IADI CORE PRINCIPLES FOR

EFFECTIVE DEPOSIT INSURANCE

SYSTEMS

Research, Policy & International Relations

Department

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 Outline

1) Background
2) Meaning of IADI Core Principles
3) Objectives of IADI Core Principles
4) Application/Users of IADI Core Principles
5) IADI Core Principles Preconditions
6) Overview of IADI Core Principles
7) IADI Core Principles Compliance Assessment
8) Conclusion

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 Background

• IADI was established in May 2002 in Basel, Switzerland to enhance the

effectiveness of DISs by promoting guidance and international cooperation.
Specifically, the aims of setting up of IADI include:

To promote cooperation among different deposit insurance organizations;

To Promote the stability of the international financial system;
To Provide deposit insurance practitioners with the opportunity to discuss
leading issues in deposit insurance; and
 Information sharing and net-working among members.

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 Background Cont’d

• IADI CPs are benchmarks for assessing the quality/effectiveness and for identifying
gaps in their existing systems and putting in place measures to address them.

• CPs are also mechanisms for setting up of new systems in countries where they do
not exist.

• The revised CPs reflect the need for effective DI in preserving FS-a key lesson of the
2007-09 financial crisis.

• The updated CPs addresses the need for the Deposit Insurer to have additional tools
and ability to be better integrated into the financial safety-net.
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Objectives IADI Core Principles
 To enhance effectiveness of deposit insurance systems worldwide.

 To be reflective of and adaptable to a broad range of country

circumstances, settings and structures.

 A high degree of compliance with the core principles should

contribute to financial system stability and enhance depositor
protection.

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 Application/Users
• Four major users/contexts
1. Jurisdictions - for self assessment of their DIS
2. IMF/WB - for FSAP process and technical assistance
missions reviews
3. FSB/G20 - for thematic and peer reviews on DIS (2012)
4. Third Parties (consultants) - for external assessment

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IADI Core Principles Preconditions

• The effectiveness of a deposit insurance system is influenced

not only by its design features but also by the environment
within which it operates.

• The operating environment includes:

• Macroeconomic conditions;
• The financial system structure;
• Prudential regulation and supervision;
• The legal and judicial framework; and
• The accounting and disclosure system.

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IADI Core Principles Preconditions
Cont’d
Macroeconomic Conditions
• Macroeconomic conditions influence the effectiveness of
markets, the ability of the financial system to intermediate
resources, and economic growth.

• In stable periods, the Core Principles provide guidance on

minimum features for an effective deposit insurance system.

• In the face of persistent macroeconomic instability, however,

the Core Principles provide guidance on areas that a deposit
insurance system will need to reinforce, in order to provide
robust support to depositors.

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IADI Core Principles Preconditions
Cont’d
Financial System Structure
• Any assessment of a deposit insurance system should
consider the health and structure of the financial sector, and
the range of possible demands on the deposit insurer.

• Elements to consider include:

• An assessment of the health of banks
• The number, type and characteristics of banks (types of deposits)
• Any pre-existing depositor protection arrangement

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IADI Core Principles Preconditions
Cont’d
Prudential regulation, supervision and resolution
• The strength of prudential regulation, supervision and the resolution
regime influences the functions and effectiveness of a deposit insurance
system.

• Strong prudential regulation and supervision ensure that an institution’s

weaknesses are promptly identified and corrected.

• The system of prudential regulation, supervision and resolution should

be in compliance with international standards, including the BCBS’s Core
Principles for Effective Banking Supervision and the FSB’s Key Attributes
of Effective Resolution Regimes.

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 IADI Core Principles Preconditions
Cont’d
The Legal and Judicial Framework
• Deposit insurance systems cannot be effective if relevant and
comprehensive laws do not exist or if the legal regime is characterised by
significant inconsistencies.

• A well-developed legal framework should incorporate a system of

business laws, including corporate, insolvency, contract, creditor rights,
consumer protection, anti-corruption/fraud and private property laws.

