Transcript Deposit Insurance

“ Deposit Insurance ”
1. จาริ ณี ประสิ ทธิ์ภิรมย์
2. จุฑามาศ เอื้ออาพน
3. นีล นิลวิเชียร
4. สุ ขสันต์ ว่องชูวงศ์
4345516429
4345519329
4345544029
4345617129
Introduction about deposit insurance
 Protection for your savings, in case your bank goes
burst.
 Deposit insurance aims to prevent them from panicking
and causing a bank run,and thereby reduces systemic
risk
 The downside of deposit insurance is that it creates a
Moral Hazard
 The state safety net could be shrunk,by splitting banks
into 2 types: “ narrow bank ” , “Broad bank”
 requiring every bank to finance a small proportion of
its assets by selling subordinated debt to other
institution.
History
Benefit
 Stabilize the financial system
 Enhancing public confidence and systemic
stability
 Increase saving and encourage economic
growth
The pitfalls of Deposit insurance
•Moral Hazard : By insulating depositors from
defaults,deposit insurance reduces their incentive to
monitor bank closely.Also banks can take greater risks,
safe in the knowledge that there is a state-financed safety
net to catch them if they fall.
•Adverse Selection : occur when the weak institutions
choose to join a voluntary system,while the strongest
remain outside.
•Agency problem : This problem can occur when an
agent serves his own interest rather than those of the
principal who employ him
Objective
providing consumer protection for small
depositors
 enabling small and new banks to compete
with large and \ or state-owned banks
defining the boundaries of the government’s
exposure to loss
require banks to contribute to the resolution
of failed peers
The Deposit Insurance System’s
Mandate : Private or Public
private run and entirely privately funded
government-backed and run
The System’s Mandate
: Narrow or Broad
 Narrow Mandate
 Broad Mandate
The Narrow Mandate
 insure small depositors in member institutions
 compensate insured depositors in failed member
institutions promptly to minimize disruption to
t h e
e c o n o m y
s e t t i n g a n d c o l l e t i n g p r e m i u m s
 managing the insurance fund in a way that allows
i t t o s a t i s f y i t s ob l i g a t i o n s e ff e c t i v e l y
i n f o r m i n g t h e p u b l i c o f i t s r o l e a n d
responsibilities ,and describing how it works
The Broad Mandate
 Monitors the condition of the banking industry to
estimate its potential losses and take actions to
minimize or forestall those looses
 Take responsibility for the resolution of insured
financial institutions that have been intervened
by the supervisor ’s authority
Infrastructure
 Deposit insurance systems need to be supported by a
strong infrastructure of civil and commercial law.
 A clear understanding of their fiduciary
responsibilities by bank owners and managers
 Internationally accepted accounting and auditing
standards
 Public disclosure of individual bank data
 The system also needs to be supports by a wellformulated lender of last resort and adequate riskmanagement framework in the payment system.
Deposit Insurance System
Need To Be Supported By...
Supervision,Regulation,and Resolution
The regulatory and supervisory system should
 having the supervisory authorities for forcing the
strict resolution of problem banks ,using a swift
application of a spectum of enforcement actions to be
taken as soon as a bank becomes undercapitalized or
show sign of weekness.
 requiring and enforcing capital requirements also
protect deposit insurance system.
 high deductible in property reluctant to take excessive
risk.
Supervision,Regulation,and Resolution
The regulatory and supervisory system should (ต่ อ)
 . restricting the insured bank to holding only safe
assets
 in Broad mandate,The supervisor needs authority to
close and liquidate or resolve insolvent banks in some
other incetivecompatible manner
Requiring subordinated Debt
 Its holders are at the back of the queue for their
money if the bank gets into trouble and they have no
safety net
 To sell its debt,the bank will have to persuade
informed investors .If it cannot convince them it
cannot operate
 Requiring subordinated debt is feasible only for large
publicly traded banks
A Framework for Resolving Individual banks
 All countries need a firm framework for the resolution of
Troubled banks.If it does not already exist, the
establishment of a system of deposit insurance provides an
opportunity to design and enact a legal and institutional
framework that will help authorities to intervene in troubled
bank
 Legal framework will help to avoid costly delays
 Broad mandate case,the resolution framework should
require that the bank pass to the government-run deposit
insurance agency for resolution immediately after it has
been intervened by the supervisory authority.
Country specifics
 Deposit insurance is best suited for an economy with a
relatively large number of banks operating according to
the same rule
 Deposit insurance is not suit for country which have
1 . size-that is,one or a few very large banks and some
or many smalls ones
2. ownweship – that is,a few dominant state-owned
banks that may carry explicit or implicit guaruntees of
all their deposits
3 . soundness – that is , a few well managed and solvent
banks togetherwith a significant number and share of
insolvent and/or nonviable banks
Ownership:State-Owned Banks
Government commonly institute a system
of deposit insurance when there are a
few,large state owned banks that have
implicit guaruntees and a number of
smaller or newly-chartered private banks.
 These can help to build the system’s
resources and somewhat redress the state
institutions’ competitive advantage
Fragility
Explicit deposit insurance should be
installed when the banking system is sound
Countries are often impatient and reluctant
to wait for this opportune time ,however
deposit protection can prospone a banking
debacle,but it is unlikely to prevent one
Some country may have more lefitimate
reasons for starting a system of deposit
insurance .
Avoiding Moral Hazard
Deposit insurance can create incentive
incompatibilities that weaken the banking system
and make the cost of insurance prohibitive. Thus,
a deposit protection system needs to be designed
to provide a set of inducements to encourage all
of the parties involved to act in ways that serve
to strengthen the banking system
The steps that can be taken
to contain Moral Hazard
Make the Deposit Insurance System Transparent
: Transparency is essential because it allows bank
customers to protect their interests
Define Deposits : Both the deposit insurance
agency and institutions covered by that agency carry
a responsibility to publicize which deposits are
insured and which are not
Information for the Supervisor and the Deposit
Insurance Agency : The supervisor needs accurate
and timely information on the condition of each
bank .
The deposit insurance authority with broad mandate
needs to know the condition of banking industry in general
and of weak institutions that mightimpose costs upon it so
that it may plan for payouts and choose resolution strategies
Finding a way for the supervisor in a deposit insurance
agency to share information and satisfy each agency’s
specifics information needs is a challenge. However,the
law should specify what information the deposit insuer is
entitled to receive and what information the supervisor is
obliged to convey promptly.
Disseminating Information : Supervisors will want
to disseminate as much of their information as is
competitively equitable to enable the public to
protect its financial interests and help keep the
banking system sound through market discipline.
Coverage : Which classes of depository institution
should be required to join the system of deposit
insurance , which financial instrument to cover , and
to when extent to cover them
Which Institutions to cover? : A country may
choose to institute a seperate scheme to cover such
depository institutions .This scheme may offer
lower coverage, or change higher premiums in order
to cover the additional risks attendant on inferior
prudential
Which Instrument to cover ? : Which instruments
to cover by deposit insurance and the limits on, and
exclusions from, coverage.
The type of deposits to be included, and establish that
both principal and interest would be covered
 1 ) Deposit insurance of all types that are dominated in domestic
currency , should be covered
 2) Promissiory notes that are often tssued by finance companies
would be covered by the system if finance companies are
allowed to join the scheme
 3) Both principal and any accured interest that has not already
been added to the principal would be coverd
 4 ) For trust accounts, one person should be designated to
represent the group,which would be entitled onle to coverage for
a single person
 5 ) Foreign currency deposit : where foreign currency deposits
are widely used , and particularly ,The deposit insurance system
may insure foreign currency deposit to promote financial
stability
Which Instrument to Exclude ? : The exclusion of
bearer instruments can be justified because it would
be impossible to implement the required limitations
on coverage
Other Nonessential Exclusions : The careful
supervision cen prevent problems about insider who
often receive special privileges
•Some countries exclude deposits carrying
excessively high interest rates from coverage.
•The supervisor should deal with such problems
rather than encumber the deposit insurance system
with a supervisory responsibility.
 Extent of Coverage : The deposit insurance
scheme should be designed to protect small
depositors .Excluding larger depositors to monitor
the condition of their bank carefully.
 Coverage for Each Deposit or each Depositor :
Compensation should be paid up to the limit on the
sum of depositor in any member institotion.
Amount of Coverage : The aggregate amount of
coverage offered to each depositor in any bank
should be relative low.
Coinsurance : Coinsurance has the advantage of
assuring depositors of the prompt repayment of at
least part of deposit.It is often run on a sliding
scale,so that the depositror recover.

Should the Coverage limit be indexed to
inflation ? The ideal situation is one where a
country has low inflation
Netting Deposits Against Loans : When a
depositor is also a debtor of the failed bank ,
his/her deposit should be netted against the loan.
However, should not be offset a good borrower.
The insured parts of deposits of all kinds be netted against
•claims that have have already fallen due
•promised, but undelivered,subscription from shareholders
•damage assessments against owner and manager.
Reducing adverse selection
Make membership compulsory
Risk adjustment premium
Make membership compulsory :
 membership in the system should be
mandatory for all institution located in
the country. Otherwise,only the weakest
institution will join and the system will
not be financially viable.
