Volume II - PDF - International Association of Deposit Insurers

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•BACKGROUND DOCUMENTS• Part I: Research countries, directors and the chief executive officers of institutions who are replaced by the supervisor cannot take a similar position in another institution for a stated period of time. In still other countries, the deposit insurer may sue to recover losses resulting from wrongful acts by directors, officers, attorneys, accountants, appraisers, and others who have provided professional services to an institution that subsequently failed. primary objectives of deposit insurance in their country; (b) the conditions that may determine the effectiveness of particular methods of curtailing moral hazard; (c) the commitment and the ability of the country to meet these conditions; and (d) progress in advancing a reform agenda to eliminate gaps in the country’s ability to implement particular methods. Conclusions The main conclusions of this paper can be summarised as follows: Moral hazard is present in deposit insurance systems. Greater efforts to curtail moral hazard are needed in many cases. In general, moral hazard may be difficult to contain in countries that have serious gaps in their legal, accounting, disclosure, and supervisory regimes. Various methods are available in principle for curtailing moral hazard. The moral-hazard issue may be addressed by ensuring good corporate governance and management of individual institutions, promoting market discipline exercised by uninsured depositors and other creditors, and instituting regulatory discipline exercised by supervisors and, in some countries, deposit insurers. These methods are most effective if they work in tandem to control moral hazard. Many financial systems have elements of all three. Owners, managers, and directors also may have incentives to control moral hazard, but reinforcement by regulatory action may be needed. Regulatory discipline can substantially affect the incentive structure faced by owners, managers, and directors, and effectively reduce moral hazard. All of the methods for controlling moral hazard have potential advantages and disadvantages. Choices among these methods generally involve trade-offs among competing public-policy objectives and risks, and reflect a variety of factors existing in a particular country. Thus, in choosing among methods of reducing moral hazard, policymakers in a particular country may wish to consider: (a) the Endnotes 1 The members of the Subgroup on Moral Hazard are officials from the United States (coordinator), Chile, France, Germany, Italy, Japan, and The World Bank. 2 Losses sustained by uninsured depositors and other creditors generally refer to losses of principal. In addition, uninsured depositors in some countries are subject to substantial delays and uncertainties as to the timing and amount of recoveries, and to resultant liquidity strains. Payments to insured depositors in some countries also are subject to considerable delay. Although these conditions may tend to curtail moral hazard, they also may undermine the credibility of, and public confidence in, deposit insurance. 3 Discussions of insurance levels generally refer to the amount of insured balances that can be held by a depositor in individual accounts in a particular institution. Depending on applicable law in any particular country, an individual depositor may be able to own a considerably larger aggregate amount of insured funds in a single institution through the use of individual, joint-ownership, and trustee accounts. 4 In addition to interbank deposits, some countries exclude from coverage deposits of insiders and governments, deposits denominated in foreign currencies, illegal deposits—such as those made for the purpose of money-laundering—and high-rate deposits. Insurance levels and the scope of coverage are discussed in the paper on coverage. 5 This discussion refers to primary objectives of deposit insurance. Many countries pursue multiple objectives —for example, financial stability and consumer protection. These issues are discussed in the paper on public-policy objectives. 25 Guidance for Developing Effective Deposit Insurance Systems: Volume II
•BACKGROUND DOCUMENTS• Part I: Research 6 Several alternatives for coinsurance have been distinguished. First, there may be no protection up to a specified level (in a manner analogous to the deductible in many automobile insurance policies) and protection for a percentage of deposits above that level. Second, protection may be provided for a percentage of deposits—for example, 90 percent, up to a level—for example, EURO 20,000. Third, protection may be provided for a percentage of the amount on deposit, with the percentage declining as the amount increases. Finally, coinsurance can be applied selectively to specific deposit products; for example, one country has coinsurance for term deposits and 100 percent coverage for demand deposits. 7 Coinsurance exists in 20 of the 67 countries with explicit, limited-coverage deposit insurance systems for which data are available. See Gillian G.H. Garcia, Deposit Insurance: Actual and Good Practices, International Monetary Fund, Table 11. 8 The Financial Stability Forum’s Working Group on Deposit Insurance report noted that not all coinsurance systems are able to maintain depositor confidence when the financial system is under stress. See, Financial Stability Forum Working Group on Deposit Insurance, A Consultative Process and Background Paper, June 2000, p. 6. 9 These issues are discussed in detail in the paper on depositor priority. 10 Preference also may be given to a particular group of depositors, such as depositors with small balances. In some countries, the deposit insurance authority, standing in the place of insured depositors, has preference over uninsured depositors as well as other creditors. 11 These issues are discussed in the paper on interrelationships among safety-net participants. 12 The Basel Committee on Banking Supervision is reconsidering capital requirements for internationally active banks. 13 These issues are discussed in greater detail in the paper on funding. 14 Risk-based premiums have been adopted by 24 of the 67 countries with explicit, limited-coverage deposit insurance for which data are available. See Gillian G. H. Garcia, Deposit Insurance: Actual and Good Practices, International Monetary Fund, Table 10. Such premium systems differ widely among countries, from relatively simple systems with few risk categories to more-complex systems. 26 Guidance for Developing Effective Deposit Insurance Systems: Volume II
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III Feedback
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FINANCIAL STABILITY FORUM Guidance
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