1. จาริณี ประสิทธิ์ภิรมย์ 4345516429 2. จุฑามาศ เอื้ออำพน 4345519329 3. นีล นิลวิเชียร 4345544029 4. สุขสันต์ ว่องชู

1. “ Deposit Insurance ” 1. จาริณี ประสิทธิ์ภิรมย์ 4345516429 2. จุฑามาศ เอื้ออำพน 4345519329 3. นีล นิลวิเชียร 4345544029 4. สุขสันต์ ว่องชูวงศ์ 4345617129

2. Introduction about deposit insurance • Protection for your savings, in case your bank goes burst. • Deposit insurance aims to prevent them from panicking and causing a bank run,and thereby reduces systemic risk • The downside of deposit insurance is that it creates a Moral Hazard • The state safety net could be shrunk,by splitting banks into 2 types: “ narrow bank ” , “Broad bank” • requiring every bank to finance a small proportion of its assets by selling subordinated debt to other institution.

3. History • Stabilize the financial system • Enhancing public confidence and systemic stability • Increase saving and encourage economic growth Benefit

4. The pitfalls of Deposit insurance • Moral Hazard : By insulating depositors from defaults,deposit insurance reduces their incentive to monitor bank closely.Also banks can take greater risks, safe in the knowledge that there is a state-financed safety net to catch them if they fall. • Adverse Selection : occur when the weak institutions choose to join a voluntary system,while the strongest remain outside. • Agency problem : This problem can occur when an agent serves his own interest rather than those of the principal who employ him

5. Objective • providing consumer protection for small depositors • enabling small and new banks to compete with large and \ or state-owned banks • defining the boundaries of the government’s exposure to loss • require banks to contribute to the resolution of failed peers

6. The Deposit Insurance System’s Mandate : Private or Public • private run and entirely privately funded • government-backed and run

7. The System’s Mandate : Narrow or Broad • Narrow Mandate • Broad Mandate

8. The Narrow Mandate • insure small depositors in member institutions • compensate insured depositors in failed member institutions promptly to minimize disruption to the economy • setting and colleting premiums • managing the insurance fund in a way that allows it to satisfy its obligations effectively • informing the public of its role and responsibilities ,and describing how it works

9. The Broad Mandate • Monitors the condition of the banking industry to estimate its potential losses and take actions to minimize or forestall those looses • Take responsibility for the resolution of insured financial institutions that have been intervened by the supervisor’s authority

10. Infrastructure • Deposit insurance systems need to be supported by a strong infrastructure of civil and commercial law. • A clear understanding of their fiduciary responsibilities by bank owners and managers • Internationally accepted accounting and auditing standards • Public disclosure of individual bank data • The system also needs to be supports by a well-formulated lender of last resort and adequate risk-management framework in the payment system.

11. Deposit Insurance System Need To Be Supported By...

12. Supervision,Regulation,and Resolution The regulatory and supervisory system should • having the supervisory authorities for forcing the strict resolution of problem banks ,using a swift application of a spectum of enforcement actions to be taken as soon as a bank becomes undercapitalized or show sign of weekness. • requiring and enforcing capital requirements also protect deposit insurance system. • high deductible in property reluctant to take excessive risk.

13. Supervision,Regulation,and Resolution The regulatory and supervisory system should (ต่อ) • . restricting the insured bank to holding only safe assets • in Broad mandate,The supervisor needs authority to close and liquidate or resolve insolvent banks in some other incetivecompatible manner

14. Requiring subordinated Debt • Its holders are at the back of the queue for their money if the bank gets into trouble and they have no safety net • To sell its debt,the bank will have to persuade informed investors .If it cannot convince them it cannot operate • Requiring subordinated debt is feasible only for large publicly traded banks

15. A Framework for Resolving Individual banks • All countries need a firm framework for the resolution of Troubled banks.If it does not already exist, the establishment of a system of deposit insurance provides an opportunity to design and enact a legal and institutional framework that will help authorities to intervene in troubled bank • Legal framework will help to avoid costly delays • Broad mandate case,the resolution framework should require that the bank pass to the government-run deposit insurance agency for resolution immediately after it has been intervened by the supervisory authority.

16. Country specifics • Deposit insurance is best suited for an economy with a relatively large number of banks operating according to the same rule • Deposit insurance is not suit for country which have 1 . size-that is,one or a few very large banks and some or many smalls ones 2. ownweship – that is,a few dominant state-owned banks that may carry explicit or implicit guaruntees of all their deposits 3 . soundness – that is , a few well managed and solvent banks togetherwith a significant number and share of insolvent and/or nonviable banks

17. Ownership:State-Owned Banks • Government commonly institute a system of deposit insurance when there are a few,large state owned banks that have implicit guaruntees and a number of smaller or newly-chartered private banks. • These can help to build the system’s resources and somewhat redress the state institutions’ competitive advantage

18. Fragility • Explicit deposit insurance should be installed when the banking system is sound • Countries are often impatient and reluctant to wait for this opportune time ,however deposit protection can prospone a banking debacle,but it is unlikely to prevent one • Some country may have more lefitimate reasons for starting a system of deposit insurance .

