Michael Debabrata Patra: Navigating emerging challenges for deposit
insurers and fortifying crisis preparedness
Keynote address by Dr Michael Debabrata Patra, Deputy Governor of the Reserve
Bank of India, at the International Association of Deposit Insures (IADI) Asia Pacific
Regional Committee (APRC) International Conference, hosted by Deposit Insurance
and Credit Guarantee Corporation (DICGC), Jaipur, 13 August 2024.
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Mr. Alejandro Lopez, President, International Association of Deposit Insurance (IADI),
Dr. Eva Hupkes, Secretary General, IADI, Mr. M. Rajeshwar Rao, Deputy Governor,
Reserve Bank of India (RBI), distinguished representatives of the IADI and the Asia
Pacific Regional Committee (APRC) Secretariat, chief executive officers (CEOs) and
officials of deposit insurance agencies, delegates from central banks, eminent speakers
and panellists, invitees representing banks in India, and my colleagues from the Deposit
Insurance and Credit Guarantee Corporation (DICGC) and the Reserve Bank of India
(RBI), good morning to you all.
On behalf of the IADI APRC, it is my privilege to welcome each one of you to Jaipur and
to this Conference being hosted by the DICGC after a gap of nearly 13 years - the last
one was held in November 2011 at Jodhpur, a city not far from here. Founded in 1727
by Maharaja Sawai Jai Singh (the second) II, Jaipur is unique for its historic significance
and is renowned worldwide for its architecture, culture, history, and art. It is famously
known as the Pink City due to the distinctive colour of its buildings, which were painted
pink to welcome the Prince of Wales in 1876. Jaipur is home to several UNESCO World
Heritage sites. It is also one of India's first planned cities.
Over the next two days, our DICGC team has designed sessions with topically relevant
themes that we hope will capture your interest and engage your involved participation.
We shall crystal gaze into the outlook for deposit insurance in the context of newer
financial technologies, including central bank digital currencies (CBDCs) and tokenised
deposits. We shall also delve into climate-related financial risks and the imperative of
putting in place crisis preparedness and business continuity management procedures
and policy frameworks. We believe these discussions are timely as they would enable
us to make deposit insurance more resilient and future ready. I am sure that the ideas,
knowledge and experiences shared during the conference will shine light on the path
that lies ahead for practitioners in this increasingly multi-faceted field.
It is globally accepted that the deposit insurance function is critical to the design and
effective functioning of a robust financial safety net in an economy. It operates in
conjunction with and enhances the efficacy of the functions of prudential regulation,
supervision, lender of last resort (LOLR)/ emergency liquidity assistance (ELA) and
resolution. Together, they instil public confidence in the financial system and anchor
financial stability on an enduring basis. This assumes critical relevance in the context of
the hurtling pace at which the financial landscape is evolving across many dimensions.
Let me begin with deposit insurance crossing over the virtual frontier.
2. Digitalisation of Finance
The digitalisation of financial services brings a variety of opportunities for deposit
insurers to fulfil their mandate in more efficient and effective ways, including
modernisation in reimbursement, supervision, resolution and in communication.
Digitalisation also goes hand in hand with significant economies of scale. Yet as the
experience with banking sector stress in some jurisdictions in March 2023 showed, it
could also amplify and accelerate the materialisation of financial stability risks in the
form of episodes of extreme volatility induced by the interaction of online banking and
individual depositors coordinating through social media to fuel deposit outflows. In fact,
digital financial products and services are confronting deposit insurers with fundamental
questions regarding the fulfilment of their mandate - the potential coverage of new
financial products; assessing and pricing associated risks; the increased relevance of
beneficiary accounts through e-money issuers; and the involvement of third parties.
Moreover, new business models give rise to new risks or may increase the relevance of
existing risks. Digitalisation also entails cybersecurity risk. The unavailability of essential
technical infrastructure or unscrupulous activity against such infrastructure has the
potential to significantly impair deposit insurers' business continuity.
Two digital innovations in currencies and payment systems merit special attention as
both have implications for deposit insurance. The first one is central bank digital
currency (CBDC) - legal tender or fiat currency issued by a central bank in a digital
form. The major advantages of CBDCs are the finality of transactions (settlement risks
is eliminated as there is no bank intermediation), and real-time and cost effective
globalisation of payment systems. In the medium term, adoption of CBDCs by
unbanked people could enhance financial inclusion. As an increasing number of central
banks face the risk of large-scale use by the public of private or digital instruments that
may not be backed by or denominated in the domestic currency, CBDCs may assist in
mitigating this risk by being a central bank liability and a form of digital cash. To the
public, they would be an alternative to central bank issued cash and - to a certain
extent - to private money, such as bank deposits.