• The legal system should be supported by a well-functioning judiciary.

• For the deposit insurance system, the legal framework must lay out its
appropriate powers and enable it to compel member banks to comply
with their obligations to the deposit insurer.

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 IADI Core Principles Preconditions
Cont’d
The Accounting and Disclosure Regime
• Sound accounting and disclosure regimes are necessary for the effective
evaluation of risks by deposit insurance systems.

• A sound accounting and disclosure regime includes comprehensive and

well-defined accounting principles and rules that command wide
international acceptance.

• A system of independent audits ensures that users of financial

statements have independent assurance that the accounts provide a true
and fair view of the financial position of the financial institution.

• All financial safety-net participants, including the deposit insurer, need to

have timely access to reliable financial information.

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 Overview of Core Principles

The Former 18 Core Principles (Original CPs)

1. Public policy objectives
2. Mitigating moral hazard
3. Mandate
4. Powers
5. Governance
6. Relationships with other safety-net participants
7. Cross-border issues
8. Compulsory membership
9. Coverage
NOTE:
RED= DELETED
BLUE= MERGED
BLACK= NO CHANGE

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 Overview of Core Principles Cont’d

10. Transitioning from a blanket guarantee to a limited coverage DIS

11. Funding
12. Public awareness
13. Legal protection
14. Dealing with parties at fault in a bank failure
15. Early detection and timely intervention and resolution
16. Effective resolution processes
17. Reimbursing depositors
18. Recoveries
NOTE:
RED= DELETED
BLUE= MERGED
BLACK= NO CHANGE

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Overview of Core Principles Cont’d

The new 16 Core Principles (issued Nov., 2014)

1. Public policy objectives
2. Mandate and Powers
3. Governance
4. Relationships with other safety-net participants
5. Cross-border issues
6. Deposit Insurer’s role in Contingency Planning and Crisis
Management
7. Membership
8. Coverage

NOTE:
• GREEN=NEW CP

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Overview of Core Principles Cont’d

9. Sources and Uses of Fund

10. Public awareness
11. Legal protection
12. Dealing with parties at fault in a bank failure
13. Early detection and timely intervention
14. Failure Resolution
15. Reimbursing depositors
16. Recoveries

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Overview of Core Principles Cont’d

The Key Objectives of Revising the CPs include:

1. Improve the clarity and consistency of terminology;

2. Reduce overlap and duplication among the CPs;

3. Strengthen the CPs in certain areas (e.g. governance, depositor reimbursements,

coverage, funding) and improve safeguards for the use of deposit insurance funds;

4. Provide more prescriptive guidance;

5. Incorporate IADI enhanced guidance on reimbursements, public awareness,

coverage, moral hazard, and funding;

6. Address moral hazard concerns within all relevant CPs instead of restricting moral
hazard guidance to a single principle;

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Overview of Core Principles contd

The Key Objectives of Revising the CPs include:

7. Update to better reflect the greater roles played by deposit insurers in

resolution regimes and ensure consistency with the FSB Key
Attributes;

8. Provide additional guidance on deposit insurer’s role in crisis

preparedness and management;

9. Update and enhance CPs related to cross-border deposit insurance

issues; and

10. Incorporate other considerations related to Islamic Deposit Insurance

systems, financial inclusion, and multiple deposit insurance systems.

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Principle 1-Public Policy Objectives

 Public policy objectives should be formally specified

through legislation and publicly disclosed.

 The two main PPOs for DIS are:

• Protecting depositors; and
• Contributing to the stability of the financial system.

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Principle 2- Mandate & Powers

 A deposit insurer’s mandate and powers should support the PPOs and be
clearly defined and formally specified in legislation.

 A deposit insurer should have all powers necessary to fulfill its mandate.

 Some of these powers include the ability to:

 Assess & collect premiums; transfer deposits to another bank; reimbursing
insured depositors
 Information sharing with other safety-net members;
 Entering into contracts;
 Access timely and accurate information to ensure that it can meet its obligations
to depositors, etc

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 Principle 3-Governance

 The deposit insurer should be operationally independent, transparent

, accountable and insulated from undue political and industry
influence (external interference). And should be well-governed.

