Session 2(b) Management of Deposit Insurance Funds – MALAYSIA

Wan Ahmad Ikram Chief Financial OfficerMalaysia Deposit Insurance Corporation (MDIC)

1

2

MDIC: A government statutory body …

• with legislated mandate to:– administer a deposit insurance system– protect part or all deposits in member institutions– provide incentives to promote sound risk management– contribute to the stability of the financial systemand carry out its mandate in such a manner as to minimise costs to the financial system

• with no capital structure therefore, no dividend payable

• exempted from income tax

• subject to: – audit (by the National Audit Department) – financial reporting requirements (tabling of annual financial statements to Parliament)– compliance with approved Financial Reporting Standards

• fully backed by the Government

3

Deposit Insurance Funds: Conventional and Islamic

Two separate and distinct Deposit Insurance Funds (DIFs):• Both run parallel and managed by MDIC• Clear segregation, no co-mingling• Islamic DIF managed in accordance with Shariah principles• Separate financial statements for conventional and Islamic DIF

Premiums: • Ex-ante & risk-based premiums assessed on total insured deposits• Premiums assessed/collected by MDIC and investment income build up the Deposit Insurance

Funds

Investments:• Legislative provisions and Board-approved investment policy (reviewed annually) set out the

parameters within which MDIC invests surplus funds• Investment policy:

– Funds in the DIFs are invested in safe and liquid investment instruments to enable easy access when the need arises

– Key drivers: Capital preservation and liquidity– Types of investment: Short-term government and central bank papers– Islamic funds managed in accordance with Shariah principles

4

Management of Deposit Insurance Funds (DIFs)

MANAGEMENT OF DIFsSources • Annual premiums are paid directly by member institutions

• Investment income

Uses Expenses:•Directly related to conventional or Islamic• Common/indirect expenses are allocated proportionately in

accordance with the ratio of Islamic and conventional premiums assessed for the preceding assessment year as at December 31

Surplus •Yearly net surpluses are credited to DIFs

5

FUNDING FRAMEWORK

6

MDIC’s Funding Framework

Objectives: • To cover day-to-day operating expenditures• To build funds available for meeting future obligations to

depositors

Framework takes into consideration:• MDIC’s role in the financial safety net• Legislative powers relating to sources of funding• Clear objectives for internal and external sources of funding

7

Funding Framework

INTERNAL FUNDING

Deposit Insurance Funds (“DIFs”) – Conventional and Islamic

EXTERNAL FUNDING

Borrowings from Government

Ex-ante premiums

•To cover operating

expenses

• To build DIFs over time

to reach “Target

Funds”

Sources of Funds Purpose

Investment income

Ex-post premiums

• To address liquidity

needs in case of an

intervention and failure

resolution (“IFR”)Raise funds from capital market

8

INTERNAL FUNDING:TARGET FUNDS

9

Target Fund Framework

• MDIC is currently developing a Target Fund framework

• Best practice:– Comprehensive approach using Value-at-Risk method for

estimating Target Funds to reflect expected net losses taking into consideration the regulatory and supervisory approach as well as MDIC’s approaches for risk assessment and monitoring and IFR

10

Challenges

… in building MDIC’s Funding Framework:

• Sufficiency to meet MDIC’s financial obligations• Financial impact on profitability of member institutions

MDIC’s approach, therefore, is to develop Target Funds to cover deposit insurance losses

11

Guiding PrinciplesFIRST PRINCIPLEThe Target Fund should be built to address periodic failures and not systemic failures

SECOND PRINCIPLEThe Target Fund should cover the net insurance losses arising from IFR, supported by external funding arrangements to address liquidity needs for IFR

THIRD PRINCIPLEDetermination of Target Fund for MDIC should take into consideration impact on profitability of member institutions

FOURTH PRINCIPLEThe Target Fund size should be specified as a “range” of amounts rather than an absolute amount

12

Approach• While MDIC lacks relevant historical loss data:

– there exists other external information from rating agencies and other organisations that may be useful in estimating the variables needed

– these data can be assessed together with MDIC’s internal risk assessment methodology which may be used to estimate some of the noted variables

• Scenario analysis to be incorporated into robust modelling, taking into consideration:– Strong and proactive regulatory and supervisory regime– MDIC’s comprehensive risk monitoring and assessment framework– MDIC’s legislative powers to intervene early and minimising losses to financial system– MDIC’s extensive legislative powers to conduct failure resolutions with speed and

efficiency

• Other considerations:– Alignment and integration to the premium setting process– Approach in dealing with assessment of annual premiums once Target Fund level has

been achieved– Continuous review and calibration of model

13

EXTERNAL FUNDING

14

Overview

• Objective: To supplement MDIC’s internal funding

• Powers to seek external funding:– Legislative power to borrow from the Government– Legislative power to raise funds in any manner as MDIC deems fit

• Forms of external funding:– Borrowing from the Government– Government guaranteed borrowings from the capital market

15

Government BorrowingsGUIDING PRINCIPLESPurpose To fulfil MDIC’s legislated mandate

Types of borrowing

• Islamic• Conventional

Amount Sufficient to enable MDIC to carry out its IFR activities

Tenure Sufficiently long to enable MDIC to raise funds from the market, in the most effective and efficient manner possible

Borrowing terms

• Commercial or arms-length: Government borrowing rateTo be repaid by:• Annual premiums (increase in premiums assessed)• Realisation of failed bank assets and• Funds raised in the capital market

Timing Borrowings to be made available to MDIC in a timely and prompt manner

On demand structure

Being addressed currently -• Operationalisation of processes: Pre-arranged agreements and

documentation, setting up of operational accounts, etc.

16

Capital market fund raising

CONCEPTPurpose To replace liquidity funding

Timing To be used when the operating environment is conducive to raise funds from the capital market

Structure Government guaranteed:• Fixed Income Securities – bonds, promissory notes, etc (Conventional)• Sukuk (Islamic)

Tenure Sufficiently long to match cash flows from annual premiums and realisation of failed bank’s assets

Structured program

Pre-arranged standby facility which can be drawn or called upon as and when requiredPlanning: Need to have in place so that it can be used when necessary

17

THANK YOU