Research Plan for: Developing Guidance for Determining Deposit Insurance Coverage Limit
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1 For Public Consultation Research Plan for: Developing Guidance for Determining Deposit Insurance Coverage Limit Request for Comments and Submissions Deposit Insurers and other interested parties are asked to comment on their experiences as they relate to the issues to be addressed below. Individuals and organizations that would like to make a submission on the topics addressed in the business plan are requested to inform Ade Afolabi at jadeafolabi@yahoo.com by April 15,. Purpose The objective of this project is to develop detailed guidance for the determination of deposit insurance coverage limit. Introduction One of the important aspects in the design of a deposit insurance system is the determination of the maximum insurance limit/coverage. A maximum insurance limit/coverage is the amount a depositor can claim from the deposit insurer in the event of bank failure. This aspect is crucial because it determines the potential liabilities under the system and also it influences the extent to which depositors confidence can be promoted and sustained. In the main, the credibility of the system depends, in part, on the extent of coverage. For new systems, the establishment of the maximum deposit insurance limits should take into consideration the level of coverage needed to fulfill the public-policy objectives of the system, as well as the potential costs that different coverage limits may imply. Whatever level of coverage is selected, it must be credible and must be internally consistent with other features of the deposit insurance system, including its funding arrangements. For any DIS, inflation can diminish the real value of deposit insurance coverage limit over time. In addition, changes in the composition and the size of deposits and the developments of new financial instruments may make the subsisting coverage limit inadequate. As the real value of coverage limit declines, it may become more difficult for the deposit insurer to carry out its mandate credibly well. Periodic adjustments to the level of coverage therefore become imperative.
2 Among the existing deposit insurers, coverage limits vary considerably as they depend on a country s willingness and ability to balance the objective of achieving financial stability with that of providing incentives for depositors to exercise some discipline. Striking that balance often involves some trade-offs as limits that are set too low could be counter productive to the objective of ensuring financial stability while limits that are set too high would reduce the incentive for depositors to monitor their banks risk-taking activities, (Financial Stability Forum, 2000). Issues to Be Addressed 1. Public Policy Objectives What is the public policy objective (PPO) of the scheme-is it protection of small depositors, ensuring stability of the banking system, or protection of the payments system? If the PPO is to protect small depositors, then limited coverage may suffice. On the other hand, blanket coverage may be required if the PPO is to protect the payments system. In the case of limited coverage, some of the pertinent issues to address relate to the scope of coverage, the coverage level/limit, adjustment of the coverage level and cross boarder issues in DI coverage limit. On each of the issues, the main focus of the research project is as indicated below: 1.1 Scope of Coverage: What type of deposits should be covered? In other words, what should constitute an insurable deposit? Should foreign currency deposits be covered? Should the DIS cover deposits of non-residents? Should insiders (such as bank directors and officials ) deposits be insured? Should government deposits be insured? Should deposits of professional investors such as pension fund administrators and mutual funds or inter-bank placements be insured? What are the implications of excluding certain deposits from being covered? 1.2 Coverage Level/Limit Should coverage level be based on a benchmark, such as some multiple of per capita GDP? Should it be based on the proportion of deposits/depositors covered? 2
3 What will be the process of reviewing the adequacy of the level of coverage limit? Should the coverage level be a fixed amount or a proportion of amount of deposit held by a depositor? In other words, should we adopt some form of co-insurance? Is there an optimal level of coverage limit that protects unsophisticated small savers while ensuring that others will act in such a way as to limit moral hazard? Should coverage limit be the same for all categories of participating financial institutions within a country? In countries with more than one deposit insurance system in operation, should the different systems be allowed to provide different levels of coverage limit? What are the potential effects of operating differential levels of coverage limit? How can coverage limits in neighboring countries affect a country s decision about setting its coverage limit? Should the set coverage limit be strictly adhered to when handling systemic crisis? In other words, are coverage limits affected by resolution methods? 1.3 Adjustment of Coverage Limit The coverage limit could be adjusted over time to reflect changes in deposit profile, general price levels and other macroeconomic indices. What should be the basis for adjusting the coverage limit in the future? How often should coverage limit be adjusted? Legal Framework for Adjustment Depending on the legal framework, the responsibility for the adjustment of the coverage limit could rest with either the board of directors of the implementing agency or through an Act of parliament. What is the legal framework for adjusting the coverage limit? 1.4 Cross Boarder DI Coverage Issues Should foreign banks enjoy the same level of coverage limit? If foreign banks are insured by their respective home countries deposit insurance systems, should they be allowed to provide a higher or lower level of coverage limits than what exists for domestic banks? 3
4 Where one deposit insurance system covers more than one country, should one coverage limit be applicable in all the countries? 2 Other Issues Individuals and organizations should please feel free to add more issues, which are considered relevant for the research topic, to be addressed. It would also be appreciated if others could indicate their experiences with respect to issues raised and those they consider germane for the research project. Methodology The methodology to be employed in developing the guidance paper would include literature review, surveys, case studies, practitioner experiences, consultation process and any relevant information taken from outreach activities. Responsibilities This guidance paper will be conducted by Ade Afolabi (Chair of RGC Coverage Limit Subcommittee, Nigeria). For the purposes of actual drafting, coordinating, reporting and presenting, Ade Afolabi will chair the subcommittee and will participate in the drafting as a member of the subcommittee. The work procedure and research scope will be decided through consultation with subcommittee members. Members of the subcommittee Name Organization Address Ade Afolabi Nigeria Deposit Insurance jadeafolabi@yahoo.com Corporation Yvonne Fan Central Deposit Insurance c184@cdic.gov.tw Corporation, Taiwan Carlos Isoard Instituto para la Proteccion al Ahorro Bancario (IPAB), Mexico Gustavo Michelin Central Bank of Uruguay NA Salomón Bakhyt Mazhenova Kazakhstan Deposit bmazhenova@kdif.kz Insurance Fund Wai Lin See Malaysia Deposit wailin@pidm.gov.my Insurance Corporation Mohammed Al-Jafari Jordan Deposit Insurance mjafari@dic.gov.jo 4
5 Name Organization Address Corporation Ridvan Cabukel Savings Deposit Insurance Fund of Turkey Timetable and Deliverables Timelines Deliverables September 12, 2006 Completion of detailed research outline and work plan/business plan (RGC Meeting in Kuala Lumpur) Work assignments to each Subcommittee member Approval of Advisory Group/RGC for plans End October 2006 Approval of Advisory Group Group/RGC for research plan Mid November 2006 Posting of Research plan on IADI web site for public consultation Feb 9, Subcommittee members assignment due February/March RGC Meeting Progress report by the Subcommittee Chair to RGC Last Week of May, First Draft of guidance paper on coverage limit completed and sent to RGC members for comments Last Week of June, Deadline for comments by RGC members Last Week of August, Second draft of guidance paper completed and sent to Advisory Group for comments Mid-September Deadline for Advisory Group comments Last Week of First draft guidance paper completed and September RGC October, Meeting (Yet to be fixed) sent to RGC members/advisory Group Discussion of the first draft for public consultation Mid-October, Second draft guidance paper for public consultation completed and sent to Conference Task Force End October/ November (IADI Meeting and Conference) Presentation of the second draft for public consultation at the conference. 5
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