The Role of Deposit Insurance in Contributing to Financial Stability ...
The Role of Deposit Insurance in Contributing to Financial Stability ...
The Role of Deposit Insurance in Contributing to Financial Stability ...
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<strong>The</strong> <strong>Role</strong> <strong>of</strong><br />
<strong>Deposit</strong> <strong>Insurance</strong> <strong>in</strong><br />
Contribut<strong>in</strong>g <strong>to</strong> F<strong>in</strong>ancial<br />
<strong>Stability</strong>: A Global<br />
Perspective<br />
Presentation <strong>to</strong> the First <strong>Deposit</strong> Protection<br />
Week<br />
Abuja, Nigeria<br />
16 September 2005<br />
www.iadi.org<br />
J.R. LaBrosse<br />
Secretary General
F<strong>in</strong>ancial <strong>Stability</strong> and Why Protect<strong>in</strong>g <strong>Deposit</strong>ors<br />
Matters<br />
Forms Of <strong>Deposit</strong>or Protection<br />
Topics <strong>to</strong> be Covered <strong>in</strong> this Forum<br />
<strong>Role</strong> <strong>of</strong> IADI<br />
www.iadi.org
Direc<strong>to</strong>rs and Management <strong>of</strong> Banks<br />
Government<br />
www.iadi.org
Direc<strong>to</strong>rs and Management <strong>of</strong> Banks<br />
Government<br />
www.iadi.org
Protect<strong>in</strong>g <strong>Deposit</strong>ors<br />
- Why It Matters<br />
Government <strong>Role</strong><br />
Public Perception<br />
Ma<strong>in</strong>ta<strong>in</strong><strong>in</strong>g Confidence<br />
Social Costs<br />
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Forms <strong>of</strong><br />
<strong>Deposit</strong>or Protection<br />
Implicit<br />
Blanket Guarantees<br />
Explicit<br />
www.iadi.org
Forms <strong>of</strong><br />
<strong>Deposit</strong>or Protection<br />
Implicit<br />
Blanket Guarantees<br />
Explicit<br />
www.iadi.org
Forms <strong>of</strong><br />
<strong>Deposit</strong>or Protection<br />
Implicit<br />
Blanket Guarantees<br />
Explicit<br />
www.iadi.org
Alternatives <strong>to</strong><br />
<strong>Deposit</strong>or Protection<br />
Market Discipl<strong>in</strong>e and Disclosure<br />
<strong>Deposit</strong>or Preference<br />
Narrow Banks<br />
Subord<strong>in</strong>ated Debt<br />
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Market Discipl<strong>in</strong>e<br />
and Disclosure<br />
Borrows from unregulated bank<strong>in</strong>g model<br />
Reliance on full disclosure and exposure<br />
<strong>of</strong> all agents <strong>to</strong> market discipl<strong>in</strong>e<br />
A conceptual model but useful elements<br />
www.iadi.org
Market Discipl<strong>in</strong>e<br />
and Disclosure<br />
Borrows from unregulated bank<strong>in</strong>g model<br />
Reliance on full disclosure and exposure<br />
<strong>of</strong> all agents <strong>to</strong> market discipl<strong>in</strong>e<br />
A conceptual model but useful elements<br />
www.iadi.org
Advantages<br />
Disadvantages<br />
www.iadi.org
Legal Actions<br />
Guarantees and Undertak<strong>in</strong>gs<br />
www.iadi.org
Legal Actions<br />
Guarantees and Undertak<strong>in</strong>gs<br />
www.iadi.org
Explicit <strong>Deposit</strong><br />
<strong>Insurance</strong> Systems<br />
Credible and contributes <strong>to</strong> f<strong>in</strong>ancial stability<br />
Limits government fiscal and political exposure<br />
Reduces bank runs<br />
www.iadi.org<br />
Cannot deal with f<strong>in</strong>ancial system <strong>in</strong>stability<br />
Requires appropriate skills and resources
Explicit <strong>Deposit</strong><br />
<strong>Insurance</strong> Systems<br />
Credible and contributes <strong>to</strong> f<strong>in</strong>ancial stability<br />
Limits government fiscal and political exposure<br />
Reduces bank runs<br />
www.iadi.org<br />
