Guiding Principles of Effective Reimbursement Systems: An Overview Kevin Chew MDIC

Outline Core Principle 17: Reimbursing Depositors IADI General Guidance Paper (Oct 2012) Differences in Practices Among Deposit Insurers Survey Methodology and Results Supporting Guiding Principles (IADI General and Enhanced Guidance papers) Conclusion 2

Why Did The Bank Cross The Road? 3

Principle 17: Reimbursing Depositors (Key Elements) Depositors be given prompt access to insured funds Depositors be informed of: a) When and under what conditions reimbursement will commence; b) Time frame for reimbursement; c) Whether advance/interim payments are to be made; and d) Applicable coverage limits Deposit insurers be given: a)advance notification of conditions for triggering reimbursement b)advance access to depositor information 3 MAINTAIN Public confidence Credibility of DI protection scheme MINIMISE Likelihood of contagion Disruption for depositors Prompt reimbursement - When depositors have access to their funds within a time frame that does not undermine financial stability and the proper functioning of payment systems

IADI General Guidance Paper 5 Aim of Paper: Review experience and range of practices among DIs Identify impediments to effective reimbursement Identify supplemental guidance points (13 guidance points) Methodology: Survey to identify impediments and challenges and how to address these problems Five case studies (FSCS, IPAB, MDIC, FDIC and CDIC- Canada) to analyse in greater detail several aspects of the fundamental building blocks Forms basis of the IADI Enhanced Guidance paper IADI Subcommittee formed to identify effective practices and guidance for developing effective reimbursement systems and processes.

IADI Survey On Effective Reimbursement Systems Identified impediments ranked according to criticality Ranking 1) Access to prompt and accurate information 2) Resources 3) Coverage rules and product insurability 4) IT System 5) Mandate and powers Questionnaire divided into five sections Obtain information and gain better understanding of the key elements of reimbursement systems around the world Identify the key impediments to effective reimbursement systems. Objectivese 6

Differences In Practices Among Deposit Insurers Different approaches to reimbursement (i.e. IT system, non- automated system, utilising system of third party) Different time frame for reimbursements Different timing of access to depositor records Different quality of depositor records Diverse impediments to effective reimbursements Different coverage rules Different institutions triggering a claim for reimbursement Different starting date used to set reimbursement time frames 7

Timing of Reimbursements and Pre- closure Preparatory Work Arranging and organising man resources Developing work plans and budgets Assessing the funding requirements Confirming the eligibility of products and depositors with differing legal status Reconciling the bank’s depositor information Reviewing the bank’s systems and procedures Confirming the treatment of transit items Establishing the payment method or methods Developing the communications strategy 8

Effective Reimbursement Model – Pre and Post Closure Preparation Activities 9 Efforts and Intensity

Top 6 Impediments to Effective Reimbursement System 10 Source: IADI Survey on Effective Reimbursement Systems Developed 13 supporting guiding principles to address impediments Supporting Guidance consistent with the Essential Criteria in the IADI Methodology for Assessing Compliance with the Core Principles Developed 13 supporting guiding principles to address impediments Supporting Guidance consistent with the Essential Criteria in the IADI Methodology for Assessing Compliance with the Core Principles Lack of access to depositor records in advance of a failure Poor quality of depositor records at banks Inability of banks to provide depositor records within desired time frames Determining depositors’ claims and related loans/liabilities for complying with netting requirements Lack of unique identifier Lack of appropriate IT system reimbursement plans

Other Impediments Insufficient funding Lack of experience and expertise to undertake and complete prompt reimbursement Submission of claim forms requirement Difficulty to undertake prompt reimbursement as a result of poor operational independence Problems related to splitting/dis- aggregating of joint accounts The lack of legislative mandate to determine when and how to conduct a reimbursement Problems related to computation of accrued interest payable 11 Inappropriate communication strategies

Supporting Guiding Principles (1) A. Product Insurability 1.The limits and scope of coverage and product insurability must be set out in law, clearly defined and communicated to depositors to mitigate confusion. B. Access to Accurate Data 2.A deposit insurer should have access to depositor records at all times and undertake preparatory reviews of bank deposit liability records to ensure prompt and accurate reimbursement of insured deposits. 3.Authorities should issue guidelines or regulations to ensure that banks can provide accurate deposit liability records, within a specific time frame, for aggregation of depositors’ funds and when required by law or regulation, a single customer view (SCV). 12

