International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Macroeconomic Policy and the Role of Deposit Insurance in the Era of Globalisation Speech By Jean Pierre Sabourin Chair of Executive Council and President of the International Association of Deposit Insurers and Chief Executive Officer of the Malaysia Deposit Insurance Corporation Speech By Jean Pierre Sabourin Chair of Executive Council and President of the International Association of Deposit Insurers and Chief Executive Officer of the Malaysia Deposit Insurance Corporation

2 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Outline Short perspective on how globalisation complicates the conduct of macroeconomic policies, and the risks and rewards of globalisation. The role of deposit insurers in macroeconomic management. The critical success factors necessary for effective deposit insurance systems.

3 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Importance of Sound Macroeconomic Policy Pro-active and sound macroeconomic policies - prudential oversight with market discipline to preserve financial stability - crucial to the development and economic well being of a nation. Ultimate aim of policymakers - put in place mechanisms, such as a well-functioning and robust financial system, that prevent financial problems and external shocks from seriously destabilising the economy.

4 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Globalisation and Macroeconomic Policy Globalisation complicates the conduct of macroeconomic policies in a number of ways. –The new challenges that organisations face would put new burdens on policymakers –As markets become increasingly integrated, macroeconomic linkages would continue to be fundamentally altered

5 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 The Two Sides of Globalisation Globalisation is a double-edged sword, offering both risks and opportunities. The rapid rise in per capita income during the unprecedented integration of markets over the past two decades bears evidence to the indisputable gains of globalisation. The great difficulties that East Asia went through in 1997/98 led to questions about its efficacy.

6 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Vietnam and Globalisation Vietnam has benefited immensely from globalisation. –One of the fastest growing nations in East Asia –Income per capita has risen sharply from US$170 in 1993 to US$620 in 2005 Admission to the WTO would result in further integration. An even playing field and a more predictable regulatory landscape would boost investors‘ confidence, encouraging more trade, more foreign investment inflows and more multinational expanding their operations to Vietnam. –FDI last year reached a record high US$10.2 billion

7 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Negative Pitfalls of Globalisation Managing income disparity between the rich and the poor. Some sectors would surely face greater competition. Greater competition may result in rising unemployment.

8 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Managing Globalisation If properly managed, globalisation could serve as the best platform for growth and wealth, reduce poverty, and promote international trade. To avoid pitfalls, nations need to put in place mechanisms - effective legal system and financial infrastructure, and efficient supervision and regulation including governance. Gaps in these areas could leave nations vulnerable.

9 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Banking and Globalisation Banking and financial services sector - important feature of globalisation. With banking crisis a major source of financial instability, sector subject to the most intense scrutiny and supervision by regulators. Vietnam’s WTO commitments have paved the way for 100 per cent fully foreign owned subsidiary banks to operate on equal footing with local banks starting April this year. Liberalisation without the necessary safeguards, accounting standards, sound legal, regulatory and supervisory systems could seriously undermine the effectiveness of a deposit insurance system.

10 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Broad Criteria of An Effective Deposit Insurance System To be effective, a deposit insurance system needs: – to be well-designed with good structure and organisational arrangements –other components of the financial system to be strong. Even a well-designed deposit insurance system cannot be effective if other components of the financial system are weak Financial sector is broad, encompassing the financial markets, institutions and infrastructure in which a deposit insurance system is only one sub-set. Unrealistic to expect a deposit insurance system to, on its own, assure stability in the financial system. System can only be effective when it is part of a well- designed and coordinated financial safety-net.

11 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Role of Deposit Insurance in Macroeconomic Policy Management To manage globalisation, the general policy responses often prescribed are: –Shift towards more flexible exchange rate regime –Proper sequencing of liberalisation and institution building –Regulation and supervision Deposit insurers can exert influence in institutional building, regulation and supervision.

12 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, Areas Deposit Insurance Play in Macroeconomic Policy Management 1)Maintaining stability of the financial system: –Instilling confidence of member banks –Encouraging banks to managing risks responsibly and reducing moral hazard –Reducing the likelihood of bank runs –Employing a formal mechanism for bank resolution –Supporting and contributing to an orderly or proper functioning payments system –Reducing severity of economic down-turn by mitigating the consequences of failures of insured institutions for depositors

13 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, Areas Deposit Insurance Play in Macroeconomic Policy Management (cont’d) 2)Promote savings. 3)Instill discipline on member banks. 4)Promotes banking competition. 5)Reduces governments’ financial exposure. Facilitates the transition from blanket guarantee.

14 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Critical Success Factors for Deposit Insurers Good structure and organisational arrangements are vital. Deposit insurers need: –Clearly defined and legislated mandates –High degree of operational independence and legal indemnification –Access to adequate, timely information and appropriate funding Deficiencies could hamper effectiveness and efficiencies.

15 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Clearly Defined and Legislated Mandates Functions and responsibilities of deposit insurers should be explicitly differentiated from other financial safety net players. Deposit insurers should be given broad authority and necessary powers to resolve troubled banks effectively.

16 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 High Degree of Operational Independence and Accountability With independence comes responsibility and accountability. Public trust and integrity, central to the success of a deposit insurance system. Should have in place robust enterprise risk management framework, and good accounting, internal control and auditing systems. The deposit insurer's mandate, roles, responsibilities and actions should be transparent and be clearly communicated to all stakeholders. Deposit insurance laws should prescribe clearly responsibilities, coverage limits and circumstances for making obligatory or discretionary payments to depositors. Conditions for intervention cannot be arbitrary

17 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Legal Indemnification Deposit insurers, should be provided with legal indemnification for their employees. Without fear of personal litigation, employees are able to act promptly and decisively. Speed of such actions can have crucial impact in limiting the contagion effects of bank failures.

18 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Access to Adequate and Timely Information Should be empowered to obtain detailed and timely information on member banks. Data needed to assess inherent risks of insured banks so as to deal with problems early. Need to know funding requirements and annual premiums to be assessed. Help deposit insurers develop sound contingency plans. Should have in place confidentiality provisions in statute.

19 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 IADI - the Voice of Deposit Insurers Past 5 years, IADI mission - to share knowledge and expertise on deposit insurance internationally. Next five years, to continue with this mission and to propagate deposit insurance as an essential element of financial stability. Issuing sound and effective deposit insurance principles and practices. Providing added value for our members. Will launch first training program in July this year. Another core area is in research. From our research work, IADI will issue core principles on many key areas of deposit insurance.

20 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Conclusion Globalisation is a double-edged sword, but nations are now better prepared Deposit insurance system, within a sound regulatory system, reinforces the financial market infrastructure to better manage globalisation To be effective, a deposit insurance system, first, needs to be well-designed Second, even a well-designed deposit insurance system cannot be effective if the other components of the financial system are weak. System can only be effective when it is part of a well- designed and coordinated financial safety-net.

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Thank You