1. International Association of Deposit Insurers Annual Conference Opening Address
Presentation by:
J.P Sabourin
Chair of the Executive Council and President &
President and Chief Executive Officer
Canada Deposit Insurance Corporation
Brunnen, Switzerland
October 26, 2004

2. “For every complex problem, there is a solution which is simple, neat, and wrong”
H.L. Mencken

3. The Can’t-Fail Syndrome
Perception that banks can’t fail
Creates public information challenges
Globalization, technological innovation and financial liberalization creates new forms of risk
“creative destruction” occurs
IADI contributes to financial stability through research and guidance

4. Origins and Mandate of CDIC
Established in 1967 to protect citizens’ deposits from financial institution failure
Also established to prevent “runs” on other deposit-taking institutions – contributing to overall financial stability
Crown Corporation accountable to Parliament

5. Origins and Mandate of CDIC
Mandated to reimburse depositors to a maximum of $20,000
CDIC operated on the “paybox” model for 20 years
Powerful force have worked against stronger mandates, e.g.:
More active insurer may be more costly
Compliance burden may complicate system

6. Origins and Mandate of CDIC
Only two financial institution failures in the 1970s
Five-member Board of Directors holding government positions
Three employees at CDIC until 1979

7. Canada experienced a wave of failures in 1980s-90s
Tumultuous 1980s
Canada experienced a wave of failures in 1980s-90s
Included 2 federally-chartered banks
23 member-institution failures by the end of the 80s

8. Tumultuous 1980s Since 1967… CDIC payout of $600 M insured deposits
43 member institution failures (23 in the 80s)
CDIC payout of $600 M insured deposits
Government payout of $800 M uninsured deposits
Many safety net agencies encouraged customers to stay with failing institutions

9. Tumultuous 1980s
Primary regulator may be slow to identify potential for crisis
Tendency for overconfidence in the application of regulator’s powers
Radical action necessary to stop losses

10. Enlarged Mandate
Creation of the Office of the Superintendent of Financial Institutions (OSFI) – 1987
Promote Standards of Sound Business and Financial Practice
Benefit depositors and minimize CDIC’s exposure to loss

11. Enlarged Mandate A “risk-minimizing” deposit insurer
Board consists of government and private-sector membership
Increased international awareness of the value of insurers independent from prudential supervisors and partisan persuasion
Risk-minimizers most often reduce overall costs

12. Reduced Costs of Deposit Insurance
43 member institution failures
Cost members $4.7 B
52¢
Before 1987
$ 5 B savings to CDIC
17¢
1990s

13. Reduced Costs of Deposit Insurance
Premiums charged to financial institutions lowest since 1982
Operating expenses less than income on investments
Less than ¼ % of operating costs of member institutions

14. Innovative Techniques
Increasing mandate may bring reduced costs to financial system
Active mandates = independence, facilitating innovation and reduced costs
CDIC takes a private-sector style approach to deal with bank resolutions
Distressed preferred shares
Risk sharing arrangements
Incentives promoting performance

15. Innovative Techniques
CDIC has moved from a flat rate premium to differential premiums based on classification
Reduced reporting requirements under Standards of Sound Business and Financial Practices
CDIC has reduced its own operating costs
2003 – 20% reduction in employees, 10% reduction in annual reporting budget

16. Innovative Techniques
CDIC looks for models of efficiency and best practices from other deposit insurers
IADI provides valuable guidance, research and information on best practices

17. Crises of the 1990s
Crises in Mexico, Russia, East Asia and Argentina brought forth the Financial Stability Forum
Effective deposit insurance arrangements must be international in reach
IADI promotes wide international co-operation

18. Crises of the 1990s
“Weak mandates of supervisors, deposit insurers and resolution agencies to restructure banks create major problems. These entities should have clear frameworks, be adequately capitalized and have a board composed of reputable professionals” Ingves & Hoelscher – IMF
The Key intervention issue is “exposure to loss” David Mayes – Bank of Finland

19. IADI Role in Interdependence
IADI provides fora for assembling an up-to-date tool kit for deposit insurers
Expanding scope of assistance and advisory programs:
Guidance strategy
Team of practitioners understanding public policy issues and management of an effective deposit insurance system

20. Interdependence
Developing new initiatives and using best practices is due to CDIC’s interdependence
Deposit insurer is a separate legal entity in experienced systems
Independent insurers are insulated from influences that detract from focus
Good governance requires accountability, transparency and integrity
Independence
Let me return once again to Canada’s experience. My point is that our ability to develop new initiatives and adapt to those we see working elsewhere is due in large part to our independence.
As we will discuss in our first session this morning, in some countries the deposit insurer and other safety-net functions are combined in a single entity, such as in a central bank. However, in the most experienced financial systems, the deposit insurer is for the most part a separate legal entity.
It is now widely recognized by international organizations such as the IMF and World Bank that an independent deposit insurer is more likely to be insulated from the influences that detract from a focus on deposit protection. Other primary features that go hand in hand with independence are accountability, transparency and integrity – the underpinnings of good regulatory governance.

21. Interdependence Credibility is an important asset
Generates confidence
Promotes stability
Reduces disruptive and counter-productive conduct
Interdependence improves transparency and helps avoid conflicts of interest
Leads to co-operative mechanisms for information sharing and co-ordination

22. Financial services industry is becoming more complex
Conclusion
Financial services industry is becoming more complex
With this comes increased risk
IADI will play a greater role in collaboration to counter risk and contribute to stability

23. International Association of Deposit Insurers Annual Conference Opening Address
Presentation by:
J.P Sabourin
Chair of the Executive Council and President &
President and Chief Executive Officer
Canada Deposit Insurance Corporation
Brunnen, Switzerland
October 26, 2004