Overview of Deposit Protection Scheme John M. Chikura Chief Executive Officer Deposit Protection Corporation August 2015

Presentation Outline n Concept of Deposit Protection n  Establishment & Implementation Program n  The Benefits of Deposit Protection  DPC’s Need for Information on The Health Status of Banks n  Role of Deposit Protection in Problem Bank Resolution   DPC Exposure to Financially Distressed Banks   Current Size of the Fund   Cover Level   DPC Payout Experience to Date   Recent Developments in Deposit Protection   Current Challenges   Conclusion

Concept & Establishment of Deposit Protection   In general terms, deposit protection is a bank deposit guarantee scheme which ensures that depositors are reimbursed part or all of their deposits in the unlikely event of a bank failure.   In Zimbabwe, the Deposit Protection Scheme was established on 1 July 2003 in terms of section 66 of the Banking Act [Chapter 24:20] and the Banking (Deposit Protection) Regulations S. I. 29 of 2003 as read with section 4 of the Deposit Protection Corporation Act [Chapter 24:29].   At inception, development of DPC was divided into two phases: Phase One & Phase Two.   Funding: There was no seed capital provided. The scheme is funded by the banks 19/8/15

Implementation Program  Phase One: The Scheme had a narrow mandate mainly protecting depositors, especially small depositors and operated as a “pay-box” under the Chairmanship of the Governor of the Reserve Bank. Phase Two: In conformity with the public-policy objectives and international best practice on DISs, entailed transformation of DPC into an independent entity, separate from the Reserve Bank, with a risk minimization mandate. In terms of the current law, the principal objectives of the DPC’s statutory responsibilities are to: (1) protect depositors; (2) contribute to the stability and public confidence in the financial system; (3) participate in problem bank resolution; and (4) protecting the Fund against loss. Among other responsibilities, DPC is required to: monitor & assess risk of members and carryout where necessary special examinations, curatorship & liquidations.    19/8/15

Benefits of Deposit Protection to Financial Sector The benefits of deposit protection accrue to both depositors and banks through enhancement of financial stability. Promote Financial Stability By protecting the deposits, a DPS fosters confidence in the banking system & prevents self-fulfilling panics or bank runs thereby reducing the likelihood of contagion and cascading defaults. A DPS reduces financial uncertainty, thereby promoting financial intermediation and enhancing economic and financial stability. Competition  A DIS levels the playing field. Larger banks due to their size, track record & brand visibility have an edge over smaller contributory institutions in attracting deposits at lower interest rates. A DPS makes depositors of smaller banks feel safe and protected hence neutralize the advantages. Liquidity Some deposit insurers have mandates and resources that enable them to inject capital in distressed contributory institutions to avert bank failures.    19/8/15

Benefits of Deposit Protection to Depositors   Peace of Mind Depositors are guaranteed reimbursement in event of insolvency. A DPS reduces financial uncertainty & builds confidence. Free Membership No direct charge to depositors as banks pay the premiums. Depositors do not apply or fill in forms as deposit protection is automatic once a depositor opens an account with a member bank. Financial Inclusion Promotes inclusivity. Establishment of a DPS catering for both individual and well to do corporate clients, as opposed to a scheme for small depositors alone, also reduces incidences of deliberate financial exclusion.     6 19/8/15

(..continued ...) Benefits of Deposit Protection to Depositors   Minimize Losses & Protecting Majority of Depositors. DPS helps to minimize losses to small depositors (the majority) who are most affected by bank closures, and lack resources & skills to monitor contributory institutions. Effectiveness of DPS depends on the coverage level i.e. % of depositors with deposits equal or below the protection limit. Best practice: 90% of depositors by number. Others use per capita income, others its stipulated by law ie EU & US. Target Fund: 2% of the total deposit base. Public Awareness: This is an important objective When a bank fails, a deposit insurer informs depositors on how and when reimbursement will be made. Banks have a legal obligation to inform depositors regarding the nature & extent of coverage. Prompt & Orderly Exit of Failed Contributory Institutions: A resolution mandate provides orderly exit for failed banks; prompt refund; and protects interests of large depositors and creditors via the liquidation process     7 19/8/15

DPC’s Need for Information on the Health Status of Banks   As an insurer, as per best practice, DPC needs to assess and understand its exposure to troubled banks.   The International Association of Deposit Insurers (IADI) prescribes best practices for deposit insurance in liaison with other standard-setting bodies including FSB, IMF & the World Bank.   In terms of the joint IADI and Basel “Core Principle [CP] 2”, the DPC should be empowered to obtain timely, accurate and comprehensive information necessary to competently fulfill its mandate and public policy objectives, directly if necessary, from member institutions irrespective of any confidentiality rules.   DPC special examinations are (& should be) targeted at financially distressed financial institutions [with CAMELS ratings of “3” to “5”] to protect the Fund by ensuring that it understands the profile of the bank’s assets & that the bank maintains accurate depositors records. 8 19/8/15

(..continued ...) DPC’s Need for Information on the Health Status of Banks   Primarily the thrust of the DPC special examinations are on early identification and mitigation of risks to the Deposit Protection Fund. Access to depositor database before a bank is closed, for instance, lessens the risk of manipulation of records, shortens the time for completing the reimbursement process e.g. within 7-20 days, and helps preserve public confidence. DPC’s enhanced roles are complementary to those of RBZ as they serve the same objective of contributing to financial stability. Laws require DPC to exercise its mandate in consultation with RBZ. Internationally, coordination is further enhanced via agreed MoU.       9 19/8/15

