Deposit Insurance Establishment (Financed by the People s Republic of China Regional Cooperation and Poverty Reduction Fund)

Transcription

1 Technical Assistance Report Project Number: Regional Policy and Advisory Technical Assistance (R-PATA) August 2009 Deposit Insurance Establishment (Financed by the People s Republic of China Regional Cooperation and Poverty Reduction Fund) The views expressed herein are those of the consultant and do not necessarily represent those of ADB s members, Board of Directors, Management, or staff, and may be preliminary in nature.

2 ABBREVIATIONS ADB Asian Development Bank DIS deposit insurance system IADI International Association of Deposit Insurers PRC People s Republic of China R-PATA Regional policy and advisory technical assistance TA technical assistance TECHNICAL ASSISTANCE CLASSIFICATION Type Regional Policy and Advisory Technical Assistance (R-PATA) Targeting classification General intervention Sector (subsector) Finance (Central banks and payment systems, bank restructuring, commercial banks, rural banks, deposit insurance, credit scoring) Themes (subthemes) Regional cooperation and integration (money and finance) Economic growth (promoting macroeconomic stability) Governance (economic and financial governance) Location impact National impact, high; regional impact, low NOTE In this report, $ refers to US dollars unless otherwise stated Vice President C. L. Greenwood, Jr., Operations 2 Director General K. Gerhaeusser, East Asia Department (EARD) Director N. Chakwin, Financial Sector, Public Management and Regional Cooperation Division, EARD Team leader B. Wilkinson, Senior Finance Specialist (Microfinance), EARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 I. INTRODUCTION 1. Two lessons emerging from the global financial crisis are the importance of adequate financial systems to help limit the probability of banking crises and the need to more effectively limit the negative impacts of crises on financial systems when they do occur. Explicit deposit insurance is important to help establish an adequate financial safety net, reduce runs on banks, limit government fiscal and political exposure, and create a formal mechanism for transferring costs of bank failures to industry rather than taxpayers 1, shoring up the financial system in times of crisis. The central banks of the People s Republic of China (PRC) and Mongolia have requested assistance to develop and physically establish explicit deposit insurance systems (DISs). In both countries, the current explicit (in Mongolia s case) or implicit (in the PRC s case) government guarantees on deposits create significant levels of contingent government liabilities and uncertainty. Conversion to an explicit, separately funded deposit insurance scheme will both limit government liabilities and reduce moral hazard. Fact-finding missions visited Mongolia during February 2009 and Beijing during 1 3 April 2009 to determine the objectives, scope, and implementation arrangements for regional policy and advisory technical assistance (R-PATA). 2 The technical assistance (TA) design and monitoring framework is in Appendix 1. II. ISSUES 2. Explicit deposit insurance is a key element in maintaining confidence in the banking system and promoting financial stability. 3 The purpose of deposit insurance varies from one country to another, depending on the legal framework and financial infrastructure that exist, but in most cases deposit insurance schemes are designed to protect less financially sophisticated depositors and contribute to financial stability. As deposit insurance helps protect small savers and the poor from losing their savings due to failure of the insured financial institutions, these people attain greater asset security and lower risk. While most deposit insurance schemes are established and run by some combination of national governments and central banks, others are private. Some countries have different schemes to protect different types of banks, and some deposit insurance arrangements have multiple-country participants. Some countries have deposit insurance for nonbank deposit-taking institutions as well as for banks. 3. Since the first deposit insurance corporation began in the United States in 1933, various countries worldwide have established DISs. The number of countries that had established, are establishing, or are considering establishing DISs has expanded rapidly in recent years. As of 2008, 103 countries had instituted some form of explicit deposit insurance (up from 12 in 1974). 4 Another 16 countries are studying or considering explicit DISs, including Mongolia and the PRC. In establishing a DIS, each country must consider what it hopes to achieve and whether the scheme will be internally consistent with its goals. Circumstances unique to the country will bear significantly on what a system can achieve and how it should be structured. Three main types of DIS have emerged: (i) a pay box system has a narrow mandate of collecting and investing premiums purely for insurance purposes; (ii) a middle way approach insures deposits, while the deposit insurer may take regulatory action if there are concerns about the bank regulator s actions when bank soundness is weakened or compromised; and (iii) a broad mandate has both a deposit insurance and regulatory role and permits closing of troubled banks. 1 Canadian Deposit Insurance Corporation Effects of the Global Financial Crisis on Deposit Insurance Organizations. PowerPoint presentation at Symposium on the Financial Crisis and Bank Resolution. Warwick University (UK) April. 2 The TA first appeared in ADB Business Opportunities (Internet edition) on 15 May Country System List. International Association of Deposit Insurers (IADI)

