PowerPoint bemutat

1
Funding and Investment Policies for Deposit
Insurers
Presented by J.R. LaBrosse Secretary
General IADI
22 June 2004
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Funding
Objectives
Funding should ensure that

• adequate funds are readily available to reimburse
  depositors promptly in the case of the failure of
  one or more members (banks)
• operating and administrative expenses of the
  deposit insurer are covered

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Funding
Sources of Funding

• Depositors (insurance fees)
• Banks
• Government (Public funding)

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Funding

• Funding
• Liquidity support and/or funding of losses
• Levies
• Premiums

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Funding
Premiums

• Collection of premiums from member banks can be
  accomplished using one or a combination of two
  methods
• Ex-ante funding calculated and assessed each
  year, regardless if losses/failures occur
• Ex-post funding levied after a failure in order
  to pay for losses/failures that have occurred in
  order to replenish the insurers resources or
  repay debt

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Funding
Ex-ante Funding

• Accumulation of a reserve fund
• Prompt reimbursement of insured deposits
• Operating and administrative expenses
• Contribution from all banks including the
  potentially failing ones
• Smoothing the premium paid by banks over the
  business cycle
• Include prospective premiums in their financial
  planning process

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Funding
Difficulties of ex-ante funding

• Determining the size of the fund
• Implementing sound investment policies
• Setting investment objectives
• Determining the length of time to fund the
  reserve
• Balancing the level of premiums and the effect on
  the liquidity of the banking system

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Funding
Ex-post funding

• Member institutions have use of funds for
  intermediation and their expenses are minimized
• As long as there occur, is no failure, there is
  no assessment against the banks
• When failures premiums are charged to fund
  deficits and losses

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Funding
Difficulties of ex-post funding

• Requires access to liquidity support from
  government or third party
• Determining the level of losses and premiums
  assessed when information may be inadequate
• Charging high premiums difficult in an economic
  slowdown
• Possible weakened position by member
  institutions' potential reluctance to cover
  failure costs
• Difficult to anticipate future assessments
• Failed institution doesn't pay for the deposit
  insurance

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Funding
Hybrid Funding Method
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Funding

• In an ex-ante system, a deposit insurer has two
  premium assessment options
• Flat-rate system
• Risk-adjusted differential premium system (RADP)

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Funding - Flat-rate
Flat-rate system

• Advantage easy to calculate and administer

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Funding - Flat-rate
Flat-rate system

• Disadvantages
• low-risk members pay for part of the deposit
  insurance benefit enjoyed by high-risk members
• banks can increase the risk profile of their
  portfolios without incurring additional deposit
  insurance costs
• Flat-rate systems are usually adopted by newly
  established deposit insurance systems

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Funding - RADP
Differential Premiums

• Advantage
• financial incentives to reduce risks
• contributes to fair play

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Funding - RADP
Differential Premiums

• Disadvantage
• appropriate/acceptable methods of differentiating
  bank risk
• obtaining reliable and timely data
• ensuring rating criteria is transparent
• potential destabilizing effect of imposing high
  premiums on troubled banks

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Funding
Other issues to be addressed

• Nature of the assessment basis insured deposits
  or total deposits
• Frequency of assessments
• Frequency of the collection of premiums
• Non payment of premiums due

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Funding
Other Funding Issues

• Start up or initial funding needs
• One-off admission fee from banks
• Supplementing funding during a wave of failures
• Guarantees to support private borrowing by the
  deposit insurer

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Funding
Issues

• Two approaches to the Establishment of a Deposit
  Insurance Fund
• Long-term premium rate
• provides a steady stream of funds over the
  long-term
• must match the funding needs of the deposit
  insurer and the capacity of member institution to
  pay

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Funding
Premium rates tied to a target fund ratio
(e.g. deposit insurance fund)

• issue of the optimal size for the fund
• depends on the structures of member institutions
• needs adequate data to support
• loss against default experience

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Funding
Premium rates tied to a target fund ratio
(e.g. deposit insurance fund)

• After the targeted ratio is reached
• premium holidays
• pay-as-you-go system
• assessment rate based on inherent risk exposure
• premium rebates

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Summing Up

• Formal funding is crucial to the efficiency of a
  deposit insurance system and the maintenance of
  public confidence
• It is important to have funding alternatives
  (hybrid system)
• Funding for liquidity or losses

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Factors to consider in Devising Investment
Policies for Deposit Insurers

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Responsibilities of Management

• Setting out a policy
• Determining risk tolerances

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Governance framework

• Processes
• Will the function be outsourced?
• Decision making
• Reporting

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CDICs experience with risk tolerances

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Policy Considerations

• Determining the purpose of the portfolio
  will lead to an understanding of the risk
  tolerance that can be accepted by
  management

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Determining risk tolerances of the investment
portfolio

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Risk tolerance conclusions

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Evolution of CDICs investment policy

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• Investment policy limitations
• Credit risk
• Counterparty risk
• Maturity Profile
• Liquidity Risk by Issuer, and
• Portfolio Liquidity Risk

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