19. Avoiding Moral Hazard • Deposit insurance can create incentive incompatibilities that weaken the banking system and make the cost of insurance prohibitive. Thus, a deposit protection system needs to be designed to provide a set of inducements to encourage all of the parties involved to act in ways that serve to strengthen the banking system

20. The steps that can be taken to contain Moral Hazard • Make the Deposit Insurance System Transparent : Transparency is essential because it allows bank customers to protect their interests • Define Deposits : Both the deposit insurance agency and institutions covered by that agency carry a responsibility to publicize which deposits are insured and which are not

21. The deposit insurance authority with broad mandate needs to know the condition of banking industry in general and of weak institutions that mightimpose costs upon it so that it may plan for payouts and choose resolution strategies • Finding a way for the supervisor in a deposit insurance agency to share information and satisfy each agency’s specifics information needs is a challenge. However,the law should specify what information the deposit insuer is entitled to receive and what information the supervisor is obliged to convey promptly. • Information for the Supervisor and the Deposit Insurance Agency : The supervisor needs accurate and timely information on the condition of each bank .

22. Disseminating Information : Supervisors will want to disseminate as much of their information as is competitively equitable to enable the public to protect its financial interests and help keep the banking system sound through market discipline. • Coverage : Which classes of depository institution should be required to join the system of deposit insurance , which financial instrument to cover , and to when extent to cover them

23. Which Institutions to cover? : A country may choose to institute a seperate scheme to cover such depository institutions .This scheme may offer lower coverage, or change higher premiums in order to cover the additional risks attendant on inferior prudential • Which Instrument to cover ? : Which instruments to cover by deposit insurance and the limits on, and exclusions from, coverage.

24. The type of deposits to be included, and establish that both principal and interest would be covered • 1 ) Deposit insurance of all types that are dominated in domestic currency , should be covered • 2) Promissiory notes that are often tssued by finance companies would be covered by the system if finance companies are allowed to join the scheme • 3) Both principal and any accured interest that has not already been added to the principal would be coverd • 4 ) For trust accounts, one person should be designated to represent the group,which would be entitled onle to coverage for a single person • 5 ) Foreign currency deposit : where foreign currency deposits are widely used , and particularly ,The deposit insurance system may insure foreign currency deposit to promote financial stability

25. Which Instrument to Exclude ?: The exclusion of bearer instruments can be justified because it would be impossible to implement the required limitations on coverage • Other Nonessential Exclusions : The careful supervision cen prevent problems about insider who often receive special privileges • Some countries exclude deposits carrying excessively high interest rates from coverage. • The supervisor should deal with such problems rather than encumber the deposit insurance system with a supervisory responsibility.

26. Extent of Coverage : The deposit insurance scheme should be designed to protect small depositors .Excluding larger depositors to monitor the condition of their bank carefully. • Coverage for Each Deposit or each Depositor : Compensation should be paid up to the limit on the sum of depositor in any member institotion. • Amount of Coverage : The aggregate amount of coverage offered to each depositor in any bank should be relative low.

27. Coinsurance : Coinsurance has the advantage of assuring depositors of the prompt repayment of at least part of deposit.It is often run on a sliding scale,so that the depositror recover. • Should the Coverage limit be indexed to inflation ? The ideal situation is one where a country has low inflation

28. Netting Deposits Against Loans : When a depositor is also a debtor of the failed bank , his/her deposit should be netted against the loan. However, should not be offset a good borrower. • The insured parts of deposits of all kinds be netted against • claims that have have already fallen due • promised, but undelivered,subscription from shareholders • damage assessments against owner and manager.

29. Reducing adverse selection • Make membership compulsory • Risk adjustment premium

30. Make membership compulsory : • membership in the system should be mandatory for all institution located in the country. Otherwise,only the weakest institution will join and the system will not be financially viable.

31. Risk- adjustment premium : • The objective of risk adjusting premiums is to require riskier institutions that are more likely to call upon assistant from the deposit insurer to pay more coverage • - One straight forward method is to ask bank to pay premiums based on their risk adjusted asset,rather than on their deposit • - A second approach is to charge lower premium to banks that have higher capital ratios and/or supervisory rating

32. Minimizing Agency Problem To minimizing agency problem banking system should avoid these problems • 1 ) Political interference : The agency need to be support by a clear legal and regulatory framework to limit political interference • 2 ) Regulatory capture : is a situation where the deposit insurance agency serves the bans rather than the interst of the public problem arise only when a privately fund has government financial backing . It can be solve by having the government run the scheme even though , It is owned by the banks

33. Minimizing Agency Problem • 3 ) Interagency friction : is a lack of cooperation between or within financial regulatory agency to remedy this problem,The objective and function of different financial authorities must be clarified.