4 2 4. Demirgüç-Kunt, Kane and Laeven assembled a cross-country and time-series database covering 181 countries to review the evolution of DISs and the different features that have developed. 5 This database has provided comprehensive information on the circumstances that have encouraged adoption of deposit insurance schemes, the design features installed in these schemes, and changes in these features that had been made over time. Based on their findings, the authors provided six principles for developing and establishing a DIS. First, it is important to set enforceable coverage limits and to stay focused on managing risk for those who cannot easily interpret bank credit and intermediation processes. By contrast, it must be clear to large depositors, subordinated debt holders, and correspondent banks that their funds are at risk and are not guaranteed. This motivates them to assess and manage their own risks of loss. 5. Second, the most effective DIS has compulsory membership. Third, a better DIS has a blend of public and private management, with both being jointly responsible for oversight. Fourth, a strong DIS has a limited ability to shift losses and exposure to the government and taxpayers. If this is not the case, as evidenced by the experience of the UK with its system of shifting part of the insurance costs to depositors, runs on banks can still occur. Fifth, pricing is a key issue and should be carefully assessed. Finally, deposit insurers must have some power to get involved and in fact involve themselves in decisions about how and when insolvent banks will be addressed. This finding argues against the pay box system and for a more intrusive DIS. 6. The current global financial crisis is characterized by liquidity problems and a crisis of confidence in banking institutions around the world. Many of the steps recently taken by governments to help restore confidence in the banking system involve actions associated with deposit insurance. Examples of specific reforms initiated or under consideration include two countries implementing deposit insurance (Australia and New Zealand); mechanisms to pay depositors promptly when banks fail and to have public awareness and consultation systems (UK and EU); increases in deposit insurance coverage (many countries, including the US, EU, and the Philippines); government blanket deposit insurance (many countries, including Mongolia); and enhancements to the risk-based premium systems for deposit insurance (US). 7. Recent work focusing on lessons from the global financial crisis for financial safety nets, and in particular for deposit insurance schemes, narrows the options and creates opportunities for better structuring of explicit deposit schemes. 6 Specific lessons for developing countries include the importance of an explicit DIS, need for government intervention during a systemic crisis, the ineffectiveness of co-insurance, the need for effective public awareness and strengthening of regulatory and supervisory apparatuses as well as close interagency cooperation, and sound corporate governance in insured financial institutions. 8. Today s unique global financial circumstances dictate that countries without DISs may benefit from expedited engagement, and there is both financial and political pressure to take this step. In the case of the PRC, deposit insurance legislation has been under consideration and was submitted to the State Council in the latter part of However, precise mechanisms for the physical establishment and financing of the DIS have yet to be formalized. In Mongolia s case, the country will need to arrange for transition from the current blanket government deposit 5 A. Demirgüç-Kunt, E. Kane and L. Laeven Deposit Insurance Design and Implementation: Policy Lessons from Research and Practice. World Bank Policy Research Working Paper No Washington, DC. 6 S. Schich Financial Crisis: Deposit Insurance and Related Financial Safety Net Aspects. In Financial Market Trends. Paris: OECD; and G. Ogunleye, The Global Financial Crisis: Lessons For Deposit Insurance Systems (DIS) In Developing Countries, PowerPoint presentation at Warwick University (UK) Symposium on the Financial Crisis and Bank Resolution, April 2009.

