governance of deposit insurance systems

Governance of Deposit Governance of Deposit Insurance SystemsInsurance Systems

Presented by:Mr. Guy Saint-Pierre

President and Chief Executive OfficerCanada Deposit Insurance Corporation

IADI Fifth Annual ConferenceRio de Janeiro, Brazil

November 15-17, 2006

Governance of Deposit Insurance SystemsGovernance of Deposit Insurance Systems

• Subcommittee membersSubcommittee members– Canada (Chair)Canada (Chair)– FranceFrance– JapanJapan– MalaysiaMalaysia– MexicoMexico– TurkeyTurkey– USAUSA

• Additional Submissions received fromAdditional Submissions received from– NicaraguaNicaragua– RussiaRussia– SwedenSweden


**The Discussion Paper is a work in progress****The Discussion Paper is a work in progress**

Introduction to Discussion Paper:Introduction to Discussion Paper:

Governance Defined: Governance Defined:

““. . . the processes, structures and information used . . . the processes, structures and information used for directing and overseeing the management of an for directing and overseeing the management of an organisation. . . organisation. . . [and] . . . [and] . . . the relationship between the relationship between the deposit insurance system and the authority from the deposit insurance system and the authority from which it receives its mandate or other authority to which it receives its mandate or other authority to which it is ultimately held accountable ”which it is ultimately held accountable ”


Four Key elements:Four Key elements:

1.1. Operational independenceOperational independence is defined as the ability of an is defined as the ability of an organisation to use the powers and means assigned to it without organisation to use the powers and means assigned to it without undue influence from external parties.undue influence from external parties.

2.2. Accountability Accountability means that individuals and organizations should be means that individuals and organizations should be responsible for their actions and for fulfilling their objectives.responsible for their actions and for fulfilling their objectives.

3.3. IntegrityIntegrity speaks to speaks to Individual integrityIndividual integrity, in that individuals should , in that individuals should pursue the objectives of their organisation without compromise to pursue the objectives of their organisation without compromise to self-interest and self-interest and organisational integrity,organisational integrity, such as appointment of such as appointment of quality governing body members and head of management and quality governing body members and head of management and clear terms of office and criteria for removal of those individuals. clear terms of office and criteria for removal of those individuals.

4.4. Transparency and DisclosureTransparency and Disclosure: : TransparencyTransparency is the principle is the principle fostered when the actions and decisions of an organisation, such as fostered when the actions and decisions of an organisation, such as a deposit insurer, are revealed and clarified to the organisation’s a deposit insurer, are revealed and clarified to the organisation’s stakeholders. stakeholders. DisclosureDisclosure refers to the release to stakeholders of refers to the release to stakeholders of information necessary for them to judge the effectiveness of the information necessary for them to judge the effectiveness of the deposit insurer’s conduct.deposit insurer’s conduct.


I.I. Governance StructuresGovernance Structures

– State-owned enterprises (e.g. Canada)State-owned enterprises (e.g. Canada)– Subsidiaries of state-owned enterprisesSubsidiaries of state-owned enterprises– Separate government agenciesSeparate government agencies– Privately administered deposit insurers, run by industry Privately administered deposit insurers, run by industry

associationsassociations– Departments of other safety-net organisationsDepartments of other safety-net organisations– Others Others


Suggested Guidance Point #1Suggested Guidance Point #1

The mandate of a deposit The mandate of a deposit insurance system should be insurance system should be clearly defined and preferably clearly defined and preferably set out in legislation.set out in legislation.

IllustrationIllustration

• CDIC’s mandate is set out and clearly defined in CDIC’s mandate is set out and clearly defined in the the CDIC ActCDIC Act of 1967. The mandate has, of 1967. The mandate has, however, been changed numerous times over the however, been changed numerous times over the past 39 years.past 39 years.

• Currently, it calls upon CDIC to:Currently, it calls upon CDIC to:a)a) Provide insurance against the loss of part or Provide insurance against the loss of part or

all of deposits;all of deposits;b)b) To promote and otherwise contribute to the To promote and otherwise contribute to the

stability of the financial system in Canada; stability of the financial system in Canada; andand

c)c) To pursue the objects set out in paragraphs To pursue the objects set out in paragraphs (a) and (b) for the benefit of persons having (a) and (b) for the benefit of persons having deposits with member institutions and in deposits with member institutions and in such manner as will minimise the exposure such manner as will minimise the exposure of the Corporation to loss.of the Corporation to loss.



A deposit insurance system A deposit insurance system should have a governing body.should have a governing body.


• Most deposit insurers have a Most deposit insurers have a governing bodygoverning body

• CDIC’s governing body CDIC’s governing body comprises 5 comprises 5 ex officioex officio public public servants, 5 private-sector servants, 5 private-sector directors, and a private-sector directors, and a private-sector ChairmanChairman


II.II. RelationshipsRelationships

The deposit insurance system’s relationships with:The deposit insurance system’s relationships with:• political authoritiespolitical authorities• member banksmember banks• other safety-net organisations (particularly other safety-net organisations (particularly

important for deposit insurers that are publicly important for deposit insurers that are publicly administered)administered)



It is a good governance It is a good governance practice for a deposit insurer to practice for a deposit insurer to have operational independence have operational independence in using the powers and means in using the powers and means accorded to it to fulfil its accorded to it to fulfil its mandate.mandate.


• CDIC’s operational CDIC’s operational independence of central bank independence of central bank and supervisorand supervisor– Powers within its Powers within its ActAct– Has its own staffHas its own staff– Can set its own budgetCan set its own budget

• Operational independence Operational independence requires information-sharing requires information-sharing mechanismsmechanisms– Financial Institutions Financial Institutions

Supervisory CommitteeSupervisory Committee



The governing body of a deposit insurance system The governing body of a deposit insurance system should be structured in such a way as to prevent undue should be structured in such a way as to prevent undue influence from influence from

political forces, political forces, the financial services industry, or the financial services industry, or other safety-net participantsother safety-net participants


Preventing undue influence from Political Forces

Illustration

• Forbid undue political influence explicitly in law• Protect the head of the governing body against removal for undue

political reasons:• In Canada, the Chairman of CDIC can only be removed for cause in

law.• Structure governing body’s reporting framework such that it reports to a

non- or multi-partisan authority• CDIC reports to Parliament (through the Minister of Finance)


Preventing undue influence from Preventing undue influence from Member banksMember banks::

• Tradeoffs to weighTradeoffs to weigh– Banking expertise v. increased potential for conflicts of interestBanking expertise v. increased potential for conflicts of interest

• IllustrationIllustration– Appoint non-affiliated private-sector individuals to the governing Appoint non-affiliated private-sector individuals to the governing

body body – Allow member banks (as a collective) to elect non-affiliated Allow member banks (as a collective) to elect non-affiliated

individuals to the governing bodyindividuals to the governing body– Allocate governing body seats according to type of credit Allocate governing body seats according to type of credit

institutioninstitution


Preventing undue influence from Preventing undue influence from other safety-net other safety-net organisationsorganisations

Tradeoff to consider:Tradeoff to consider: ex officio ex officio expertise and intervention coordination v. potential for expertise and intervention coordination v. potential for

undue influence from other safety-net organisationsundue influence from other safety-net organisations

Governing bodies for privately administered systems do not Governing bodies for privately administered systems do not usually comprise individuals from other safety-net usually comprise individuals from other safety-net organisations.organisations.



A deposit insurance system A deposit insurance system should be structured such that should be structured such that the potential for conflicts of the potential for conflicts of interest respecting members of interest respecting members of the governing body and the governing body and management is minimised.management is minimised.

IllustrationIllustration• Clear and separate mandates for Clear and separate mandates for

each safety-net organisation (related each safety-net organisation (related to Point #1).to Point #1).

• Governing body should appoint—or Governing body should appoint—or have as great a role as possible in have as great a role as possible in appointing--the head of management appointing--the head of management and corporate officers.and corporate officers.

• Governing body members and Governing body members and management should be required management should be required always to act in the best interests of always to act in the best interests of the DIS, which might not always be the DIS, which might not always be aligned with the interests of political aligned with the interests of political authorities, member banks, and other authorities, member banks, and other safety-net organisations.safety-net organisations.



It is a good governance It is a good governance practice for governing body practice for governing body members, senior officers, and members, senior officers, and employees of a deposit employees of a deposit insurance system to be subject insurance system to be subject to conflicts of interest codes to conflicts of interest codes and codes of conduct and and codes of conduct and ethical behaviour.ethical behaviour.


In CanadaIn Canada– CDIC CDIC Conflicts of Interest Conflicts of Interest

CodeCode– Code of Business Conduct Code of Business Conduct

and Ethical Behaviour and Ethical Behaviour for for employeesemployees

– Code of Business Conduct Code of Business Conduct and Ethical Behaviour for and Ethical Behaviour for DirectorsDirectors


III. The Governing Body and ManagementIII. The Governing Body and Management

• Governing body selection authority and appointment Governing body selection authority and appointment processesprocesses

• Member training and performance evaluationMember training and performance evaluation• Role of governing body in setting DIS strategyRole of governing body in setting DIS strategy• Usefulness of governing body charters or policy documentsUsefulness of governing body charters or policy documents


Suggested Guidance Point # 7Suggested Guidance Point # 7

It is a good governance practice It is a good governance practice for governing practice for a for governing practice for a deposit insurance system to deposit insurance system to maintain a profile of desired maintain a profile of desired skills for its governing body and skills for its governing body and senior executive team and for senior executive team and for governing body members to be governing body members to be knowledgeable of and knowledgeable of and adequately trained in matters adequately trained in matters related to deposit insurance and related to deposit insurance and the financial services industry.the financial services industry.


• In Canada, CDIC’s Chairman, board members, In Canada, CDIC’s Chairman, board members, and CEO are recommended by the Minister of and CEO are recommended by the Minister of Finance for appointment by Cabinet. Historically, Finance for appointment by Cabinet. Historically, in recommending CDIC’s CEO, the Minister has in recommending CDIC’s CEO, the Minister has also considered the advice of CDIC’s Board of also considered the advice of CDIC’s Board of Directors Directors

• In appointing the Chairperson and board In appointing the Chairperson and board members, the government has usually accepted a members, the government has usually accepted a profile of desired skills-sets to inform it in its profile of desired skills-sets to inform it in its selection process.selection process.

• Principle 3 of CDIC’s Board Charter calls upon the Principle 3 of CDIC’s Board Charter calls upon the Board to “arrange for orientation of new directors Board to “arrange for orientation of new directors and ongoing training appropriate to the Board’s and ongoing training appropriate to the Board’s governance responsibilities and needs”governance responsibilities and needs”

• CDIC provides offsite ongoing training to new CDIC provides offsite ongoing training to new Board members. New CDIC directors are provided Board members. New CDIC directors are provided with a comprehensive “Director’s Manual”with a comprehensive “Director’s Manual”



It is a good governance It is a good governance practice for the governing body practice for the governing body to conduct meaningful self-to conduct meaningful self-assessments.assessments.


• Governing body should assess its Governing body should assess its conformity with relevant practices conformity with relevant practices from the private sector and should from the private sector and should assess its own performanceassess its own performance

• A governing body might also consider A governing body might also consider engaging an external consultant to engaging an external consultant to assist it in its self-assessment. CDIC assist it in its self-assessment. CDIC has done this in the past with goodhas done this in the past with good results.results.



It is a good governance It is a good governance practice that the governing practice that the governing body set the strategic direction body set the strategic direction of the deposit insurance of the deposit insurance system and that management system and that management take action to carry out that take action to carry out that strategic direction.strategic direction.


• The governing body should The governing body should direct and supervise; direct and supervise; management should manage. management should manage. Not the other way aroundNot the other way around



It is a good governance It is a good governance practice for the governing body practice for the governing body to have a charter or policy in to have a charter or policy in place that lays out the place that lays out the governing body’s governing body’s responsibilities.responsibilities.


This can assist the governing This can assist the governing body in understanding its body in understanding its responsibilities and ensure that responsibilities and ensure that those responsibilities are being those responsibilities are being carried out.carried out.

CDIC’s Board Charter lays out CDIC’s Board Charter lays out 20 principles of governance 20 principles of governance and specific obligations of the and specific obligations of the Board of Directors in fulfilling Board of Directors in fulfilling those 20 principles.those 20 principles.

Governance of Deposit Insurance SystemsGovernance of Deposit Insurance SystemsCDIC’s CDIC’s Board CharterBoard Charter

• Principle 1: Independent judgmentPrinciple 1: Independent judgment• Principle 2: Understanding CDIC Principle 2: Understanding CDIC

objects, powers and objects, powers and governance governance responsibilities responsibilities

• Principle 3: Orientation and training Principle 3: Orientation and training of of directors directors

• Principle 4: Board profilePrinciple 4: Board profile• Principle 5: Delegation to Board Principle 5: Delegation to Board

committees and committees and Management Management

• Principle 6: Responsibilities of Principle 6: Responsibilities of Chairperson and CEO Chairperson and CEO

• Principle 7: Standards of business Principle 7: Standards of business conduct and ethical conduct and ethical behaviour behaviour

• Principle 8: Recommendation on Principle 8: Recommendation on appointment of CEO appointment of CEO

• Principle 9: Appointment of Principle 9: Appointment of Corporate Officers Corporate Officers

• Principle 10: Principle 10: Succession of CEO Succession of CEO and and

corporate officerscorporate officers

• Principle 11: Principle 11: Compensation for Compensation for non-non-ex ex

officioofficio directors, directors,

corporate officers and corporate officers and employeesemployees

• Principle 12:Principle 12: Objectives and Objectives and evaluation of CEOevaluation of CEO

• Principle 13:Principle 13: Human ResourcesHuman Resources• Principle 14:Principle 14: Strategic Strategic

management management processprocess• Principle 15:Principle 15: Enterprise risk Enterprise risk

managementmanagement• Principle 16:Principle 16: Control environmentControl environment• Principle 17:Principle 17: Internal audit functionInternal audit function• Principle 18:Principle 18: CDIC “in control”CDIC “in control”• Principle 19:Principle 19: Effective Effective

communicationcommunication• Principle 20:Principle 20: Review of Board Review of Board

CharterCharter


IV.IV. Audit and Legal ProtectionAudit and Legal Protection

• Use of external and internal auditingUse of external and internal auditing• Legal protection issues for individuals working for a Legal protection issues for individuals working for a

deposit insurance systemdeposit insurance system


Suggested Guidance Point #11 Suggested Guidance Point #11

It is a good governance It is a good governance practice for a deposit insurance practice for a deposit insurance system to be subject to regular system to be subject to regular external audits and external audits and examinations and for those examinations and for those audits and examinations to be audits and examinations to be made public.made public.


• External examinations and audits External examinations and audits provide comfort to the governing bodyprovide comfort to the governing body—and, when made public, to —and, when made public, to stakeholders—that the deposit stakeholders—that the deposit insurer’s operations are being carried insurer’s operations are being carried out effectively and efficiently.out effectively and efficiently.

• CDIC is subject to ongoing internal CDIC is subject to ongoing internal audit, annual external audit, and to a audit, annual external audit, and to a special external examination every special external examination every five years, the results of which CDIC five years, the results of which CDIC posts on its website.posts on its website.



It is a good governance It is a good governance practice for a deposit insurance practice for a deposit insurance system’s internal audit function system’s internal audit function to report to the audit committee to report to the audit committee of the governing body.of the governing body.


• This is increasingly a best practice in the This is increasingly a best practice in the private sector.private sector.

• At CDIC, the internal audit division At CDIC, the internal audit division reports to the Audit Committee of the reports to the Audit Committee of the Board of Directors with a “dotted line” to Board of Directors with a “dotted line” to the CEO for administrative issues.the CEO for administrative issues.

• CDIC’s Internal Auditor cannot be CDIC’s Internal Auditor cannot be removed without Board Approval.removed without Board Approval.

• The internal auditor’s reports are The internal auditor’s reports are provided to the Audit Committeeprovided to the Audit Committee

Governance of Deposit Insurance SystemGovernance of Deposit Insurance System


Governing body members, Governing body members, senior officers and employees senior officers and employees of a deposit insurance system of a deposit insurance system should be provided with legal should be provided with legal protection for decisions made, protection for decisions made, omissions, and actions taken in omissions, and actions taken in good faith and while good faith and while discharging the mandate of the discharging the mandate of the deposit insurance system.deposit insurance system.


• Preexisting Guidance from the 2004 Preexisting Guidance from the 2004 APEC Policy DialogueAPEC Policy Dialogue

• Crucial to the proper function of a Crucial to the proper function of a DIS: Without legal protection, those DIS: Without legal protection, those working for a deposit insurance working for a deposit insurance system will be reluctant to act.system will be reluctant to act.

• Should only be provided in respect of Should only be provided in respect of decisions taken in good faithdecisions taken in good faith


V. Transparency and DisclosureV. Transparency and Disclosure • General disclosure regimes to which a DIS is General disclosure regimes to which a DIS is

subject subject • Disclosure of pertinent financial and non financial Disclosure of pertinent financial and non financial

details about operationsdetails about operations• Tradeoffs between transparency and confidentialityTradeoffs between transparency and confidentiality

Governance of Deposit Insurance SystemGovernance of Deposit Insurance System


A deposit insurer should be as A deposit insurer should be as transparent as possible and transparent as possible and disclose appropriate disclose appropriate information on its activities, information on its activities, governance practices, governance practices, structure, and financial results. structure, and financial results. This disclosure can take the This disclosure can take the format of a public annual format of a public annual report.report.


• Necessary to balance the Necessary to balance the sometimes competing aims of sometimes competing aims of transparency and the need to transparency and the need to protect confidentialityprotect confidentiality

• ““Freedom of Information” Freedom of Information” statutesstatutes

Governance of Deposit Governance of Deposit Insurance SystemsInsurance Systems

Presented by:Mr. Guy Saint-Pierre

President and Chief Executive OfficerCanada Deposit Insurance Corporation

IADI Fifth Annual ConferenceRio de Janeiro, Brazil

November 15-17, 2006

governance of deposit insurance systems

Documents

deposit insurers conduct

financial system

illustrationcdics mandate

discussion paper

organisational integrity

individual integrity

privatesector directors

canada andto