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Knowing Early and Enough Prevents Bank Runs
Presented by: Jean Pierre Sabourin, CEO
International Financial Planning Advisors Conference 23 February 2008
Discussion
Importance of public awareness on deposit insurance
Lessons learnt from the Northern Rock bank run
Deposit insurance – a form of consumer protection and its importance in financial planning
Importance of public awareness
Better awareness & understanding
Better appreciation of DI system
Higher confidence in PIDM & a more effective DI system
Contribute to financial system stability
Northern Rock Bank, UK
Northern Rock Bank requested emergency funding from the Bank of England after facing a liquidity crunch.
Reportedly a temporary financial hiccup – Northern Rock was still solvent!
Worst bank run in recent British history
Depositors rushed to withdraw their deposits.
News of bank run further created unease in financial markets – shares fell about 30%.
In total, Government provided approximately RM 81 billion in loans.
Contributing factors
1. Lack of awareness and understanding
Financial Services Compensation Scheme (FSCS): compensation limit is £31,700 per depositorFirst £2,000 – fully coveredNext £33,000 – 90% covered (or £29,700)
If an institution fails, depositors must file claims to FSCS
Payment could take up to 6 months or longer
Contributing factors (cont’d)
2. Lack of confidence
Depositors do not fully understand how the scheme
worked felt that they had to wait too long for
their deposits to be reimbursed also felt that the coverage limit was
inadequate
Subsequently, guarantee increased to 100% (up to £35,000).
What can we learn from Northern Rock?
LESSON NO. 1LESSON NO. 1
Peace of mind only works if you know you are adequately protected.
LESSON NO. 2LESSON NO. 2
Never say "don't panic”.
Deposit Insurance – a form of consumer protection
A system that protects depositors against loss of their insured deposits placed with member institutions in the unlikely event of a member institution failure
In such situations, depositors will be reimbursed promptly up to the coverage limit
A national Government sponsored scheme It is not a commercial insurance policy Depositors need not pay premium
Importance of deposit insurance
Deposit insurance contributes to the overall economic growth by building public confidence in the banking system
PIDM is committed in building public awareness
It is crucial for depositors to know how deposit insurance works for them
In bad times, such knowledge gives certainty and comfort to depositors in the face of rumours of bank failure
Deposit insurer’s fundamental role
One of a deposit insurer’s fundamental role –wealth protection
Our role complements the major role of the financial planning profession – wealth creation and management
Most clients’ investment portfolio would also include deposit products offered by banks
To enhance your profession
Financial Education – ‘snow ball’ effect
It is essential to ensure clients understand the investments they are making and the level of risks involved
It is crucial for your clients to have an adequate understanding of deposit insurance
Greater understanding of deposit insurance enables financial advisors to be more equipped to make proper assessment of financial risks
Financial literacy promotes market discipline
A well-informed public less susceptible to unsubstantiated rumours, hence preventing such rumours from creating consumer panic
Financial literacy aims to educate consumers
ability to make informed decisions on financial products
access to information and ability to compare information
capability to scrutinise conduct of banking institutions
Value of the deposit insurance system
A well-designed deposit insurance system forms a stable financial system
The establishment of an effective deposit insurance system can also mitigate the problem of moral hazard, the existence of which often undermines the value of deposit insurance system
Africa Asia Europe
Middle East
Western HemisphereAlgeriaKenyaNigeriaSudanTanzaniaUgandaZimbabwe
BangladeshHong KongIndiaIndonesiaJapanKazakhstanKoreaLao PDRMalaysia Marshall Isl.MicronesiaPhilippinesSingaporeSri LankaTaiwanTajikistanUzbekistanVietnam
AustriaAlbaniaArmeniaBosnia- HerzegovinaBelgiumBulgariaCroatiaCyprusCzech Rep.DenmarkEstoniaFinlandFranceGermanyGibraltarGreeceHungaryIcelandIrelandIsle of ManItaly
LatviaLiechtensteinLithuaniaLuxembourgMacedoniaMaltaMoldovaMontenegroNetherlandsNorwayPolandPortugalRomaniaRussiaSerbiaSlovak Rep.SloveniaSpainSwedenSwitzerlandTurkeyUkraineUK
BahrainJordanLebanonMoroccoOman
ArgentinaBahamasBrazilCanadaChileColombiaDominican Rep.EcuadorEl SalvadorGuatemalaHondurasJamaicaMexicoNicaraguaParaguayPeruPuerto RicoTrinidad & TobagoUruguayUSAVenezuela
Implemented worldwide since 1934
In total, 96 countries with a deposit
insurance system
In Malaysia
In Malaysia, deposit insurance was proposed in 2001 as part of the Financial Sector Master Plan
Akta Perbadanan Insurans Deposit Malaysia 2005 (PIDM Act) enacted by Parliament in July 2005
Perbadanan Insurans Deposit Malaysia (PIDM) established to administer a deposit insurance system in Malaysia
PIDM is an operationally independent statutory body, accountable to the Parliament through the Minister of Finance
PIDM’s responsibilities
Statutory Mandate(a) Administer a deposit insurance system
under the PIDM Act;(b) Provide insurance against the loss of part
or all deposits of a member institution; (c) Provide incentives for sound risk
management in the financial system; and(d) Promote or contribute to the stability of
the financial system
In achieving objects under (b) and (d), PIDM will act in such manner as to minimise costs
tothe financial system.