5 3 guarantee arrangements to a DIS. The level of PRC participation in the Mongolian economy suggests that a parallel development of deposit insurance may benefit both countries by increasing the security of Mongolia-based investments and improving the safety for regional banks on either side of the border. The focus of this R-PATA is on developing a holistic roadmap consisting of (i) a complete transition plan from the current circumstances to a DIS, inclusive of establishing an appropriate regulatory framework, installing institutional structures, and providing financing; (ii) a capacity building plan for managers and staff; (iii) a public information program to facilitate transition with social harmony and confidence; and (iv) a timeline for a suitable DIS to be implemented. 9. The Asian Development Bank (ADB) has undertaken a number of activities associated with deposit insurance, particularly during and just after the 1990s Asian financial crisis. Most of its DIS work has concentrated on capacity building for existing schemes and applied research. In 1997, assistance to the Philippine Deposit Insurance Corporation was provided under a TA project. 7 In 1999, a small-scale TA project examined issues for the establishment of deposit insurance in Indonesia. In 2000, as part of substantial research all across Asia, ADB published a series 8 with included an article by J. Choi entitled Structuring a Deposit Insurance System from the Asian Perspective. Choi provides a good history of deposit insurance in Asia; identifies the risks inherent in implicit deposit guarantees; defines the appropriate status and functions of an Asian deposit insurance scheme; provides information on operations, financing, and structure of existing DISs in India, Republic of Korea, and the Philippines at that time; and lays out information on desirable management structures. In 2003, as part of program assistance, work to enhance the deposit insurance agency in Viet Nam was undertaken; 9 and follow-up activities are under way now. Lessons learned from this work include (i) the need for practical, action-oriented outputs; (ii) the importance of strong commitment from the central banks and DIS officials for the processes agreed; (iii) prudent selection of consultants with proven knowledge and experience, and (iv) active interaction among ADB, the consultant team, and the relevant government officials. These lessons have been built into the R-PATA structure. 10. The International Association of Deposit Insurers (IADI) is a technical, membershipbased nonprofit institution focused on deposit insurance schemes worldwide and based at the Bank for International Settlements in Basel, Switzerland. In June 2009, it produced, and the Bank of International Settlements endorsed, the Core Principles for Effective Deposit Insurance Systems (IADI Core Principles), which consist of 21 principles in 11 categories that cover the range of organizational and operational features of an effective DIS. Along with the Core Principles, IADI has provided a list of prerequisites for the installation of an effective DIS. These materials will form the basis of DIS development under the proposed TA. III. THE TECHNICAL ASSISTANCE A. Impact and Outcome 11. The impact of this R-PATA will be improved confidence in, and stability of, the financial sectors in Mongolia and the PRC, as measured by the full operation of a DIS in each country by 7 ADB Institutional Capacity Building of the Philippine Deposit Insurance Corporation. Manila (approved 31 December 1997 for $742,000). 8 ADB Final Report - Rising to the Challenge in Asia: A Study of Financial Markets. 12 volumes. Manila. 9 ADB TA Capacity Building for the Financial Sector and Capital Markets. Manila (approved 18 December 2003 for $780,000); and follow up ADB Support for Developing Capital Markets and Building Capacity in the Financial Sector. Manila (approved 5 June 2008 for $1,000,000).