The impact of CBDC on deposits and hence deposit insurance is largely unknown as of
today. The operating models and design features of each individual jurisdiction's CBDC
will be a crucial factor in expanding our understanding of the balance of risks. For
deposit insurers, factors of key interest would be the degree of replacement of bank
deposits by CBDC, the division of labour between central and commercial banks and
the degree of privacy attached to CBDC usage. They also need to contend with the
possibility that during crises triggering depositor panic, CBDCs could be perceived as a
safe haven, thus rendering bank deposits, particularly uninsured deposits, more prone
to withdrawal and hence the risk of bank runs. Given the inherent links between such
systems and the objectives and operations of deposit insurers, it is expected that the
topic of CBDC will continue to grow in relevance for deposit insurers and the IADI,
warranting the need to keep abreast of developments and policy deliberations as they
emerge.
Second, the digital payments space is undergoing a silent revolution. In over 70
countries today, domestic payments reach their destination in seconds at near-zero
cost to the sender or the recipient with the growing availability of instant payment
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systems (IPS). Deposit insurers are having to re-evaluate operational risks posed to
depositors and member banks from the emergence of these 24/7 payment systems.
While digital innovations can ease cross-border supply of financial services, they can
also increase the likelihood of deposit insurers exposed to member banks with a
significant share of non-domestic depositors and additional challenges in the case of a
payout following bank default. In fact, the increasing ambit of cross-border banking
activities makes cross-jurisdiction cooperation between deposit insurers and other
financial safety net participants all the more relevant.
3. Tokenised Deposits
The growing adoption and utilisation of blockchains and distributed ledger technology
has given traction to tokenised deposits or digital representations of traditional bank
deposits hosted on a secure blockchain. Tokenisation and unified ledgers are also
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central to the Bank for International Settlement's (BIS's) vision for "Finternet" . Deposit
tokens can be of two types: 1) bearer-like instruments which are transferable; and 2)
non-transferable claims which are settled in central bank money or wholesale CBDC.
From the user's perspective, tokenised deposits should be inter-operable with different
systems, provide the same level of trust and confidence as other forms of money and
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should also comply with the "singleness of money" - the same value as other forms of
money. Tokenised deposits may have various use cases across domestic and
crossborder payments, trading and settlement, and for cash collaterals. In fact, by being
programmable, they can be used seamlessly in smart contracts, merging payment
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information and payment value to provide "atomic" settlement . Overall, tokenised
deposits may provide benefits of increased liquidity, cost effectiveness, improved
accessibility (24x7), fractional ownership and quick settlements. The BIS's Project Agora
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(Greek for "marketplace") will explore how tokenisation can enhance the function of
the monetary system.
Regulatory and financial stability issues associated with tokenisation include the
potential to amplify bank runs in times of stress; the legal architecture required to
ensure that tokenised deposits are treated as traditional deposits for various purposes,
including for deposit insurance; operational risks and cyber security concerns; and
technology solutions for ensuring seamless payments and resolution of troubled banks.
Deposit insurers must remain in readiness for tokenised deposits by reflecting on how
to modify their mandates and coverage, considering that tokenised deposits are
essentially claims on issuing banks like other forms of deposits. Moreover, the risks
posed by tokenised deposits have to be modelled for determining fund size and
premium rates. They will also have a bearing on the choice of modalities for resolution
and claim processing, with different banks using different technologies as also the
possibility that tokenised deposits could be held by depositors who are not KYC
compliant and not clients of issuing banks. Consequently, verification of the authenticity
and genuineness of claims may prove to be a testing challenge.
4. Climate Change-related Financial Risks
2023 was the warmest year in recorded history and 2024 may eclipse it. Climate
change is overwhelming us, imperilling humanity and the planet. Green swan events
due to climate change are likely to recur with rising intensity. Threats to financial
stability through physical risks and transition risks are already impacting the balance
sheets and operations of banks and other financial intermediaries from the rising
incidence of economic costs and financial losses from severe climate events. As
economies transition towards net zero targets, banks may be even more severely
impacted by transition risks from policy changes, technological developments and
investor and consumer preferences influenced by environmental, social and
governance (ESG) goals. It is against this backdrop that the Basel Committee on
Banking Supervision (BCBS) has issued 18 principles for effective management and
supervision of climate related financial risks. Some central banks and regulators are
engaged in the design and conduct of climate stress tests with a view to informing the
framing of monetary policy strategies and regulatory and supervisory approaches for
climate-related financial risk management among regulated entities.
From the point of view of deposit insurance, climate risks are different from traditional
risks in the sense that effective insurance schemes and hedging tools are not available.
Furthermore, modelling these risks is challenging due to evolving green taxonomy and
non-availability of data on greenhouse gas (GHG) emissions, particularly on emissions
down the value chain or scope 3 emissions. Nonetheless, as the frequency and severity
of natural disasters increase and morph into financial stability considerations, it is
crucial for deposit insurers to prepare for actively assessing and addressing the
potential impact of climate change on the institutions they oversee. In fact, the IADI's
surveys show that the majority of deposit insurers expect the relevance of ESG to
increase, with implications for net claim outflows and resolution costs. Fund
management by deposit insurers may need an overhaul, incorporating climate friendly
avenues such as sovereign green bonds which are increasingly gaining traction.
