Given the nature of their business, primary dealers are more likely to seek financing for their inventories of securities rather than look to invest cash in reverse repos with the Federal Reserve. 6  BIS central bankers’ speeches  operations through tri-party arrangements and an expanded set of counterparties now in place, we’re focusing on additional ways to tap the capabilities. Specifically, reverse repos with expanded counterparties could also be used in an overnight, fixed-rate, full-allotment facility with same-day settlement that directly targets overnight interest rates. Such a facility – which is essentially an extension of IOER to a broader set of counterparties – might help strengthen the floor and tighten control over short-term interest rates by increasing competition in the market and diverting deposits from banks, potentially improving the integration among the various market segments. Reverse repos with non-banks would remove reserves from the banking system. The TDF and term reverse repos are somewhat parallel tools, in that they were initially envisioned to auction a fixed quantity of term investments (deposits or reverse repos) to bank and non-bank counterparties, respectively, in order to drain reserves. Their capabilities have been tested periodically over the past several years through small-value exercises in order to ensure that they’ll be ready to deploy in size if and when needed. Nevertheless, for reasons discussed earlier, achieving an interest rate target through the management of the supply of reserves alone may not offer the best framework for implementing monetary policy in a system with an elevated level of reserve balances.

With the encouragement of the Bank of England, the UK’s bank supervisors – today at the FSA, from next year at a new Prudential Regulation Authority within the Bank – are requiring deposit takers to advertise prominently the availability and terms of deposit insurance, in every branch, on every ATM, on every key webpage. Further, crucially, the UK’s Financial Services Compensation Scheme will ensure they can deliver rapid payout, ideally within 7 days. This requires banks to hold more information about their depositors than it seems they would choose on their own. It is perfectly reasonable for society to demand this. Once those conditions are met,2 the deposit insurance regime has the potential to revolutionalise retail banking. By assuring retail depositors of safety, new banks should find it easier, other things being equal, to establish a deposit base, lowering barriers to entry into banking. Later I shall come to who pays for this: it isn’t government and the taxpayer but the industry itself. Deposit insurance and resolution But we know from experience that liquidation and payout to insured depositors can be a seriously inferior way of handling the failure of some deposit-takers. That is because liquidation can entail a destruction of value, disruption to the provision of services, and other spillovers to the rest of financial system. Some of that can be avoided if, instead, we are able to transfer the insured deposit book and some good assets to another bank (or other  1  Paul Tucker is chairman of the FSB’s Resolution Steering Group.