A PPLYING THE C ORE P RINCIPLES WITH DIFFERENT MANDATES, SETTINGS AND STRUCTURES : THE CASE OF M EXICO OCTOBER 23, 2014 Lorenzo Meade Executive Secretary, IPAB

THE EVOLVING ROLE OF DIS: MEXICO AND ABROAD Financial Crisis BCBS/IADI Core Principles Updated MX pilot test CP Methodology Key Attributes PCA Bank Resolution Financial Reform Financial Reform Insolvent Bank Liquidation Mexico CESF G20 Summit

2 Role of deposit insurance system since the recent financial crisis Relevance of international financial standards Importance of coordination between authorities THE RECENT FINANCIAL CRISIS AND DEPOSIT INSURANCE

3 International response o Key Attributes o Crisis Management Groups o FSB Peer Reviews on DIS and on Resolution Regimes and recommendations to IADI on additional guidance o Updating the Core Principles 3 rd stage: Mexico’s Financial Reform package, includes: o Strengthening of the Bank Resolution Framework o Special regime for Insolvent Bank Liquidation RESPONSE TO THE CRISIS AND CHANGES IN DIS MANDATES

IPAB o Public agency o Deposit Insurer and Resolution Authority o Ex-ante funding system o Flat rate premium fees charged to banks o Coverage Limit: 400,000 UDIs ~ USD $150,000 Banking system: 47 commercial banks Powers and mandate enable IPAB to implement any of the following resolution methods: Deposit reimbursement Transfer of assets and liabilities Bridge bank Open bank assistance (in case of systemic risk) IPAB OVERVIEW 4

5 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 10. Transitioning from a blanket guarantee to a limited coverage deposit insurance system 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 THE FORMER CORE PRINCIPLES

6 Observation: o Minor differences between the IPAB’s mission statement and law could be clarified, mandate not entirely consistent with stated public policy objectives (i.e. mandate of protecting small-scale depositors in conflict with high coverage limit) Actions: o 2011: mission statement modified “…to guarantee bank deposits, primarily of small and medium-sized depositors” CP 3: MANDATE

7 Observation: o The high level of coverage per depositor appears excessive, making the mitigation of moral hazard more challenging. Actions: o In the wake of the crisis, it was determined that coverage was appropriate if the large majority of depositors across banks are fully protected while leaving a substantial proportion of the value of deposits unprotected CP 9: COVERAGE

8 Observation: o Accumulation of a Fund is hampered by payment of legacy debt that stems from crisis o The Fund has no target level o Access to extraordinary funding is conditional and may require a period of time to enact Actions: o 2011: IPAB’s Governing Board approved the development of a strategic project to determine adequate fund size and the timeframe required to implement it o Extraordinary funding arrangements: under review Unresolved: o Legacy debt payment: issue of public policy CP 11: FUNDING

9 Observation: o Uncertainty exists about the ability of shareholders to halt a resolution process through judicial injunctions (amparos) Actions: o 2013: Law on Judicial Injunctions (Ley de Amparo) was modified to establish that resolution measures cannot be halted by shareholders through judicial injunctions. CP 15: EARLY DETECTION, TIMELY INTERVENTION AND RESOLUTION

10 Observation: o Bank deterioration may turn out to be sooner than expected. o Bank insolvency may lead to liquidation under commercial insolvency regime Actions: o 2014: Insolvent bank liquidation process is implemented CP 16: EFFECTIVE RESOLUTION PROCESSES

11 Observation: o Ability of IPAB to conduct on-site examinations, the introduction of standardized data templates and elimination of claims form should reduce payout periods Actions: o 2014: IPAB is granted the power to carry out direct inspection visits and the claim form for depositor reimbursement is eliminated CP 17: REIMBURSING DEPOSITORS

12 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 9. Sources and Uses of Funds 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 THE PROPOSED CORE PRINCIPLES

13 POSSIBLE FUTURE CHALLENGES FOR THE IPAB Governance o Operational independence (composition of Governing Board and term limits) Cross-border issues o Cooperation agreements with deposit insurers from home countries of all foreign banks operating in Mexico (as subsidiaries) Coverage o Regular revision of coverage level Sources and uses of Funds o Pre-arranged sources of liquidity funding Reimbursing Depositors o Reimbursement within 7 days (in practice, but not in law)

14 CONCLUSIONS It is important to note that, as a result of the aforementioned changes and reforms, Mexico maintains an updated deposit insurance system and bank resolution regime. In addition, the financial reform allowed us to shorten timeframes in the case of an insolvent bank liquidation. Evidence of this is our recent experience with a bank resolution, which demonstrated that the process works to allow for the orderly and timely exit of a bank from the system. As such, and notwithstanding the foreseen challenges that I have mentioned, we do not consider these as material obstacles to a prompt and orderly bank resolution process.

@LorenzoJMeade