Supporting Guiding Principles (2) C. Requirements in Determining Depositor Entitlements 4.Authorities should work on the elimination of impediments to prompt reimbursement. These could include eliminating the right of set-off and disaggregation of multiple ownership accounts. These agreements should be in place in good times. D. IT Systems for Reimbursement 5.To expedite the reimbursement process, a deposit insurer should rely on technology-based systems to process depositor information in a systematic and accurate manner. 13

Some Essential Elements of a Technology Based System Support -ability Low maintenance and other recurring costs Scalability Ownership of Intellectual Property Ability to integrate with other dependent systems of Deposit Insurer, the payment agent and member banks 14

Supporting Guiding Principles (3) E. Payment Methods and Time Frames for Payment 6.A deposit insurer should consider a range of payment methods that would expedite the reimbursement process. 7.A deposit insurer must communicate clearly the payment methods and timing for payments to depositors as part of a comprehensive communications strategy to manage public expectations. 8.A deposit insurer may provide interim payments in circumstances when the deposit insurer is of the view that insured depositors require access to their funds before the start of actual reimbursement is made, if it could do so without impeding the overall reimbursement process. 15

F. Human Resource Capabilities and Capacity 9.Adequate resources and trained personnel dedicated to the reimbursement function should be made available to ensure readiness in undertaking reimbursements. Where internal resources are insufficient, a contingency plan should be in place to augment resources in times of need. G. Coordination With Other Safety Net Participants 10.Transit items of banks should be subject to agreements with all clearing and settlement system agencies to ensure that the items, after a bank failure, are dealt with in an appropriate and consistent manner. Supporting Guiding Principles (4) 16

Supporting Guiding Principles (5) H. Cross-Jurisdictional Coordination 11.Where reimbursement-related cross-border issues exist, such as who would perform a reimbursement in an affected jurisdiction, these should be addressed well in advance to ensure that effective and timely reimbursements can be implemented. This would involve developing coordination protocols to define the responsibilities for performing reimbursement-related activities, developing consistent communication messages and strategies, and addressing other reimbursement-related issues. I. Verification of the Reimbursement Process and Reimbursed Amounts 12.It is an effective practice to conduct an audit of the reimbursement process by an independent party to confirm that appropriate internal controls have been applied during the reimbursement process and that reimbursements are accurate. J. Operational Readiness Through Simulations 13.Effective practices should be in place to conduct regular simulation exercises to test the operational readiness of the deposit insurer in carrying out reimbursements. 17

Objectives of Simulation Exercises To ensure that personnel involved in reimbursement function are sufficiently trained, knowledgeable, and have clear understanding of their roles and responsibilities, and the key processes of undertaking a reimbursement. To provide opportunity to determine appropriate level of resources required for a reimbursement and to assess ability of the deposit insurer’s internal and external resources to work in a coordinated and effective manner. To help identify problematic areas requiring improvements and apply the lessons learnt to fine tune or enhance overall reimbursement function. To ensure that the IT reimbursement system has adequate capacity and functionality to deal with the possible situations that may arise in a reimbursement. To ensure that reimbursements are accurate and can be made within a constrained time frame and under a stressed environment. 18

The FSB Thematic Review on DIS Access to Information Need for early access to information Design Features Reform of certain design features: shifting to a gross payout basis to improve the timeliness and efficiency of reimbursements provide assured access to secondary funding sources undertake frequent simulation exercises 19 Confirmed IADI’s research findings on:

3 Additional Enhanced Guidance Points Funding arrangements for the deposit insurance system should ensure the prompt reimbursement of depositors’ claims and include a pre- arranged and assured source(s) of back-up funding for liquidity purposes. Depositors should be provided access to their insured funds as quickly as possible and no longer than one month from the event triggering reimbursement (e.g. closure of the bank). For deposit insurers that do not have the authority to act as a receiver or liquidator (or choose not to exercise such powers) it is an effective practice to have in place arrangements for the receiver/liquidator to assist the deposit insurer, if requested, in the execution of the deposit insurer’s duties. 20

Conclusion - Building Blocks Of an Effective Reimbursement Powers Legislative mandate and legal authority Operational independence Early access to accurate depositor level data Authority to compel banks to provide accurate depositor record within desired timeframe (SFF, SCV) Authority to conduct reimbursement preparatory work Resources Adequate funding Trained in-house personnel dedicated to the reimbursement process Contractual agreements with service providers Systems and Processes Simple coverage rules Access to a range of payment options Transit items are dealt with Effective communications strategy Limit and scope of coverage and product insurability clearly defined and communicated IT based reimbursement system ) Strategic Alliances Framework for the close coordination and information sharing between safety net players Effective cross- jurisdictional coordination protocol 21

Thank You 22