34. Promoting Credibility • The design of the deposit insurance agency can importantly influence its credibility. The agency should be design to be independent but accountable and have adequate management and staffing

35. Independence:Refer to status within the government and to freedom from political pressure and domination by the banking industry . • Accountability : the authorities must maintain its books and record a transparence way and be subject to the same audit rules as other public entity The records of a public deposit insurance agency must , therefore,be subject to published annual audit conducted by the Office of the Auditor General or its equivalent.

36. . Staffing :The propose deposit insurance agency could have a small staff in a country where there is not a large number of insure institution and failure are rare. • Public Relation:Such a program require that the deposit insurer issue publication that keep the public inform about coverage under the guarantee. • -The staff must be granted legal protection against lawsuits • -Staff would need analytical skill and high integrity

37. Ensuring Financial Integrity • A financial issued that need to be resolved before setting up a system is “How to fund the system”.Resolving this issues will improve the financial position of the system and reduce its need to call on government resources for back up

38. Optimum fund size : • There are 2 separate philosophies reguarding fund size • 1 ) Aim to have a fund large enough to self sufficiently compensate when bank failure occur in a normal time. • 2 ) Reduce fund size but only to a level that enable a system to borrow ,to pay depositor in failed bank.

39. Start up Funding :A newly established system may receive initial contribution for bank/Central Bank / Government. Where are strong initially to foot the bill they should do so. • Ongoing Funding-Premium :Insurance fund would be accumulate and member would be required to pay premium at the rate of “ X ” percent per year based on total deposit • - Premium would be levied as needed to cover expenses and build, maintain or rebuild the fund to its target level

40. Deposit Preference :Giving depositors and / or the insurance fund preference over the assets of the failed bank increases their share in the value recovered and reduces the fund’s net outlays , while increasing the share of losses borne by others . • The choice between granting priority and not granting it is judgement call. Yhe choice would be influenced by an assessment of the balance between a fiscal need and deposit insurance system efficiency in recoveries.

41. Managing Fund Assets : Another defense of the fund is to invest fund resources wisely. • When investing fund resources : • Should be in vested in government securities. • Should determine the most appropriate maturity. • Sholud have market interest on the fund and safety • Even government paper may not always be sufficiently liquid insurance system may wish to invest in government securities abroad

42. Back-up Funding : It could have a government guarantee,a right to borrow without limit from the treasury/the national debt office,ihe central bank ,or from the market. • The Government Guaruntee : The following points should be considered when a government guaruntees the deposit insurance agency:

43. The fund may need a government guarantee to be credible with the public. • The agency should have the power to borrow according to rules but wiyhout any limit on the amount needed to restore its viability from the treasury/debt agency or the central bank and issue bonds and notes in the markets. • The government’s guaranteeof the deposit insurance system would ensure that any central bank liquidity support is repaid • Agency would need to seek prior approval ( From the ministry of finance and central bank ) regarding the timing of borrowing from the markets • The agency should have the authority to impose special ,additional ,ex pose assessment on all member institutions,as need ; for example,to repay borrowed funds.

44. Case study : Germany • The German Deposit Insurance System • The German banking system: Large share of public and cooperative bank • The German traditionallly been universal banks doing both commercial and investment banking and serving both household and firms

45. General Characteristics of German deposit insurance schemes • There are 3 major deposit insurance schemes in Germany • Establish under political pressure • Organization & administration has been private from the beginning • Each of 3 main German bank groups has its own deposit insurance scheme • Offset the competitive advantage that the saving bank has due to their public ownership

46. General Characteristics of German deposit insurance schemes • Saving banks and cooperative bank group has both regional and national insurance schemes • The schemes of both saving and cooperative banks do not directly guarantee deposits, but rather the institution themselves • All 3 bank groups have their own auditing entities and work closely with the Federal Banking Supervisory Office and the Budesbank • Bundesbank is prohibited by law to act as lender of last resort for the deposit insurance schemes. It is rater expected that in the case of a systemic crisis, a political solution will be found without this case being predictable

47. Membership • Voluntary but compulsory for all members of the German Bank Assosiation • Although membership is Voluntary, non-participating banks face high barriers • Member of a deposit insurance scheme cannot use their membership for advertisement purposes • Non – member has to post the fact that it I s not a member in its General Terms and condition and in the schedule of prices displayed in the banking hall and on the application forms for opening an account

48. Coverage • All non bank deposit are covered up to a limit of 30 % of liable capital of troubled institution • Given that minimum capital for a bank the minimum limit is 1.5 million Euro • Given that average equity size of a commercial bank is 295.6 Euro ,the average limit is around 90 miilion Euro • It is very high limits make the coverage almost complete

49. Financing • Fiananed exclusively by member bannks and on a mixed ex-ante and expost basis • Member bank have to pay premium of 0.03% of “liabilities to other creditor arising from banking business” every year • Additional payment of 0.09 % for new members • Banks that have paid for more than 20 years and are classified in the lowest risk category (A), can be exempted from premium payment

50. Financing • Banks that are classified as higher risk (B or C) are required to pay an additional premium of up to250% of the regular premium. • Available fund are not publicly know • No public funding • The Bundesbank is prevented by the Bundesbank act to function as lender of last resort