PIDM’s responsibilities [cont’d]
Functions
(a) Assess and collect premiums from member institutions
(b) Manage Deposit Insurance Funds(c) Undertake resolution of non-viable
banks(d) Reimburse depositors should a member
institution fail(e) Comply with Shariah principles in
respect of Islamic deposits and funds(f) Create and enhance public awareness
on the deposit insurance system
BNM remains the primary supervisor and regulator of the financial system
PIDM complements BNM’s role in promoting financial stability
Strategic Alliance Agreement between PIDM and BNM with respect to exchange of information and collaboration
PIDM may undertake resolution on member institutions upon notification of non-viability by BNM
Role of PIDM in the financial system
Features of deposit insurance system
Dual System
PIDM administers both Islamic and conventional deposit insurance systems under a single organisation
Membership
All licensed commercial banks (22) and all licensed Islamic banks (12)
Membership is mandatory under the PIDM Act
Who are our members?
ABN Amro Bank Affin Bank Alliance Bank Malaysia * AmBank Bangkok Bank Bank of America
Malaysia Bank of China (Malaysia) Bank of Tokyo-
Mitsubishi UFJ (Malaysia)
CIMB Bank Citibank * Deutsche Bank
(Malaysia)* With Islamic
windows
EON Bank Hong Leong Bank HSBC Bank Malaysia * J. P. Morgan Chase
Bank Malayan Banking
Berhad OCBC Bank (Malaysia)
* Public Bank * RHB Bank Standard Chartered
Bank Malaysia * The Bank of Nova
Scotia United Overseas Bank
(Malaysia)
Commercial Banks
Who are our members? (cont’d)
Affin Islamic Bank Al Rajhi Bank AmIslamic Bank Asian Finance Bank Bank Islam Malaysia Bank Muamalat Malaysia CIMB Islamic Bank EONCAP Islamic Bank Hong Leong Islamic Bank Kuwait Finance House Maybank Islamic Berhad RHB Islamic Bank
Islamic Banks
Coverage
Automatic coverage for all depositors with RM deposits Depositors need not apply or pay
premiums Eligible deposits include Ringgit-
denominated savings and current accounts and fixed deposits
Coverage limit RM60,000 per depositor per member
institution
Separate coverage Based on legal ownership of deposit
Funding
Annual insurance premiums are paid by member institutions
PIDM administers two separate funds Islamic Deposit Insurance Fund Conventional Deposit Insurance Fund
Flat rate premium assessment – 2005 to 2007
Differential premium systems from 2008 onwards
Payment to depositors
Depositors will be promptly reimbursed on their insured deposits Based on records of member
institution
According to PIDM Act, PIDM shall reimburse depositors within 3 months from date of winding-up order
Depositors can file a claim with the bank’s liquidator for uninsured amount
Reaching out to the public
Integrated Communications Plan 2007-2011
Print and broadcast advertising Training for member institutions Media events, interviews and articles Briefings and roadshows Website, publications and information
video
Collaboration with Bank Negara Malaysia and other partner agencies in public awareness and consumer education
Moving forward
Provision of Information on Deposit Insurance
Regulations will be issued to ensure member institutions provide relevant deposit insurance information to customers
Focus on building greater financial literacy
Development and implementation of educational programme for schools, colleges and universities
Conclusion
Awareness and knowledge of deposit insurance benefits everyone
Important to engage the public for which the deposit insurance system is created
Responsibility of deposit insurer, depositors and other stakeholders to find out about deposit insurance
PIDM continues to enhance the deposit insurance system to remain current and relevant to depositors
Contact
For further information on deposit insurance:
Contact our Customer Service Call Contact our Customer Service Call Centre:Centre: 1-800-88-1266 (Toll-free) 8.30 a.m. to 5.30 p.m. (Monday-Friday)
Visit our Web site at:Visit our Web site at: http://www.pidm.gov.my
Email us at:Email us at: [email protected]