Cannot deal with f<strong>in</strong>ancial system <strong>in</strong>stability<br />
Requires appropriate skills and resources
Explicit <strong>Deposit</strong><br />
<strong>Insurance</strong> Systems<br />
Credible and contributes <strong>to</strong> f<strong>in</strong>ancial stability<br />
Limits government fiscal and political exposure<br />
Reduces bank runs<br />
www.iadi.org<br />
Cannot deal with f<strong>in</strong>ancial system <strong>in</strong>stability<br />
Requires appropriate skills and resources
www.iadi.org<br />
International Experience <strong>in</strong><br />
Design<strong>in</strong>g <strong>Deposit</strong> <strong>Insurance</strong><br />
Systems
www.iadi.org<br />
International Experience <strong>in</strong><br />
Design<strong>in</strong>g <strong>Deposit</strong> <strong>Insurance</strong><br />
Systems
www.iadi.org<br />
International Experience <strong>in</strong><br />
Design<strong>in</strong>g <strong>Deposit</strong> <strong>Insurance</strong><br />
Systems
www.iadi.org<br />
International Experience <strong>in</strong><br />
Design<strong>in</strong>g <strong>Deposit</strong> <strong>Insurance</strong><br />
Systems
www.iadi.org<br />
International Experience <strong>in</strong><br />
Design<strong>in</strong>g <strong>Deposit</strong> <strong>Insurance</strong><br />
Systems
www.iadi.org<br />
International Experience <strong>in</strong><br />
Design<strong>in</strong>g <strong>Deposit</strong> <strong>Insurance</strong><br />
Systems
Explicit <strong>Deposit</strong><br />
<strong>Insurance</strong> Systems<br />
Credible and contributes <strong>to</strong> f<strong>in</strong>ancial stability<br />
Limits government fiscal and political exposure<br />
Reduces bank runs<br />
www.iadi.org<br />
Cannot deal with f<strong>in</strong>ancial system <strong>in</strong>stability<br />
Requires appropriate skills and resources
Self Assessment<br />
Model<br />
Design<strong>in</strong>g, Implement<strong>in</strong>g and Enhanc<strong>in</strong>g an Effective <strong>Deposit</strong> <strong>Insurance</strong> System<br />
www.iadi.org
Introduc<strong>in</strong>g a <strong>Deposit</strong> <strong>in</strong>surance<br />
System<br />
Implicit <strong>Deposit</strong>or Protection don t provide benefits<br />
Blanket guarantees are an extreme form <strong>of</strong> moral<br />
hazard<br />
Bank runs are very costly<br />
When a bank fails there is a need for a mechanism<br />
<strong>to</strong> settle deposi<strong>to</strong>r claims and <strong>to</strong> optimize recoveries<br />
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Views on<br />
<strong>Deposit</strong> <strong>Insurance</strong><br />
it is clear that deposit <strong>in</strong>surance has<br />
played a key--at times even critical--role<br />
<strong>in</strong> achiev<strong>in</strong>g the stability <strong>in</strong> bank<strong>in</strong>g and<br />
f<strong>in</strong>ancial markets that has characterized<br />
the past almost seventy years<br />
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Views on<br />
<strong>Deposit</strong> <strong>Insurance</strong><br />
the positive effects <strong>of</strong> deposit <strong>in</strong>surance<br />
schemes now seem generally agreed at least<br />
by government and <strong>in</strong>ternational <strong>of</strong>ficials.<br />
One important benefit is consumer<br />
protection for those deemed <strong>in</strong>capable <strong>of</strong><br />
adequately assess<strong>in</strong>g the risks <strong>of</strong> <strong>in</strong>dividual<br />
banks themselves.<br />
www.iadi.org
Views on<br />
<strong>Deposit</strong> <strong>Insurance</strong><br />
It is the conviction <strong>of</strong> the FSF that this report<br />
(F<strong>in</strong>al Report <strong>of</strong> the Work<strong>in</strong>g Group on <strong>Deposit</strong><br />
