential to have early warning of problem banks, so that in 

case of a failure the resolution can be implemented in a very short time. The experience of 

various deposit insurance systems around the world shows that strong coordination, 

information-sharing and exchange arrangements are essential. In some cases, however, the 

effectiveness of the arrangements actually can be enhanced when high-level officials from 

the different safety-net participants establish formal arrangements for sharing information 

as well as analyses and views on the state of the financial system.5 All confidential 

information should remain so. 

Coordination among Safety-Net Participants 

The need for coordination and goodwill among the various safety-net participants is 

directly related to the possibility of conflicting mandates. When dealing with bank crises, 

for example, it is particularly important to establish precisely which safety-net 

participant(s) has the power to formally declare an institution to be insolvent (or formally 

initiate the liquidation procedure of a failed institution).6 

Tensions may arise between the deposit insurer and the lender of last resort with respect to 

financial assistance to troubled institutions. Indeed, the granting of funds to a troubled 

institution may create problems if the use of those funds by the troubled insured institution 

is not properly monitored or even conditioned by the central bank. Indeed, troubled 

institutions could use the financial assistance provided by the lender of last resort to engage 

in risky activities (“gambling for resurrection”), significantly increasing the deposit 

insurer’s risk exposure and potential losses.7 

Potential tensions between the supervisory authority and the deposit insurer may arise if the 

supervisor, who is generally in charge of closing a bank, is viewed to be delaying or even 

avoiding such an action altogether (forbearance). As long as failures of insured institutions 

are thought to somehow represent supervisory failures, there could be a tendency to give 

troubled institutions “the last chance” in order to avoid a potential crisis and its attendant 

5

 In some countries, information-sharing arrangements are mainly informal, and the bank supervisory 

authorities provide the deposit insurers with the necessary information on a regular basis. In other countries, a 

formal memorandum of understanding is used to manage relationships. 

6

 As stated above, the distribution of powers among safety-net participants is discussed in the paper on 

powers. 

7

 At least in principle, there could be cases in which the resources provided by the central bank, whose 

repayment is usually guaranteed by the troubled institution’s best assets, are actually used to repay uninsured, 

rather than insured, liabilities or to invest in riskier assets. In this case, the deposit insurer could find that its 

losses are higher than they otherwise would be. 
 

 

 

effect on the supervisor’s reputation; this, in turn, could create an incentive for troubled 

institutions to engage in riskier activities. 

This is obviously not the case when failures of individual institutions are viewed to be a 

“natural” result of competition among financial institutions. Indeed, the primary objective 

of bank supervision is to avoid systemic banking crises; the pursuit of this objective 

generally is compatible with accepting failures of some insured institutions. 

An important and effective way to promote smooth coordination on the part of safety-net 

participants is a clear division of powers and responsibilities. Although this clear division 

can be considered as a minimum requirement when addressing coordination issues, 

provision for prompt-corrective-action rules could be an additional requirement in order to 

promote smooth coordination among safety-net participants. 

In the case of deposit insurers with broader mandates, it is important that the insurer has 

sufficient control of the risks it actually faces. This objective also can be achieved by 

coordinating the powers of the different safety-net participants so that they do not operate at 

cross-purposes. Although the precise mechanisms of the coordination obviously will 

depend on each country’s institutional set-up, efforts should be made, for example, to 

ensure that the powers to revoke deposit insurance are coordinated with licensing 

requirements. 

Finally, a clear division of powers and responsibilities is particularly important with respect 

to the closure and liquidation of insured institutions. This division should be spelled out 

beforehand, for example, in legislation. Indeed, when failures occur, it could be very hard 

for the participants in the safety net to fulfil their responsibilities without a clear ex-ante

mandate. In such cases, events may unfold quickly and time becomes of the essence. 

Reconciliation of potential conflicting mandates requires prior discussion and a high degree 

of transparency when setting the “rules of the game.” 

Formal Mechanisms to Ensure Coordination and Information Sharing 

Although informal arrangements for information sharing and coordination can work well in 

certain circumstances, given the sensitivity of institution-specific information and the 

challenge of maintaining open communication channels, it may be useful to formalise these 

agreements either through legislation, memoranda of understanding, formal agreements or a 

combination of these techniques. 

If formal information-sharing arrangements are relied on, they should clearly acknowledge 

the roles and responsibilities of the respective parties, set out what is to be shared and by 

whom, as well as the type, level of detail and frequency of information to be exchanged. 

Confidentiality of information exchanged between parties also should be respected at all 

times. 
 

 

Apart from these specifics, formal agreements also may be useful in providing a general 

framework for safety-net participants to coordinate their related operational and policymaking activities by promoting regular meetings and opportunities for consultation. 

Conclusions 

The main conclusions of this paper are as follows: 

• When considering the creation of a deposit insurance system, a country should address 

effectively the issues related to the deposit insurer’s relationships with the other safetynet participants. Depending on the institutional, economic and financial situation of a 

country, and its history, the characteristics of the relationships among the central bank, 

the ministry of finance or the treasury, the supervisory agency, and the deposit insurer 

can vary substantially. Irrespective of the specific structure of a country’s financial 

safety net, however, smooth cooperation and goodwill between the components are key 

to an effective deposit insurance system. 

• Information sharing among safety-net participants is essential for an effective deposit 

insurance system. Indeed, in order to discharge their mandates, deposit insurers should 

have access to an adequate flow of relevant information. Ideally, information should be 

timely, accurate and relevant; a strong disclosure regime is based on these elements. 

The effectiveness of a deposit insurance system is clearly enhanced if laws and 

regulations provide for a strong information disclosure regime, which is characterised 

by a high degree of transparency of institutions’ balance sheets and accounting rules. 

• The need for coordination and goodwill among the various safety-net participants is 

directly related to the emergence of potential conflicts between them. The most 

important and effective way to promote smooth coordination on the part of safety-net 

participants is to provide for a clear division of powers and responsibilities among them 

and appropriate mechanisms to ensure coordination and information sharing.