APEC Policy Dialogue on Deposit Insurance: Key Policy Conclusions

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APEC Policy Dialogue onDeposit Insurance Key
Policy Conclusions

Presented to International Association of
Deposit Insurers Third Annual Conference
Brunnen, Switzerland October 26-27, 2004
Presented by David K. Walker Director, Policy
and Interational Canada Deposit Insurance
Corporation

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APEC Policy Dialogue on Deposit Insurance

• Held in Kuala Lumpur, Malaysia in February,2004
• Chaired by the Canada Deposit Insurance
  Corporation
• Hosted by Bank Negara Malaysia.
• Held back-to-back with the APEC Policy Dialogue
  on Financial Disclosure (Chile and New Zealand).
• Attended by 61 participants from 16 APEC
  economies, other countries and international
  organizations.

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Major issues addressed

• Legal Protection and Indemnification
• 2. Governance and Interrelationship Management
• 3. Trigger Mechanisms for Prompt Corrective
  Action

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Legal protection and indemnification

• A. Current situation and implications
• In some economies individuals working for deposit
  insurers and other safety net organizations are
  held personally liable for their decisions taken
  in the normal discharge of their
  responsibilities.
• Work by CDIC, the IMF and World Bank show legal
  protection is lacking in many countries.
• This can result in
• reduced incentives for diligence
• costly delays when dealing with troubled banks
  and resolving failed banks and
• erode credibility, independence and integrity of
  the deposit insurer and other safety net
  participants.

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Legal protection and indemnification
B. Main conclusions

• Individuals should be protected against legal
  liability for their decisions, actions or
  omissions taken in good faith.
• Legal protection should be codified in
  legislation and administrative procedures, and
  under appropriate circumstances, cover legal
  costs for those indemnified.
• But, protection must coexist in an environment
  where there is clear accountability.
• Secrecy and confidentiality provisions need to be
  in place.

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Governance and interrelationship management
A. Importance of good governance

• Sound governance of organizations comprising the
  safety net strengthens the financial system and
  contributes directly to stability.
• The four major elements comprising sound
  governance of organizations are
• Independence
• Accountability
• Transparency and
• Integrity.
•  
•  

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Governance and interrelationship management

• Key policy conclusions
• Operationally independent and accountable safety
  net organizations provide greater integrity,
  credibility and legitimacy than entities lacking
  such independence
• Separate, operationally independent and
  accountable deposit insurance entity working
  within the financial safety net is the best
  practice model available to provide
• the most effective incentives for the control of
  moral hazard affecting a deposit insurer
• the greatest protection of the interests of
  depositors
• more balanced and effective decision-making and
• promotes more extensive monitoring of potential
  conflicts than entities lacking such
  independence.

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Governance and interrelationship management

• Accountability --- reinforces independence by
  providing legitimacy.
• Transparency -- safeguards independence and
  enhances accountability.
• Integrity -- ensures individual behavior or self
  interest does not compromise the pursuit of
  organizational goals and objectives.
• integrity is required at all organizational
  levels and
• implies individuals working for the safety-net
  organization receive legal protection.

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Governance and interrelationship management
B. Interrelationship management is critical

• Information sharing among all safety-net
  participants is essential. Information should be
  timely, accurate and relevant with due respect
  given to confidentiality when required.
• Formal information sharing arrangements are
  necessary.
• Clear mandates and the division of powers and
  responsibilities among organizations support
  coordination as do formal agreements.

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Trigger mechanisms for prompt corrective action
A. Institutional arrangements

• Ensuring that a framework exists for prompt
  corrective action and resolution of troubled
  banks can reduce the costs to depositors, the
  deposit insurer and contribute to financial
  system stability.
•  
• Institutional arrangements for prompt corrective
  action need to ensure that the safety net
  participants involved have
• clearly defined mandates, roles and
  responsibilities
• the framework is well defined, transparent and
  understood and
• sound information sharing and coordination
  arrangements exist.
• The framework needs to be supported by strong
  regulation and supervision, sound accounting and
  disclosure regimes, and an effective legal
  system.

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Trigger mechanisms for prompt corrective action
B. Trigger mechanisms

• When dealing with troubled banks, a balance needs
  to be struck between adopting a purely
  rules-based or discretionary approach.
•  
• The determination and recognition of when a bank
  is or is expected to be in serious financial
  difficulty should be made early and on the basis
  of well defined and transparent trigger
  mechanisms.
•  
• Effective trigger mechanism should include a
  variety of relevant indicators -- not just
  capital. Examples include
• Deterioration in the quality of assets or
  earnings
• Serious deficiencies in quality of management
• Other concerns such as serious liquidity
  problems, rapid loan growth, non-compliance with
  regulations etc.

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• Results and lessons learned
• Score of 4.7 out of 5 from participants and
  speakers for overall effectiveness of the
  dialogue
• Topics considered highly relevant and timely by
  participants
• Key conclusions tabled at the September 1-3, 2004
  APEC Finance Minister's meeting in Santiago,
  Chile.
• More work needs to be done to enhance legal
  protection, strengthen governance and promote the
  use of more effective trigger mechanisms for
  prompt corrective action.