RBI Dy Governor highlights urgent need to evolve deposit insurance system

Jaipur (Rajasthan) [India], August 13 (ANI): Reserve Bank of India (RBI) Deputy Governor Michael Patra on Tuesday underscored the urgent need for evolving deposit insurance systems to meet the challenges posed by rapid financial innovation and climate change.

Speaking at an event organised by the Deposit Insurance Corporation of Global Communities (DICGC) on Tuesday in Jaipur, the RBI Governor pointed out emerging new risks such as cyber threats and the potential for accelerated financial instability that he said the rapid pace of digital transformation has introduced.

During his address, the deputy governor pointed a cautionary example to the March 2023 banking sector stress where digital financial products and social media-fueled deposit outflows exposed systemic risks.

“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,” he said.

Patra focused on the critical themes shaping the future of deposit insurance, including the rise of Central Bank Digital Currencies (CBDCs), tokenized deposits, and the digitalization of financial services.

He stressed that these technological advancements, while offering significant benefits, also pose new risks that could disrupt traditional financial safety nets.
Going further, the deputy governor highlighted the dual impact of digitalisation on deposit insurance, noting that while it can enhance efficiency and reduce costs, it also introduces vulnerabilities.

Another focal point of Patra’s speech was the rise of tokenised deposits, which are digital representations of traditional bank deposits utilising blockchain technology.
He noted that while tokenised deposits offer benefits such as increased liquidity and faster settlements, they also bring new regulatory and operational challenges.
Patra also addressed the threat of climate change, describing it as a significant risk to global financial stability.

The RBI Deputy Governor emphasised the importance of incorporating climate risk considerations into deposit insurance frameworks, including climate risk-based premiums and stress testing of insurance funds.

“As the frequency and severity of natural disasters increase, deposit insurers must proactively ensure the resilience of the institutions they oversee,” Patra said.
Patra highlighted the necessity of fortifying crisis preparedness and business continuity management among deposit insurers. He urged the global financial community to develop robust frameworks for managing the failure of deposit-taking institutions and preventing contagion.

“Crises are becoming more complex and fast-moving,” Patra noted. “Ensuring access to emergency liquidity and enhancing coordination among global financial safety net participants will be crucial in maintaining stability,” he said.