Role of Deposit Protection in Bank Resolution   Notwithstanding the best supervisory efforts, banks can and do fail, hence effective bank insolvency regime is critical for stability   Since the global financial crisis (GFC), deposit protection emerged as an important part of financial safety net in arresting panic reaction and restore public confidence in banking systems.   Since then, some jurisdictions are considering expanded powers for deposit insurers to render them more pro-active in regulatory frameworks for early identification of bank failures and resolution.   In particular, there is growing consensus that the deposit insurer has more appropriate incentives for deciding resolution options.   Critical elements of effective resolution & exit regime include: early intervention before insolvency; speed of intervention/resolution; ability to restructure or merge a banks’ operations; effective write-down of shareholding; create bridge banks; open bank assistance; & closure of bank, liquidation & deposit payout. 10 19/8/15

Deposit Protection Cover Level    A cover level of about $1,000.00 would ensure that at least 92% of depositors are covered in full and comply with the public policy objectives full coverage benchmark of at least 90% of depositors. The DPC Act provides that payout should commence as soon as as possible from date of closure of a contributory institution. Following placement of a member on provisional and/or final liquidation by the High Court, DPC advises the insured depositors in writing via electronic and print media to collect claim forms from its offices or from the website for them to be compensated. The depositor is usually reimbursed within 14 working days from date of submission of a duly completed claim form. Once the verification process is completed, payment is done by mobile phone and bank transfers.         12 19/8/15

DPC Payouts - Experience to Date   Since its inception in 2003, DPC has compensated depositors of 9 failed banking institutions which were subjected to liquidation, namely: Century Discount House; Rapid Discount House; Sagit Finance House; Genesis Investment Bank; Royal Bank; Trust Bank Corporation; Interfin; Allied Bank; and AfrAsia Bank   Payments to Genesis, Royal, Trust, Allied, Interfin and AfrAsia depositors are still on-going. We urge all those depositors who have not yet submitted their claims to get in touch with us. 13 19/8/15

(..continued ...) DPC Payouts Experience to Date.   In view of the current legislative framework, no compensations were made to depositors of failed banking institutions whose resolution methods did not entail liquidation, namely: NDH; High Veld; Intermarket Bank; Intermarket Discount House; Original Trust Bank, Royal Bank, and Barbican Bank whose assets were sold to ZABG in 2005.  Capital Bank has also failed but has not yet been placed under a provisional or final liquidation order. As already indicated, some of the banking institutions also failed prior to the establishment of the DPC.   14 19/8/15

Recent Developments in Deposit Protection   Higher Coverage Levels The global financial crisis prompted an increase in coverage limits in some jurisdictions. EU coverage limit currently stands at 100, 000 Euros per individual whilst in USA its at $250, 000. Elimination of Coinsurance Most jurisdictions have moved away from the concept of co-insurance. Integrated Deposit Protection Scheme Some jurisdictions in Europe and Asia are introducing Integrated Protection Schemes to provide protection to insurance policyholders, depositors and investors in banks and non-bank financial institutions like asset managers and stockbrokers.     15 19/8/15

(..continued ..) Recent Developments in Deposit Protection   From Paybox to Risk Minimisation Mandate Several deposit insurers have had their mandates widened from paybox to loss minimizer, or risk minimizer thereby, in the latter role, assuming an explicit financial stability mandate involving offsite & where necessary, on-site special examinations as well as assuming a full suite of resolution powers (e.g. Kenya & Nigeria). Flat Premium Rate versus Risk-Based Premium Rate Risk-based premium regimes foster discipline among institutions. Single Customer View Concept Historically, most deposit insurers faced challenges when making reimbursements due to lack of access to depositor records in advance & poor quality of depositor records at banks. Some have proactively introduced mandatory reconfiguration of banking institutions’ IT infrastructure to provide a single customer view (SCV) perspective.     16 19/8/15

Challenges In carrying out its duties, the Corporation has encountered the following challenges: There are material deficiencies in the current problem-bank resolution framework militating against attainment of finality and speedy resolution of failing or failed institutions. In some jurisdictions, litigation by former shareholders does not result in suspension of corrective remedial actions as compensation for proven breaches is pecuniary and not annulment of corrective orders and enforcement actions. Currently the appointment of the Corporation as a Liquidator is still subject to confirmation by the courts. Proposed amendments have been submitted to the Ministry of Finance.       19/8/15

Concluding Remarks   Establishment of an explicit DPS in Zimbabwe in 2003 was a major milestone which ushered in explicit rules and regulations clarifying Government’s obligation to depositors in the event of a bank failure.   Since the GFC, the role of financial safety nets, deposit protection included, attracted greater attention, and are currently subject of on- going reforms, including clearer focus on financial stability via adoption of risk minimization mandate.   Following assumption of risk minimisation mandate by DPC, there is need to mentor specialists in: deposit protection, special bank examinations and problem bank resolution befitting of a competent risk minimisation deposit insurer and in line with the Corporation’s quest to be center of excellence in deposit protection.   In conclusion, a DPS protects depositors, promotes financial inclusion, financial stability and ultimately, economic prosperity. 19/8/15

-THANK YOU-