International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 The Legal Architecture of Deposit Insurance Systems Arthur Mitchell General Counsel Asian Development Bank 28 March 2007, Hanoi Arthur Mitchell General Counsel Asian Development Bank 28 March 2007, Hanoi

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Support by Asian Development Bank Support for Financial Sector development and reform throughout the Asia Region through: –ongoing policy advice; –policy-based loans; –capacity building services. ADB’s aim is to: –improve the quality of, and to build confidence in, financial markets; –contribute to the evolution of a good credit culture

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Types of Depository Insurance Systems Explicit Systems = contractual obligations –Pillar of the financial safety net –2005, 78 countries have some form of explicit deposit guarantee program – up from 12 in –2000, Viet Nam introduced limited guaranteed system Implicit Systems = coverage is conjectural, based on political incentives

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Range of Guarantee Coverage Typesof DIS Risks ExplicitRule based Specifies details of claims and timing of payment Moral Hazard issue – reduces market discipline ImplicitPolitical incentives Only announced after bank failure Uncertain if claim will be paid

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 No "one size fits all" set of guidelines ARC + IADI are developing a set of best practices: –Must be tailored to individual country needs –Country circumstances impact on what the DIS can achieve and how to structure the DIS. A firm foundation is needed including: –effective prudential, regulatory, and supervisory systems –efficient licensing and accounting regimes Challenges for Designers

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Firm Foundation - Legal Environment Clear legal framework for banking regulation Well-defined property and contractual rights which are enforceable by the depositors Legislation covering: –securities markets, –a secured transactions regime, –consumer protection. Effective enforcement procedures for collection of claims and enforcement of security

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Firm Foundation – Effective Judicial System Recognizes rights of depositors; Clear rules on jurisdiction and applicable law for a matter to be heard quickly and expeditiously; Effective enforcement laws and court procedures for the collection of claims against the failed banking institution and related parties; Laws providing for the enforcement of security, to offset some of the losses incurred.

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Legal Framework For the Agency General Framework Requirements: –A clear legal mandate is needed for each supervisory agency with consistent objectives –Legislation to identify: role of the depository insurance agency in bank supervision and in the liquidation of failed banks the extent of the coverage provided, the pricing for the insurance cover, and related terms and conditions –Mandatory membership of DIS –DIS to be fully funded ( base premiums on individual-bank risk exposures )

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 General Framework Requirements Clear power to initiate insolvency proceedings of the failed banking institution Transparency when depository insurance agency implements claim procedures Agency and staff must be accountable - adequate judicial review provisions Clear legal protection for agency and staff acting within their power

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Challenges for each Jurisdiction Are amendments to legislation needed? Are there effective operations of: –the judiciary, –the courts, –the enforcement services? Change management support put in place Public awareness campaigns to be undertaken

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 DIV and its Challenges June 2005, DIV adopted a strategic development plan May 2006, a Financial Sector Roadmap ( ) was adopted to provide: –New Law on Deposit Insurance –key principles comprising comprehensive, integrated legislation; the harmonizing and alignment of the financial safety net; and strong linkages to consumer protection DIV role is to be one of ‘risk minimizer’ Interesting challenges ahead

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Conclusion – Key elements and conditions for introduction of DIS A poorly designed DIS tends to increase the likelihood that a country will experience a banking crisis. DIS can reduce inherent adverse incentives and moral hazard problems, while providing protection for small depositors. DIS cannot prevent, let alone withstand, systemic crisis. Continued legal and regulatory reforms in the banking sector and restructuring efforts to stabilize banking systems are prerequisites for introducing a well designed DIS. widen the horizons of our political leaders and policy makers as they consider reforms Link reforms to ensure a strong system of justice

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Thank you (Arthur Mitchell, General Counsel) Web site: (Arthur Mitchell, General Counsel) Web site: