indonesia deposit insurance corporation funding mechanism presented by firdaus djaelani chief...

Indonesia Deposit Insurance

Corporation FUNDING MECHANISM

Indonesia Deposit Insurance

Corporation FUNDING MECHANISM

Presented byPresented by

Firdaus DjaelaniFirdaus DjaelaniChief Executive OfficerChief Executive Officer

8th ARC Meeting & International Conference

Goa – India, 18-20 January 2010

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OutlinesOutlines

1. IDIC Key Features 2. Mandates3. Sources of Fund4. Insurance Premium 5. Investment Policy6. Back-Up Funding7. Fund Sufficiency

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IDIC Key FeaturesIDIC Key Features

1. Public corporation2. In between, paybox & risk

minimizer 3. Mandatory & automatic

membership4. Ex-ante funding system 5. User fee funding approach6. Max. coverage IDR 2 billion7. Flat rate premium8. Subrogation right

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1. IDIC mandates are protecting depositor’s fund; and actively participate in promoting financial system stability, among others, by resolving failed member banks

2. In fulfilling its mandates, IDIC develop adequate funding mechanism and build collaboration, coordination, and information sharing with other financial safety net players

3. IDIC utilize reimbursement to depositors of closed banks and financial assistance to improve the operation of failed banks

Mandates (1)Mandates (1)

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4. Before reimbursing depositors, IDIC verify and reconcile deposits record on failed bank

5. Eligible depositors, insured deposits, payment schedule, paying agent bank, and location of payment then announced to public

6. In resolving failed banks, IDIC provide financial assistance, acquire General Shareholder Meeting, replace management, & take necessary actions to improve soundness of the bank

7. The financial assistance is booked as temporary capital placement to the bank

Mandates (2)Mandates (2)

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Investment Yield

One Time Membership Contribution(0.5% of Paid up Capital/Equities)

Initial Capital (IDR 4 trillion, about US$ 410 million )

Sources of FundSources of Fund

Annual Insurance Premium(0.2% of Average Insurable Deposits)

Government

Member Banks

Government Bond/Sukuk & Central Bank Securities

Closed Banks Recovery from Liquidated Assets

Member Banks Fines on Late Payments

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Insurance Premium (1)Insurance Premium (1)

1. Member banks pay a flat rate 0.1% semi-anually premium (0.2% p.a.) based on monthly average of insurable deposits

2. Member banks do self-assessment; calculate, pay, and report their own premium to IDIC

3. For premium payment, commercial banks debit their accounts at the Central Bank; whilst rural banks pay to IDIC account in appointed bank with widespread branches

4. Late premium payment shall be fined 0.5% of unpaid premium amount per day overdue, at maximum 150% of unpaid premium

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Insurance Premium (2)Insurance Premium (2)

5. IDIC will inform non compliance member banks to the bank supervisor

6. In addition, IDIC could prosecute directors and commisioners of non compliance member banks for breaching the Law

7. During global financial crisis, level of coverage was increased from IDR 100 million to IDR 2 billion, but the premium rate was unchanged and there is no special premium

8. IDIC is considering to apply differential premium system in the near future

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Investment PolicyInvestment PolicyInvestment PolicyInvestment Policy

1. The emphasis of IDIC investment policy is on the safety and liquidity of the fund

2. IDIC can only invest on securities issued by Government or Central Bank

3. The investment tools includes Government Bond & Islamic Bond (Sukuk), and Central Bank Certificate

4. For day to day operation, IDIC is allowed to place minor amount on current account in commercial bank

5. In regard to protect Islamic bank deposits, IDIC invest on Sukuk proportionally with the share of the particular deposits

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Back-Up Funding (1)Back-Up Funding (1)

1. In order to have access to sufficient funding in time, IDIC has fully back up from the Government

2. If IDIC encounter liquidity problem, the Government provide liquidity support facility

3. The facility conditions includes interest rate, tenor, repayment, and other arrangements will be ruled in Government Regulation

4. There is no ceiling limit for these facilities5. IDIC is not allowed to borrow directly from

financial institutions or market

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Back-Up Funding (2)Back-Up Funding (2)

6. When IDIC capital drops below its initial capital, the Government injects new capital to restore IDIC capital

7. In restoring IDIC capital, Government could issue Bond through private placement, or to the market, or to Central Bank

8. The terms of bond issues include amount, interest rate, tenor, repayment of principle and interest, and other requirements will be ruled in Government Regulation

9. IDIC is not allowed to raise funds through bond issuance

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Fund Sufficiency (1)Fund Sufficiency (1)

1. In order to ensure that IDIC has sufficient fund to fufill all of its duties, IDIC sets target Insurance Reserves and calculates Provision for Insurance Loss (PIL)

2. IDIC’s Insurance Reserves is targeted at the level of 2.5%of the insurable deposits

3. In determinig the target level, IDIC taken into accounts : composition & concentration of member banks (number, size, line of business), liabilities structures, probability of defaults, bank supervisory effectiveness, and failure experiences

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4. The allocation of annual surplus : 80% for Insurance Reserves and 20% for Special Purpose Reserve

5. Annual surplus imply IDIC’s one year operational revenues minus operational expenses and corporate income tax

6. Special Purpose Reserve is a fund which purposed to enhance capacity & capability of IDIC in carrying out its duties and responsibilities such as for fixed assets, human capital, and IT expenditures


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7. Once the target of Insurance Reserves reach 2.5% of insurable deposits, all or part of the annual surplus will be remitted as non-tax revenue to the Government

8. In user fee model approach, the Government bears all the risks associated with member bank failures, so member banks have no claim againts the Insurance Reserves

9. Otherwise, the government could reduce the premium rate once the target fund met


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10. Insurance Reserves basically is an Unexpected Losses (UL) that’s extraordinary losses of the DI Fund that can occur under unlikely, yet possible unfavorable outcomes, which, however, are not considered as systemic crisis scenarios

11. Provision for Insurance Loss (PIL) is Expected Losses (EL) that’s the “usual” or average losses that a DI Fund incurs under normal circumstances of deposit insurer’s business

12. IDIC develops the method of calculating PIL using credit risk model approach


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Mathematically, PIL or EL is calculated as the sum of products of EAD, PD and LGD over the whole row of member banks:

EAD – est. insured deposits in a member bankPD – probability of default of a member bankLGD – share of non-recoverable resources from the bankruptcy estate of a liquidated bank

i

iii LGDPDEADEL


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Insurance Premiums

Annual Surplus

Claim Reimbursements

Investment Yields

Membership Contributions

Others : Fines & Asset Recoveries

Bank Resolutions Expenses

Increase (Decrease) Provision for Insurance Loss

General & Administration Expenses

Reven

ue

sExp

en

se

s

Surplus Before Tax

Corporate Income Tax

Minus

Minus


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80%

Annual Surplus

20%

Insurance Reserves Special Purpose Reserves

Initial Capital (IDR 4 trillion, about US$ 410 million)

Insurance Reserves(IDR 5.4 trillion, estimated as of Dec 2009)

IDIC

’s F

un

d


Provision for Insurance Loss(IDR 6.9 trillion, estimated as of Dec 2009)

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Thank YouTerima kasih

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