6 4 end The R-PATA s outcome will be the introduction of deposit insurance systems that are consistent with the IADI Core Principles by end-2012 in Mongolia and the PRC. 12. The proposed R-PATA will provide support to the central banks of Mongolia and the PRC to develop and help establish national deposit insurance institutions which (i) conform with the IADI Core Principles 10 and the specific conditions of each country s financial market; (ii) suit the current unique global financial market circumstances; (iii) minimize moral hazard; and (iv) provide extensive public information campaigns as to the purpose and functions of deposit insurance, particularly for households that are poor, income-insecure, or have low financial sophistication. B. Methodology and Key Activities 13. The process will be conducted in accordance with specific guidance on deposit insurance development issued by the Financial Stability Forum in 2001, appropriately modified given the global financial crisis. 11 The R-PATA will be undertaken as pure advisory and policy support provided by (i) engaging the services of appropriate international and domestic consultants; (ii) fostering potential partnerships between the People s Bank of China and Bank of Mongolia and experienced, suitable DIS organizations in other countries; and (iii) conducting short-term visits and/or secondments of People s Bank of China and Bank of Mongolia officials to suitable DIS organizations. IADI has agreed in principle 12 to support consultations of this nature and to recommend potential consultant candidates for ADB consideration. 14. The R-PATA s first output will be a situational analysis, including the state of the economy, current monetary and fiscal policies, state and structure of the banking system, public attitudes and expectations, strength of prudential regulation and supervision, legal framework, and soundness of the accounting and disclosure regimes. 13 Each country s public policy objectives regarding the conversion process and explicit deposit insurance scheme will also be determined. The assessment will fully consider the IADI Core Principles, and it will provide specific recommendations for legal and regulatory revisions as needed. Consultants and seconded technical staff will undertake the review with the full partnership and support of the Mongolia and PRC central bank teams and other government officials as appropriate. Any prerequisites needed to ensure readiness for the operational establishment of DIS (including the timing of the initiatives) will be listed and discussed with key stakeholders to determine how realistic these are. An analytical policy note with results of the situational analysis, a list of validated public policy objectives, and necessary prerequisites will be provided to improve each country s readiness for deposit insurance. The information will be disseminated via seminars involving key stakeholders. 15. The second output will be a guidelines document for DIS discussions, tailored to the specific circumstances of each country. The guidelines document s key elements will be in five sections. The first section will discuss the mandates, power, and structure of each DIS. It will include a formal government statement of purpose for the DIS and its planned role within the financial safety net; arrangements for the DIS either within an existing entity or as a separate Financial Stability Forum Guidance for Developing Effective Deposit Insurance Systems. London. 12 Subject to decisions to be made by the Executive Council of IADI, which will consider these issues and make determinations by the end of Working Group on Deposit Insurance, Financial Stability Forum, 2001.Guidance For Developing Effective Deposit Insurance Systems. London (Page 4.)

7 5 organization; responsibility and basic operations; a governance structure fitting fully into responsible regulatory arrangements for strategic planning, risk management, internal control and audit, transparency, and accountability; and the basic human resource arrangements. The second section will include the relationships among financial safety net agencies, the roles and responsibilities of each agency, and coordination and information-sharing commitments. The third section will include such specific design features as membership (banks, nonbank financial institutions, state-owned institutions, foreign banks; and whether or not membership is mandatory) and coverage limits (including whether foreign currency deposits will be covered). The fourth section will propose funding arrangements, including consideration of ex-ante or expost financing, size of the fund, and premium arrangements (size, flat rate or risk-adjusted). The last section will be a design for a detailed public awareness campaign. This detailed document will be discussed broadly with stakeholders on a confidential basis, and agreements will be reached about the principles contained. Based on the detailed document, a policy note with nonconfidential information will be prepared and disseminated in each country. 16. The next output will be a draft detailed implementation plan for a DIS in each country, inclusive of comprehensive elements of an institutional structure, financing arrangements, activities that include a public information campaign, and timeline. In discussions with Mongolia and the PRC, the most appropriate mechanisms for setting up a DIS will be defined, inclusive of staff skills and costs, timing, and problems experienced by other similar countries in setting up and operating DISs. Another round of consultations on the detailed implementation plan will take place with key stakeholders, and particularly with the regulatory agencies that form the financial safety net in each country. 17. The final output will be confirmation of final arrangements for the DIS detailed implementation plan in each country, based on discussions with key government stakeholders within and between countries. The draft detailed implementation plans will be discussed with key stakeholders (the central banks, ministries of finance, other financial sector regulators, banks, and other participating institutions) to determine the required timelines, resources, and actions for establishment of the DISs. The implementation plans will then be finalized, packaged with the situational analysis and guidelines document, and then submitted to relevant decision makers for approval and funding. The implementation plans will include methods for broadly disseminating information to the public about deposit insurance and its meaning to households. C. Cost and Financing 18. The TA is estimated to cost $500,000. This amount will be financed with a grant from the People s Republic of China Regional Cooperation and Poverty Reduction Fund. The TA will cover remuneration, travel, and per diem of consultants, as well as training, workshops, publications, and miscellaneous expenses. Resources to fund transport, accommodation, and per diem for up to 9 person-months of qualified pro bono advisors seconded from suitable national DISs have been provided for in the budget. The detailed cost estimates and financing plan are in Appendix 2.

