At the end of that process of realising the assets in the rump, the Deposit Insurer learns how much it has lost. I want to stress that the DI typically incurs losses but discovers how much ex post. BIS central bankers’ speeches  3  Now imagine that the commercial bank subsidiary in question is big and complex. The realisation of the assets via a standard rump-administration is liable to destroy a lot of value, increasing the Deposit Insurer’s losses. And in any case that strategy may not be consistent with maintaining stability (or containing disorder). A way of cutting through that would be to bail in the Deposit Insurer. Rather than the Deposit Insurer waiting until the end of the process of a potentially destructive realisation of the assets, it would hear up front how much it had lost. In the scenarios I have described, its losses should be smaller that way. That approach could, if necessary, be applied in different regions to different distressed subsidiaries of the group. In the world of real banks, the firms have uninsured as well as insured deposit liabilities, and they typically combine deposit taking with some bond issuance. That means that, after equity and subordinated debt holders were extinguished, losses would be shared amongst the DIS and those bonds etc that could be bailed-in. Whether they got bailed-in together or in sequence (bonds first) would depend on whether a jurisdiction operated depositor preference in its insolvency regime.

However, aside from monetary policy, it lacks powerful decision-making institutions. This means that rules-based frameworks must act a substitute for centralised authority. For fiscal and economic issues, a unitary state would have a finance ministry which both defines and vetoes fiscal and broader economic policies. EMU must achieve the same effect through its economic governance framework. We know from  BIS central bankers’ speeches  3  research, including some by Professor Rogoff, also corroborated by experience, that softrules will not achieve the desired outcome. Strengthening the rules governing fiscal and broader macroeconomic policies is thus essential. The Stability and Growth Pact (SGP), which was created to discipline fiscal policy, has not worked well and is now being strengthened and complemented by a macroeconomic imbalances procedure. Greater automaticity in the implementation of the SGP is needed when unsustainable policies put the stability of the euro area as a whole at risk. Credible economic governance needs to be consistent and predictable. It also needs to be backed by timely, tough sanctions to encourage compliance. Fiscal surveillance should set ambitious benchmarks for excessive deficit and for setting the adjustment path towards a country’s medium-term budgetary objective. The liquidity dry-ups and contagion risks also call for stronger backstop mechanisms, to provide significant, albeit temporary, liquidity assistance. Stronger financial supervision at euro area level is also essential. Finally, national authorities need to take ownership of their European commitments. This means anchoring EU rules in their national legislation and making them mandatory and being held to account by domestic parliaments.