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 Principle 4 –Relationships with other
safety-net participants

 The deposit insurer and other financial system safety-net participants must
have a framework for close coordination and information sharing on a
routine basis.

 In particular the deposit insurer must have accurate and timely

information regarding problem banks.

 Information –sharing and coordination arrangements should be

formalized.
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 Principle 5 – Cross-border issues

 All relevant information should be exchanged between deposit

insurers in different jurisdictions and between deposit insurers and
other foreign safety-net participants when appropriate(with proper
confidentiality arrangements).

 Essential where there are foreign banks in a jurisdiction.

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Principle 6 – Deposit Insurer’s role in contingency
planning and crisis management.

• Should put in place effective contingency planning and crisis management

policies and procedures to ensure prompt response to risk of, and actual,
bank failures and other events.

• Development of system-wide crisis preparedness strategies and management

policies should be the joint responsibility of all safety-net participants.

• DI should be a member of any institutional framework related to system-

wide crisis preparedness and management.
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 Principle 7 -Membership

 In order to avoid adverse selection, membership in the deposit

insurance system should be compulsory for all deposit-taking financial
institutions.

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Principle 8 - Coverage
 Deposit Coverage has two components:
1. Scope
2. Level

Scope and Level should be clearly defined and reviewed

periodically.
 Scope – Insurable deposits must be clearly defined in law ,
prudential regulations, or by-laws.
 Level- The level of coverage should be limited but credible and
capable of being quickly determined.
 The deposit insurer applies the level and scope of coverage
equally to all its member banks.

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 Principle 9- Sources and Uses of
Funds

 A deposit insurance system should have all necessary funding

available to ensure the prompt reimbursement of depositors’ claims.

 Member banks must pay for deposit insurance since they and their
clients directly benefit from having an effective deposit insurance
system.

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 Principle 10 – Public Awareness

 An effective deposit insurance system will keep the public informed

about all aspects
(ie , benefits and limitations) of the deposit insurance system.

 Deposit insurers should promote public awareness about the deposit

insurance system on an ongoing basis to maintain and strengthen
public confidence.

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 Principle 11- Legal Protection

 The deposit insurer’s board members and employees should be

protected against lawsuits for their decisions and actions taken in
“good faith” and in the normal course of their duties.

 In turn, board members and employees must abide by proper codes

of conduct (e g , conflict of interest) to ensure they remain
accountable.

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 Principle 12 – Dealing with Parties at
fault in a Bank Failure

 A deposit insurer, or other relevant authority, should have the power

to seek legal redress, criminal and civil, against those parties at fault
in a bank failure.

 Legal redress can be sought from such parties as officers, directors,

managers, auditors and related parties of the failing/failed bank.

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Principle 13-Early Detection and
Timely Intervention
 The deposit insurer should be part of a framework
within the financial safety net that provides for early
detection, timely intervention, and resolution of
troubled banks.

 Identification of problem banks should be made early

and on the basis of well defined criteria by safety net
participants with the operational independence and
power to act before the bank becomes non-viable to
protect depositors and contribute to financial stability.
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 Principle 14- Failure Resolution

 An effective failure-resolution processes should:

Facilitate the deposit insurer’s ability to meet its primary obligation:
prompt reimbursement to insured depositors.
Minimize resolution costs and disruption to markets.
Maximize recoveries on assets
 There must be flexible mechanism to help preserve critical banking
functions by facilitating transfer of a failed bank’s assets and
liabilities(P&A transactions).

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 Principle 15 – Reimbursing Depositors

 The deposit insurance system should give depositors prompt access to

their insured funds.
 The deposit insurer must be involved early in the problem bank
process and be provided with depositor information in advance in
order to adequately prepare for prompt reimbursement.