Risk- adjustment premium :
 The objective of risk adjusting premiums is
to require riskier institutions that are more
likely to call upon assistant from the
deposit insurer to pay more coverage
- One straight forward method is to ask bank to pay
premiums based on their risk adjusted asset,rather
than on their deposit
- A second approach is to charge lower premium to
banks that have higher capital ratios and/or
supervisory rating
Minimizing Agency Problem
To minimizing agency problem banking system should
avoid these problems
 1 ) Political interference : The agency need to be
support by a clear legal and regulatory framework to
limit political interference
 2 ) Regulatory capture : is a situation where the
deposit insurance agency serves the bans rather than the
interst of the public problem arise only when a privately
fund has government financial backing . It can be solve
by having the government run the scheme even though ,
It is owned by the banks
Minimizing Agency Problem
 3 ) Interagency friction : is a lack of cooperation
between or within financial regulatory agency to
remedy this problem,The objective and function of
different financial authorities must be clarified.
Promoting Credibility
The design of the deposit insurance agency can
importantly influence its credibility. The agency
should be design to be independent but accountable
and have adequate management and staffing
Independence: Refer to status within the
government and to freedom from political pressure
and domination by the banking industry .
Accountability : the authorities must maintain its
books and record a transparence way and be subject
to the same audit rules as other public entity The
records of a public deposit insurance agency must ,
therefore,be subject to published annual audit
conducted by the Office of the Auditor General or
its equivalent.
. Staffing : The propose deposit insurance agency
could have a small staff in a country where there is
not a large number of insure institution and failure
are rare.
-The staff must be granted legal protection against
lawsuits
-Staff would need analytical skill and high integrity
Public Relation: Such a program require that the
deposit insurer issue publication that keep the public
inform about coverage under the guarantee.
Ensuring Financial Integrity
A financial issued that need to be resolved
before setting up a system is “How to fund
the system”.Resolving this issues will
improve the financial position of the system
and reduce its need to call on government
resources for back up
Optimum fund size :
There are 2 separate philosophies reguarding
fund size
 1 ) Aim to have a fund large enough to self
sufficiently compensate when bank failure occur
in a normal time.
 2 ) Reduce fund size but only to a level that
enable a system to borrow ,to pay depositor in
failed bank.
Start up Funding : A newly established system
may receive initial contribution for bank/Central
Bank / Government. Where are strong initially to
foot the bill they should do so.
Ongoing Funding-Premium : Insurance fund
would be accumulate and member would be
required to pay premium at the rate of “ X ” percent
per year based on total deposit

- Premium would be levied as needed to cover
expenses and build, maintain or rebuild the fund to its
target level
Deposit Preference : Giving depositors and /
or the insurance fund preference over the assets
of the failed bank increases their share in the
value recovered and reduces the fund’s net
outlays , while increasing the share of losses
borne by others .
– The choice between granting priority and not
granting it is judgement call. Yhe choice would be
influenced by an assessment of the balance
between a fiscal need and deposit insurance system
efficiency in recoveries.
Managing Fund Assets : Another defense of
the fund is to invest fund resources wisely.
 When investing fund resources :
–
–
–
–
Should be in vested in government securities.
Should determine the most appropriate maturity.
Sholud have market interest on the fund and safety
Even government paper may not always be
sufficiently liquid insurance system may wish to
invest in government securities abroad
 Back-up Funding : It could have a government
guarantee,a right to borrow without limit from the
treasury/the national debt office,ihe central bank ,or
from the market.
The Government Guaruntee : The following
points should be considered when a government
guaruntees the deposit insurance agency:
• The fund may need a government guarantee to be credible with
the public.
• The agency should have the power to borrow according to rules
but wiyhout any limit on the amount needed to restore its
viability from the treasury/debt agency or the central bank and
issue bonds and notes in the markets.
• The government’s guaranteeof the deposit insurance system would
ensure that any central bank liquidity support is repaid
• Agency would need to seek prior approval ( From the ministry of
finance and central bank ) regarding the timing of borrowing from
the markets
• The agency should have the authority to impose special ,additional
,ex pose assessment on all member institutions,as need ; for
example,to repay borrowed funds.