8 6 D. Implementation Arrangements 19. The TA will commence about 1 September 2009 and be completed on 31 August 2011, a span of 24 months. It will be executed by ADB and managed by the East Asia Department s Financial Sector, Public Management and Regional Cooperation Division. The project officer will work closely with the Banking Supervision Department at the Bank of Mongolia and the Financial Stability Bureau at the People s Bank of China, these entities being the designated agencies to design and establish the DIS in each country. Both BOM and PBOC have confirmed their willingness to participate in the proposed R-PATA. ADB will work with IADI to seek pro bono advisors from suitable national deposit insurance organizations to conduct the required training and refine the detailed implementation plan, as feasible and appropriate. The proceeds of the TA will be disbursed in accordance with ADB s Technical Assistance Disbursement Handbook (2008, as amended from time to time). 20. The consultants will consist of two international (8 person-months) and four national experts (two each for PRC and Mongolia, for a total of 12 person-months) in legal issues, financing arrangements, and human resources management in relation to deposit insurance. The consultants will be selected and engaged by ADB as individual consultants in accordance with ADB s Guidelines on the Use of Consultants (2007, as amended from time to time) and arrangements satisfactory to ADB for the engagement of national consultants. Consultant terms of reference are in Appendix 3. Costs for training, seminars, and conference costs will be included in the Team Leader s contract. IV. THE PRESIDENT S DECISION 21. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance not exceeding the equivalent of $500,000 financed by the People s Republic of China Regional Cooperation and Poverty Reduction Fund for Deposit Insurance Establishment, and hereby reports this action to the Board.

9 Appendix 1 7 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Improved confidence in, and stability of, financial sector Performance Targets/Indicators Deposit insurance systems (DISs) operational by end-2013 Data Sources/Reporting Mechanisms Central bank and individual bank records Assumptions and Risks Assumption Continued improvements in banking regulation and performance in both countries Risk Global economic crisis or other exogenous factors make DIS establishment difficult Outcome Deposit insurance schemes consistent with International Association of Deposit Insurers Core Principles implemented DIS structure, legislation, and financing arrangements agreed by end-2012 National legal records Central bank records Assumption Prerequisites for DIS as defined in the situational analysis met before technical assistance completed Risk Human resources for regulation may be stretched thin to deal with global crisis and setting up DIS. Outputs For each country: 1. Situational analysis and public policy objectives for DIS Analytical policy note with results and implications by month 6 Project records Assumption Regulators, governments willing to engage in establishing DIS at this time Minutes of stakeholder discussions confirming findings by month 7 Workshop proceedings and project records Risks Financing not securable ex-ante 2. Guidelines document for DIS establishment for each country Guidelines document and technical note with nonconfidential information by month 11 Minutes of stakeholder discussions confirming findings by month 13 Project records Workshop proceedings and project records Larger, influential banks resist bearing costs for smaller banks (depending on financing arrangements)

