Volume II - PDF - International Association of Deposit Insurers

More documents

Recommendations

Info

•BACKGROUND DOCUMENTS• Part I: Research their central bank or government. Generally, it is less expensive to borrow from the government than private sources. As well, funds may be more readily available from the government than the private sector. However, some countries disallow public funding except in exceptional circumstances because it is considered a competitive distortion. In deciding how to fund the deposit insurance system, attention should be paid to whether there are tax and/or budgetary implications for the country. There may be fiscal implications related to the budgetary treatment of premium revenues paid to the deposit insurer and expenditures from fund balances for failure-resolution purposes. When deposit insurance assessments are tax deductible for the paying depository institution, the burden of deposit insurance is shifted partially from insured depository institutions to taxpayers. Moreover, if insured depository institutions are treated differently for tax purposes than other providers of financial services, there may be competitive implications. Borrowing Although recoveries constitute a significant source of funding in the case of failures, they cannot be used for timely reimbursement of depositors. If the deposit insurer has insufficient funds to cover losses, it may be necessary to borrow funds. Such borrowings may have debt-management implications. Two types of borrowing can be distinguished—borrowing for working-capital purposes and borrowing against future premiums to cover any projected shortfall. In the case of the former, it may be necessary to borrow to bridge any gap between the reimbursement of depositors and the subsequent recoveries received from the disposition of the failed institution’s assets. In effect, this borrowing would be secured by the value of these assets. Borrowing imposes costs that must be paid through future assessments and the value of recovered assets. Because deposit insurers do not have an unlimited call on these resources, borrowing imposes discipline on the funding process. That is, unlimited borrowing is not a feasible long-term funding option. Uses of Funds The funds available for deposit insurance are used for several purposes. First, funds must be available to compensate insured depositors when institutions fail. Equally important, operating funds must be available to attract and retain competent staff and otherwise meet the obligations that any insurer faces in the course of normal operations. Investment policies When a deposit insurance system is funded on an ex-ante basis, policymakers need to consider which investment policy will effectively utilise the funds available for deposit insurance purposes. On one extreme, policymakers may choose to pursue a policy where funds are held in low-risk, highly liquid assets. Alternatively, policymakers might pursue an investment strategy that elevates higher rates of return above other considerations. Both of these approaches have drawbacks. If a conservative approach is adopted, the opportunity cost is the foregone return to the deposit insurance funds. The pursuit of a higher-return policy may result in funds not being available for insurance purposes when they are needed and/or a loss of principal. This, in turn, may erode public confidence in the deposit insurance system. A more-balanced approach would be an investment strategy that balances higher rates of return against the certainty that funds will be available when needed and guards against loss of principal. For some countries, such an investment policy may include investments in different currencies or foreign jurisdictions. Regardless of the investment approach selected, policymakers should ensure that funds are protected from fraud and defalcation. Disbursement of funds to depository institutions A related issue is whether depository institutions should be able to receive disbursements or rebates from past premiums collected. This issue hinges on how policymakers view the respective roles of 55 Guidance for Developing Effective Deposit Insurance Systems: Volume II
•BACKGROUND DOCUMENTS• Part I: Research depository institutions and government. If deposit insurance assessments paid by depository institutions are viewed as payments for the credit enhancement provided by government or as user fees—that is, government bears the risks associated with depository institution failures—then it is difficult to claim that the depository institutions should have a draw on the deposit insurance fund. On the other hand, if government is viewed as providing a potential back-stop for catastrophic losses alone, then depository institutions may be viewed as having a claim on past deposit insurance assessments paid to the fund. 4 Various funding arrangements are consistent with this approach. For example, rebates may be tied to the deposit insurance fund’s reserve