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Principle 16 - Recoveries

 The deposit insurer should have, by law, the right to

recover its claims in accordance with the statutory
creditor hierarchy.
 The deposit insurer, should share in the proceeds of
recoveries from the estate of the failed bank.
 Failed bank asset management and disposition should
be guided by commercial considerations and their
merits.

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 IADI CORE PRINCIPLES
COMPLIANCE ASSESSMENT

 The primary objective of an assessment should be to evaluate compliance with the Core
Principles, after taking into account the national structural, legal and institutional features of each
jurisdiction’s deposit insurance system(s).

 The assessment should review the functions inherent in providing effective deposit insurance
systems, as opposed to an assessment of just the deposit insurer.

 The assessment process should help the deposit insurer and policymakers benchmark their
deposit insurance system against the Core Principles, to judge how well the system is meeting its
public policy objectives.

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IADI CORE PRINCIPLES COMPLIANCE
ASSESSMENT CONT’D

• Major components of assessment

• Data and Documents
• Preconditions
• Questionnaire
• Interviews with Key Safety Net Players
• Analysis and Conclusions
• Feedback
• Final Report including Assessment and Action Plan for
Reforms

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 IADI CORE PRINCIPLES
COMPLIANCE ASSESSMENT
CONT’D

 The methodology proposes a set of essential criteria for each Core Principle. The essential criteria
are the only elements on which to gauge full compliance with a Core Principle.

 Assessments by external parties follow a five-grade scale as follows:

 Compliant: When the essential criteria are met without any significant deficiencies.
 Largely compliant: When only minor shortcomings are observed and the authorities are able to achieve full
compliance within a prescribed time frame.
 Materially non-compliant: Severe shortcomings which cannot be rectified easily.
 Non-compliant: No substantive implementation of the Core Principle.
 Not applicable: Not considered given the structural, legal and institutional features of the deposit insurance system.

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IADI CP Compliance
Assessment
CORE PRINCIPLES

Compliance
Compliant Assessment
Largely Compliant
Materially Non-Compliant Essential Criteria
Non-Compliant
Not Applicable Additional Criteria

Essential criteria met w/o any Assessment Rating

significant deficiencies

Only minor shortcomings; authority

able to and intends to achieve full
Corrective Action
compliance
Plan
Severe shortcomings/ practical
implementation weak

No substantive implementation Implementation Plan

And Strategy
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 IADI CORE PRINCIPLES
COMPLIANCE ASSESSMENT
CONT’D

Assessment Report
 The assessment report should include the following:
 A general section that provides background information on the assessment conducted, including information on the
organisation being assessed and the context in which the assessment is being conducted.

 A section on the information and methodology used for the assessment.

 An overview of the institutional and macroeconomic setting and market structure.

 A review of the operating environment for effective deposit insurance systems.

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 IADI CORE PRINCIPLES
COMPLIANCE ASSESSMENT
CONT’D

Assessment Report
 A compliance table, summarising the assessment results.

 A recommended action plan providing Principle-by-Principle recommendations for actions and measures to improve
the deposit insurance system and practices.

 A detailed Principle-by-Principle assessment, providing a description of the system with reference to a particular
Principle, a grading or “assessment”, and a “comments” section.

 A section for authorities’ comments.

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Conclusion

 The completion of deposit insurance Core Principles is a positive development and

represents a great achievement on the part of IADI and the Basel Committee.

 The recent global financial crisis has shown that it is essential to have properly
functioning DIS in place when financial stress emerges.

 Having proper mechanisms in place(in the form of Core Principles) in a pre-emptive

way will provide clarity and certainty should a new episode of financial stress emerge.

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 Conclusion cont’d

 Indeed , the Core Principles were a timely response to the global financial crisis.

 Public authorities can use the Core Principles , either as a benchmark against which
they can assess their own deposit insurance schemes or as a tool to implement or
reform their deposit insurance systems.

 The use and implementation of the Core Principles will provide a starting point for
more advanced deposit insurance systems and contribute to financial system
stability.
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