10 8 Appendix 1 Design Summary 3. Draft detailed implementation plan for DIS in each country Performance Targets/Indicators Draft detailed implementation plan by month 16 Minutes of stakeholder meetings confirming plan by month 19 Data Sources/Reporting Mechanisms Project records Workshop proceedings and project records Assumptions and Risks Final detailed implementation and financing plan by month 21. Project records 4. Government confirmation of final arrangements for the detailed DIS implementation plans in each country Government announcement of DIS establishment and agreement to implement detailed implementation plan by month 24 Government press releases, registration records in central bank Activities with Milestones 1.1 Work with each government for the creation of a steering committee of key regulators and other government officials and stakeholders to undertake the ongoing consultations on periodic findings and make determinations on key policy and implementation steps 1.2 Agree with the steering committee members on the timeline and process and on the conduct of meetings to discuss outputs and approvals to move to the next step 1.3 Establish a working team within each country to provide data and analysis for DIS process 2.1 Collect data and review the state of the economy, current monetary and fiscal policies, state and structure of the banking system, public attitudes and expectations, strength of prudential regulation and supervision, legal framework, and soundness of accounting and disclosure regimes 2.2 Determine public policy objectives of each country with regard to the conversion process and the explicit deposit insurance scheme, giving full consideration to the International Association of Deposit Insurers Core Principles 2.3 Make specific recommendations for any legal, regulatory, supervisory, or institutional coordination and information-sharing changes needed to ensure effectiveness of a new DIS, with specific focus on prerequisites required 2.4 Draft situational analysis with public policy objectives into report in both English and Chinese or Mongolian (as appropriate) for distribution to the steering committees 2.5 Conduct meetings with the steering committees (with the working group sitting in to observe) to discuss the situational analysis and public policy findings, revise as needed and validate these, and confirm government and financial regulator readiness to proceed Inputs Asian Development Bank (ADB): staff management time, two implementation missions per year Key financial regulators, Bank of Mongolia, People s Bank of China: staff time, office space, coordination for capacity survey Others: People s Republic of China Poverty Reduction and Regional Cooperation Fund: $500,000

11 Appendix 1 9 Activities with Milestones to the DIS guidelines document 2.6 Revise and complete the situational analysis and public policy objectives, providing a separate policy note with nonconfidential information for ADB distribution on the website Inputs 3.1 Draft a guidelines document for DIS establishment in each country, defining the mandates, power, and structure of each DIS in five sections: Government (and particularly financial regulators) defines a formal statement of purpose and role within the financial safety net, arrangements within an existing entity or as a separate organization, responsibility and basic operations, governance structure, and basic human resource requirements Lay out the relationships among financial safety net agencies while defining the roles and responsibilities of each agency, as well as the coordination and information-sharing commitments Design specific features of the DIS, such as membership (banks, nonbank financial institutions, state-owned institutions, foreign banks; whether or not membership is mandatory) and coverage limits (including whether or not foreign currency deposits will be covered) Propose funding arrangements, including consideration of exante or ex-post financing, size of the fund, and premium arrangements (size, and whether flat rate or risk-adjusted) Design a detailed public awareness campaign 3.2 Compile sections into a draft guidelines document in both English and Chinese or Mongolian (as appropriate) for distribution to the steering committees 3.3 Conduct meetings with the steering committees (with the working group sitting in to observe) to discuss and validate the guidelines, then confirm readiness to proceed to the detailed DIS implementation plan 3.4 Revise and complete the guidelines document, providing a separate technical paper with nonconfidential information for ADB distribution on the website 4.1 Using information from 3.4, lay out the elements of an institutional structure, financing arrangements, coverage, and public information campaign for DIS implementation for each country 4.2 Define step-by-step process, most appropriate mechanisms, timeline, and costs for setting up a DIS, taking into account problems experienced by other similar countries in setting up and operating deposit insurance 4.3 Compile sections into a draft detailed implementation plan report in both English and Chinese or Mongolian (as appropriate) for distribution to the steering committees 4.4 Conduct meetings with the steering committees (with the working group sitting in to observe) to discuss the implementation plan, revise it as appropriate, validate it, and confirm readiness to proceed to official government submission and approval. 4.5 Revise and complete the implementation plan, providing a separate technical note with nonconfidential information for ADB distribution on the website