<strong>Insurance</strong>), with such a pragmatic approach will<br />
serve its role as a useful <strong>to</strong>ol for policy makers<br />
who want <strong>to</strong> design deposit <strong>in</strong>surance systems<br />
that preserve the benefits <strong>of</strong> heightened<br />
f<strong>in</strong>ancial stability and small deposi<strong>to</strong>rs<br />
protection, without at the same time <strong>in</strong>creas<strong>in</strong>g<br />
moral hazard or reduc<strong>in</strong>g market discipl<strong>in</strong>e.<br />
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www.iadi.org
www.iadi.org
Public Awareness<br />
<strong>The</strong> Importance <strong>of</strong> this Issue<br />
Can t be Stressed Enough<br />
Measures <strong>to</strong> limit it<br />
www.iadi.org
Shar<strong>in</strong>g <strong>Deposit</strong> <strong>Insurance</strong><br />
Expertise<br />
Sett<strong>in</strong>g out Guidance<br />
www.iadi.org
Tra<strong>in</strong><strong>in</strong>g and Network<strong>in</strong>g<br />
Best Practices<br />
www.iadi.org
INTERNATIONAL ASSOCIATION<br />
OF DEPOSIT INSURERS<br />
SAM Model<br />
www.iadi.org
Step 1 - Public-Policy<br />
Objectives<br />
v Protection <strong>of</strong> small unsophisticated<br />
deposi<strong>to</strong>rs<br />
v Ma<strong>in</strong>ta<strong>in</strong><strong>in</strong>g confidence <strong>in</strong> the<br />
f<strong>in</strong>ancial system<br />
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Step 2 - Situational<br />
Analysis<br />
v Assessment aga<strong>in</strong>st current<br />
conditions<br />
v Market health and read<strong>in</strong>ess<br />
v Structural and <strong>in</strong>formation shar<strong>in</strong>g<br />
arrangements<br />
v Environmental scann<strong>in</strong>g - current and<br />
future (SWOT) risks<br />
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Step 3<br />
Validation<br />
vOverall accountability report<br />
vAssessment and report<strong>in</strong>g<br />
www.iadi.org
Step 4<br />
Strategic Action Plan<br />
vTimel<strong>in</strong>es and critical path<br />
vDeliverables<br />
vAccountability regime<br />
vIncentives<br />
vTransparency and disclosure<br />
vSystem design<br />
vCommunications plan<br />
www.iadi.org
Step 5<br />
Implementation Phase<br />
v<br />
v<br />
v<br />
v<br />
v<br />
v<br />
v<br />
v<br />
v<br />
Mandate<br />
Powers<br />
Accountability and <strong>in</strong>dependence<br />
Operations<br />
Communications<br />
Information-exchange arrangements<br />
Availability <strong>of</strong> knowledgeable staff<br />
Implementation <strong>of</strong> policies, practices, systems,<br />
laws<br />
Transitional arrangements for elim<strong>in</strong>ation <strong>of</strong><br />
implicit guarantees<br />
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Step 6 - On-go<strong>in</strong>g Evaluation<br />
and Validation<br />
v<br />
v<br />
v<br />
v<br />
v<br />
v<br />
v<br />
v<br />
v<br />
v<br />
State <strong>of</strong> f<strong>in</strong>ancial system and markets (<strong>in</strong>clud<strong>in</strong>g<br />
currency)<br />
Economic conditions<br />
Public awareness<br />
Regula<strong>to</strong>ry and supervisory environment<br />
State <strong>of</strong> legislative structure and support<strong>in</strong>g systems<br />
Effectiveness <strong>of</strong> corporate governance mechanisms<br />
State <strong>of</strong> audit<strong>in</strong>g and account<strong>in</strong>g standards<br />
Effectiveness <strong>of</strong> legal framework<br />
Education and tra<strong>in</strong><strong>in</strong>g <strong>of</strong> pr<strong>of</strong>essional staff<br />
State <strong>of</strong> deposi<strong>to</strong>r protection<br />
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