ratio, depository institutions may hold a claim on the deposit insurance fund, or the private sector may be incorporated into the provision of deposit insurance—for example, through private reinsurance contracts. Issues Related to a Deposit Insurance Fund Issues of concern to policymakers include: how to assess depository institutions for the purposes of building a deposit insurance fund, and whether there is an optimal size for the fund. Approaches to building a deposit insurance fund How should depository institutions be assessed for the purposes of building a deposit insurance fund One approach is to build an ex-ante deposit insurance fund through the use of premium rates that provide a steady stream of funds for the deposit insurance system over the long term. The fund balance will fluctuate in response to insurance losses, and changes in premium rates will not occur unless losses are excessive. As a result, the costs of deposit insurance may be smoothed over time. Policymakers should balance the need to set premium rates that are consistent with the funding needs of the deposit insurer against the ability of insured depository institutions to fund the system. Alternatively, an assessment system can be designed so that a targeted fund ratio is maintained, such as the ratio of the deposit insurance fund to estimated insured deposits or another measure of the deposit insurer’s loss exposure. This approach, however, can lead to a de facto ex-post system once the deposit insurance fund has achieved its target ratio. Depository institutions are then asked to pay little in good economic times and to fund deposit insurance losses after they have occurred. The resultant increased variability in premiums may be addressed by setting assessment rates on the basis of a moving average after the target ratio is attained. Because assessment rates would be determined by a predetermined formula, the premium-setting process could be insulated from political factors and would become more predictable. Where the government ultimately is responsible for losses, it can be argued that a deposit insurance fund is not necessary. However, there are practical reasons for the government to maintain an explicit deposit insurance fund. A deposit insurance fund helps to protect taxpayers from deposit insurance losses by creating a buffer paid for by depository institutions. It also can be viewed as a budgeting mechanism through which resources can be sequestered from the country’s normal appropriations process. This can help to ensure that adequate resources are available readily when problems arise, and help to smooth the costs of deposit insurance over time. Size of the deposit insurance fund In principle, a deposit insurance fund should be large enough to reduce the probability of the fund’s insolvency to an acceptable minimum, given the inherent constraints faced by the deposit insurer. One constraint is the difficulty of estimating probabilities of loss, which may be low in the immediate future when the economy and depository institutions are healthy. However, when economic conditions deteriorate, the incidence of failures can increase significantly. Other constraints relate to the finite capacity of the industry to pay, and the 56 Guidance for Developing Effective Deposit Insurance Systems: Volume II
Page 1 and 2:
Volume II FINANCIAL STABILITY FORUM
Page 3 and 4:
Acknowledgements The preparation Fi
Page 5 and 6:
•BACKGROUND DOCUMENTS• Part I:
Page 7 and 8: Process •BACKGROUND DOCUMENTS•
Page 9 and 10: •BACKGROUND DOCUMENTS• Part I:
Page 57: •BACKGROUND DOCUMENTS• Part I:
Page 109 and 110:
Page 111 and 112:
Page 113 and 114:
Page 115 and 116:
Page 117 and 118:
Page 119 and 120:
Page 121 and 122:
Page 123 and 124:
Page 125 and 126:
Page 127 and 128:
Page 129 and 130:
Page 131 and 132:
Page 133 and 134:
Page 135 and 136:
II Outreach Process . . . . . . . .
Page 137 and 138:
Activities •BACKGROUND DOCUMENTS
Page 139 and 140:
•BACKGROUND DOCUMENTS• Part II:
Page 141 and 142:
Page 143 and 144:
Page 145 and 146:
Page 147 and 148:
Page 149 and 150:
Page 151 and 152:
Page 153 and 154:
Page 155 and 156:
Page 157 and 158:
Page 159 and 160:
Page 161 and 162:
Page 163 and 164:
Page 165 and 166:
Page 167 and 168:
Page 169 and 170:
Page 171 and 172:
Page 173 and 174:
Page 175 and 176:
Page 177 and 178:
Page 179 and 180:
Page 181 and 182:
Page 183 and 184:
Page 185 and 186:
Page 187 and 188:
Page 189 and 190:
Page 191 and 192:
Page 193 and 194:
Page 195 and 196:
Page 197 and 198:
Page 199 and 200:
Page 201 and 202:
Page 203 and 204:
Page 205 and 206:
Page 207 and 208:
Page 209 and 210:
Page 211 and 212:
Page 213 and 214:
Page 215 and 216:
Page 217 and 218:
Page 219 and 220:
Page 221 and 222:
Page 223 and 224:
III Feedback
Page 225 and 226:
•BACKGROUND DOCUMENTS• Part III
Page 227:
FINANCIAL STABILITY FORUM Guidance
show all

Volume II - PDF - International Association of Deposit Insurers

Create successful ePaper yourself

Delete template?

Save as template?