12 10 Appendix 1 Activities with Milestones 5.1 Steering committee documents approval process and timeline estimates for approval of DIS implementation, and then provides these to members and ADB. 5.2 Steering committee confirms, and then central bank submits the proposed documentation for formal government approval and funding 5.3 Central bank tracks approval process and advises ADB accordingly on progress ADB = Asian Development Bank, DIS = deposit insurance system. Inputs

13 Appendix 2 11 COST ESTIMATES AND FINANCING PLAN ($ 000) Item Total Cost People s Republic of China Regional Cooperation and Poverty Reduction Fund a 1. Consultants a. Remuneration and per diem i. International consultants ii. Domestic consultants 60.0 b. International and local travel 42.0 c. Reports and communications Training, seminars, and conferences Miscellaneous administration and support costs Contingencies 33.0 Total a Administered by the Asian Development Bank. Source: Asian Development Bank estimates.

14 12 Appendix 3 OUTLINE TERMS OF REFERENCE FOR CONSULTANTS A. Overall Consulting Requirements 1. Individual consultants will be selected and engaged by the Asian Development Bank (ADB) in accordance with the Guidelines on the Use of Consultants (2007, as amended from time to time) and arrangements satisfactory to ADB for the engagement of national consultants. Two sets of domestic consultants will be recruited, one for each country. The international consultants will work with both countries and provide data on possible learning opportunities and synergies. Costs for training, seminars, and conference costs will be included in the Team Leader s contract. Position Indicative Consulting Services Inputs Person-months International Consultants Deposit Insurance Lead Specialist and Team Leader 5.0 Deposit Insurance Actuary 3.0 Subtotal International Consultants 8.0 Domestic Consultants Financial Regulations Lawyer (2x2.0 person-months) 4.0 Financial Sector Economist (2x4.0 person-months) 8.0 Subtotal Domestic Consultants 12.0 Total Inputs 20.0 B. Terms of Reference 1. Deposit Insurance Lead Specialist and Team Leader (international, 5 personmonths, intermittent) 2. Qualifications. The expert will have a suitable educational background. He or she will have very senior-level management and deposit insurance operational experience from an internationally recognized national deposit insurance institution. Networks to suitably qualified potential pro bono officials from other national deposit insurance systems (DISs) will be useful. Prior experience with the People s Republic of China and/or Mongolian officials on deposit insurance issues will be helpful. 3. Tasks: (i) Work with the central banks and Financial Sector Economists to establish senior regulator steering committees and working teams within each country. Forge an agreement among consultants, the steering committee, and working teams on specific roles and responsibilities, timelines, and how best to work together. (ii) Lead the consulting team and ensure outputs are timely, of high quality, and confirmed before moving to the next step. (iii) Complete the structural analysis and public policy statement based on information provided by working groups and national consultants. Review the state of the economy, current monetary and fiscal policies, state and structure of the banking system, public attitudes and expectations, strength of prudential