Case study : Germany
The German Deposit Insurance System
– The German banking system: Large share of public
and cooperative bank
– The German traditionallly been universal banks
doing both commercial and investment banking and
serving both household and firms
General Characteristics
of German deposit insurance schemes
 There are 3 major deposit insurance schemes in
Germany
 Establish under political pressure
 Organization & administration has been private
from the beginning
 Each of 3 main German bank groups has its own
deposit insurance scheme
 Offset the competitive advantage that the saving
bank has due to their public ownership
General Characteristics
of German deposit insurance schemes
 Saving banks and cooperative bank group has both
regional and national insurance schemes
 The schemes of both saving and cooperative banks do not
directly guarantee deposits, but rather the institution
themselves
 All 3 bank groups have their own auditing entities and
work closely with the Federal Banking Supervisory
Office and the Budesbank
 Bundesbank is prohibited by law to act as lender of last
resort for the deposit insurance schemes. It is rater
expected that in the case of a systemic crisis, a political
solution will be found without this case being predictable
Membership
 Voluntary but compulsory for all members of the
German Bank Assosiation
 Although membership is Voluntary, nonparticipating banks face high barriers
 Member of a deposit insurance scheme cannot use
their membership for advertisement purposes
 Non – member has to post the fact that it I s not a
member in its General Terms and condition and in
the schedule of prices displayed in the banking hall
and on the application forms for opening an account
Coverage
 All non bank deposit are covered up to a limit of
30 % of liable capital of troubled institution
Given that minimum capital for a bank the
minimum limit is 1.5 million Euro
Given that average equity size of a commercial
bank is 295.6 Euro ,the average limit is around 90
miilion Euro
It is very high limits make the coverage almost
complete
Financing
 Fiananed exclusively by member bannks and on a
mixed ex-ante and expost basis
Member bank have to pay premium of 0.03% of
“liabilities to other creditor arising from banking
business” every year
Additional payment of 0.09 % for new members
Banks that have paid for more than 20 years and are
classified in the lowest risk category (A), can be
exempted from premium payment
Financing
 Banks that are classified as higher risk (B
or C) are required to pay an additional
premium of up to250% of the regular
premium.
Available fund are not publicly know
No public funding
The Bundesbank is prevented by the
Bundesbank act to function as lender of
last resort
Management
 Organized within the German Bank
Association
Under management by –laws of private
association.
No public supervision
Flexible in terns of how it assists a troubled
bank
Auditing
 All member banks have to be member of the
Auditing Association of German Banks, that audits
and classifies banks on a yearly basis
 Cannot be used in advertising
 Classification criteria are the financial situation and
quality of management
 The Auditing Association of German Banks can
impose corrective actions on the member banks if
there are circumstance that increase the riskiness of
the bank’s bussiness or other circumstances that
violate the banking act or other laws referring to bank
business
Explicit
Coverage Imit
Coinsurance
Germany
EU
US
World Average
Yes
Yes
1
68 countries
30% of equity 20000 ECU
No
10%
100000 USD
No
3 เท่า per capita GDP
17 out of 68 countries
have co-insurance
Foreign Currency
Yes
Yes
exculded
Doposits Covered?
Interbank Deposits
can be
No
No
68 countries
Yes
Covered in 18 out of
68 countries
Covered?
Funding
Covered in 48 out of
Funded,but
Not
additional
regulated
Funded
58 out of 68 countries
have funded schemes
funds callable
Source of Funding
Banks only
Not
Joint
regulated
Management
Private
Not
Public :1
Public
regulated
Memership
Voluntary
Compulsory
Private: 15 Joint: 51
Private: 11 Joint: 24
Public :33
Compulsory Compulsory in 55 out
of 68 countries
Risk Adjusted Premiums
Yes
Not
regulated
Yes
21 out of 68 countries
have risk - adjusted
Premiums
Case study : FDIC
 The Federal Deposit Insurance Corporation (FDIC)
preserves and promotes public confidence in the U.S.
financial system by identifying, monitoring and
addressing risks to the deposit insurance funds; and
by limiting the effect on the economy and the
financial system when a bank or thrift institution fails
 . The start of FDIC insurance on January 1, 1934
 It is funded by premiums that banks and thrift
institutions pay for deposit insurance coverage and from
earnings on investments in U.S. Treasury securities.
 Savings, checking and other deposit accounts, when
combined, are generally insured up to $100,000 per
depositor in each bank or thrift the FDIC insures.
 The FDIC insures deposits only.
 The FDIC is the primary federal regulator of banks that
are chartered by the states that do not join the Federal
Reserve System. In addition, the FDIC is the back-up
supervisor for the remaining insured banks and thrift
institutions.
 To protect insured depositors, the FDIC responds
immediately when a bank or thrift institution fails.
Institutions generally are closed by their chartering
authority
 The FDIC has several options for resolving institution
failures, but the one most used is to sell deposits and
loans of the failed institution to another institution.
 Insured banks also pay the FDIC money four times a
year to keep being insured.
 The money the FDIC collects from banks is put into
two different accounts: The Bank Insurance Fund, and
the Savings Association Insurance Fund, or BIF and
SAIF for short.
Issues for Reform
 Merge BIF and SAIF
Reduce statutory Restrictions on Premiums
Relaxing the Reserve Ratio Regime to
Allow Gradual Adjustments in Premiums
Modify the Rebates System
Indexing Ceiling on the Coverage of
Insured Deposits
The End