Some of the options that deposit insurers can explore are climate risk-based premiums,
climate stress testing of funds, and building in elements of sustainability into fund
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management, risk monitoring and resolution plans. Additionally, collaboration and
knowledge-sharing among deposit insurers, regulators and industry stakeholders can
help establish best practices and enhance resilience in the face of climate risk while
ensuring the stability of financial systems.
5. Enhancing Crisis Preparedness and Business Continuity
Management
It is evident that in addition to traditional risks, the new risks that have been set out
earlier make it imperative for deposit insurers and other financial safety net participants
to put in place frameworks for crisis preparedness and management that enhance their
ability to manage the failure of deposit taking institutions while mitigating potential
contagion effects. Crises tend to propagate quickly and hence must include augmented
provisions of emergency liquidity assistance and pre-emptive interventions in troubled
institutions.
The IADI's Core Principle 6 on "Deposit Insurer's Role in Contingency Planning and
Crisis Management" suggests contingency planning and crisis management policies
and procedures to ensure effective responses to bank failures and other catastrophic
events. Moreover, as pointed out therein, system-wide crisis preparedness strategies
and management policies should be the joint responsibility of all safety net participants
and co-ordination between them is essential. Core Principle 4 also emphasises the
strengthening of relationships with other safety net participants. Core Principle 9
recommends that emergency funding arrangements for the deposit insurance system -
including pre-arranged and assured sources of liquidity funding - may be explicitly set
out (or permitted) in law or regulation, including market borrowing. Deposit insurers
should actively implement these guidelines and formulate toolkits to address emerging
risks.
6. Conclusion
In closing, I would like to address the environment in which deposit insurance operates
in India in the context of these new challenges. India has started a pilot for wholesale
CBDC (e-W) starting November 01, 2022 and retail CBDC (e-R) starting December 01,
2022. India is also leveraging its digital public infrastructure to be in the forefront of the
digital revolution sweeping the world. The Unified Payments Interface (UPI) provides
immediate money transfer through mobile devices round the clock 24*7*365 and brings
access to multiple bank accounts and various financial services under a single app.
India is also engaged in interlinking UPI with fast payment systems (FPS) of other
countries to make cross-border payments instant and efficient. The RBI has joined the
Project Nexus, a multilateral international initiative conceptualised by the Innovation
Hub of the BIS to enable instant cross-border retail payments by interlinking FPSs of
Malaysia, Philippines, Singapore, Thailand and India. Turning to the climate, the
Government of India has announced that the net zero target to be achieved by 2070
along with other climate goals ahead of net zero. The RBI has issued a framework for
acceptance of green deposits and a disclosure framework on climate-related financial
risks in 2024 which envisages climate-related disclosures. The Government of India has
also been issuing sovereign green bonds.
These developments are defining milestones in the DICGC's journey of six decades.
Under its "paybox plus" mandate, the Corporation is authorised to make interim
payment of claims within a stipulated timeline to depositors of banks placed under
restrictions on deposit withdrawals (even before liquidation or amalgamation). As on
March 31, 2024 interim payments were made to 376,661 depositors amounting to 5359
Crores (approximately USD 640 Million). The DICGC's coverage includes 1997 banks
comprising 140 commercial banks and 1,857 cooperative banks - the largest number of
deposit-taking institutions covered by deposit insurance in the world, second only to the
US. Currently, the deposit insurance coverage limit (500,000 or approximately USD
6,000), fully protects 97.8 per cent of deposit accounts and 43.1 per cent of deposit
value. In the context of the emerging challenges, the DICGC is prioritising risk
management, including contingency planning and crisis management frameworks.
Digital transformation of all operations is underway. Public awareness campaigns are
being refashioned and stepped up. Work on ESG policy is being prioritised alongside a
strong focus on climate risk.
The global financial landscape is changing rapidly. For deposit insurers and other
financial safety net participants, it is a race to stay ahead of the curve amidst these
tectonic shifts. I am sure that your deliberations over the next two days will enhance our
collective understanding of the emerging challenges so that we adapt, prepare and
remain relevant and meaningful in inspiring public confidence and preserving financial
stability.
I wish the Conference all success.
Thank You.
Valuable comments received from Anup Kumar, Kirtan Singh Ningwal, Dhaval Sanghvi,
Ishan Katyal, Prithviraj Harish, Shobhit Agarwal, Arun Vishnu Kumar and editorial help
from Vineet Kumar Srivastava are gratefully acknowledged.
1
https://www.bis.org/about/bisih/topics/fmis/nexus.htm
2
https://www.bis.org/publ/work1178.htm
3
https://www.bis.org/publ/bisbull73.htm
4
Blockchain equivalent of delivery versus payment (DvP). Tokens and assets for which
payment is made are transferred simultaneously.
5
https://www.bis.org/press/p240403.htm
6
IADI Survey Brief on The Role of Climate in Deposit Insurers' Fund Management,
2023.