15 Appendix 3 13 (iv) (v) (vi) (vii) regulation and supervision, legal framework, and soundness of accounting and disclosure regimes. Draft the guidelines document and detailed implementation plan, using relevant experiences of other countries and working closely with the national team to ensure realism and practicality of the proposals. Facilitate all meetings of the steering committee and help respond to questions and concerns. Ensure the technical assistance (TA) work moves forward from completion and confirmation of each output to the next step. Help both central banks locate potential persons who can advise them on a pro bono or short-term secondment basis on specific issues for the DIS development and establishment. Ideally, help them locate a long-term twinning partner DIS and establish a suitable memorandum of understanding for ongoing technical support and training. Be responsible for all written outputs, including the guidelines document, detailed implementation plan, policy note, and technical note. 2. Deposit Insurance Actuary (international, 3 person-months, intermittent) 4. Qualifications. The expert will have a suitable educational background and qualifications as an actuary. He or she will have management and deposit insurance operational experience inclusive of calculating, monitoring, and assessing deposit insurance rates under both flat and risk-based premium systems. He or she will have worked for at least 10 years in a sophisticated national DIS. 5. Tasks: (i) In collaboration with the team leader, advise working groups on data necessary to develop the financial models for each DIS. (ii) Assess data quality, in consultation with the working groups and the Financial Sector Economists, and determine risks associated with its use. If there is no minimum basis for developing DIS financial models, advise the steering committee and the Team Leader and define requirements for follow-up by the central bank. (iii) Once data is available in a suitable form, develop a range of financial model options for DIS establishment and operations for consideration within the guidelines. (iv) Provide more detail on the financing option for inclusion in the implementation plan. 3&4. Financial Sector Economists (two national consultants, 4 person-months each, intermittent) 6. Qualifications. Each of the two economists will have suitable tertiary qualifications in economics, specializing in financial sector issues. They will have at least 8 years experience conducting relevant macroeconomic analysis and reviewing financial sector performance and the impact of regulations. They will have particular familiarity with the developments of the banking system, access to suitable data to help ensure completion of key documents, and clear knowledge of and contacts within the current structure and operations of financial regulators. The economists will have strong English skills and the ability to handle translation of documents and interpreting for the Team Leader during meetings with senior officials, if needed.

16 14 Appendix 3 7. Tasks: (i) Establish senior regulator steering committees and working teams within each country to provide data and analysis for the DIS process, and come to agreement with the steering committees on the timeline, process, and roles and responsibilities of the consultants and national officials regarding TA activities. Play a major role in coordinating the consultants and working groups to ensure each completes agreed tasks on time and shares results in meaningful and understandable ways. (ii) Work with the international Team Leader to complete the structural analysis and public policy statement. Review the state of the economy, current monetary and fiscal policies, state and structure of the banking system, public attitudes and expectations, strength of prudential regulation and supervision, legal framework, and soundness of accounting and disclosure regimes. (iii) Contribute to the drafting of the guidelines document and detailed implementation plan, using local knowledge and experience to help ensure realism in the draft documents. Help ensure correct translation and timely distribution to stakeholders before meetings to discuss drafts. (iv) (v) (vi) Facilitate the work of the international Deposit Insurance Actuary, particularly in locating suitable data for analysis. Manage the setting up of all steering committee discussions and ensure documentation of meetings, recommendations, and results. Advise on final steps to carry forward each output to the next set of activities. 5&6. Financial Regulations Lawyers (two national, 2 months each, intermittent) 8. Qualifications. Each of the two lawyers will have suitable national qualifications in law, specializing in financial sector issues. They will have at least 8 years experience handling macroeconomic analysis and reviewing financial sector regulations. They will have particular familiarity with the legal developments of the banking system. They will have access to suitable legal documents, regulatory information, and court findings to help ensure completion of the TA outputs. They will have clear knowledge of and contacts within the current structure and operations of financial regulators. The lawyers will be proficient in English and have the ability to translate documents and interpret for the Team Leader during meetings with senior officials, if needed. 9. Tasks: (i) Help analyze the current legal environment for the situational analysis, identifying gaps and needs, as well as realistic approaches to developing and passing DIS requirements in suitable forms. (ii) Help determine public policy objectives of each country with regard to the conversion process and the explicit deposit insurance scheme. (iii) Make specific recommendations for any legal, regulatory, supervisory, or institutional coordination and information-sharing changes needed to ensure effectiveness of a new DIS, with specific focus on the required prerequisites. (iv) Working with the Team Leader, assist in the analysis, formulation, and drafting of the public policy and situational analysis, the guidelines, the implementation plan, and other related materials, ensuring accuracy and completeness from a legal standpoint. (v) Facilitate steering committee discussions on legal and regulatory issues, as well as provide advice as needed and appropriate.