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C OMMENTARY ON THE GENERAL GUIDANCE FOR EFFECTIVE DEPOSIT INSURANCE MANDATE. AS PREPARED BY THE SUBCOMMITTEE ON GENERAL GUIDANCE FOR EFFECTIVE DEPOSIT INSURANCE MANDATE THE RESEARCH AND GUIDANCE COMMITTEE.
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AS PREPARED BYTHE SUBCOMMITTEE ON GENERAL GUIDANCE FOREFFECTIVE DEPOSIT INSURANCE MANDATE THE RESEARCH AND GUIDANCE COMMITTEE
The views expressed herein are not necessarily those of the Jamaica Deposit Insurance Corporation or the International Association of Deposit Insurers or any other entity or person and are solely the opinions of the undernamed.
Legal Counsel/Corporate Secretary
Jamaica Deposit Insurance Corporation
30 Grenada Crescent
November 1, 2006
The General Guidance for Effective Deposit Mandate is instructive as it analyses established typologies of Deposit Insurance systems and practices in a number of jurisdictions and properly emphasizes the significance for the Deposit Insurance Mandate being adequately aligned to public policy objectives of the Deposit Insurance System. Recognizing the need for this alignment and that it be publicly disclosed in legislation is fundamental to ensuring an effective Mandate for a Deposit Insurance System.
Once this fundamental is understood the Guidance appropriately then recognizes the necessarily complementary function of Deposit Insurance in a financial safety net system and that the Deposit Insurers Mandate must be aligned with that of other institutional functions.
The Guidance satisfies its objectives in offering guidance in designing an effective Mandate of Deposit Insurance Schemes for countries considering the adoption of deposit insurance or the revision of existing deposit insurance systems.
(See General Guidance for Effective Deposit Insurance Mandate Prepared by The Subcommittee on General Guidance for Effective Deposit Insurance Mandate, The Research and Guidance Committee, International Association of Deposit Insurers)
The financial safety net institutions for the deposit taking financial sector are commonly:
Each financial safety net institution carries out specific functions towards the public policy objective of contributing to financial system safety and soundness notwithstanding, however, with different and potentially conflicting objectives.
DEPOSIT INSURANCE IN THE FINANCIAL SAFETY NET (CONTINUED):
The General Guidance for Effective Deposit Insurance Mandate findsfrom the research that there is commonly agreed three types of Deposit Insurance Systems: the paybox, usually by an agency of a type that carries out functions at (i) and (ii); the paybox with extended powers which is usually of a type that carries out some of the functions at (ii) and the risk minimizer which carries out all or most of the functions of (ii).
The objective of this commentary is to postulate that there may be an optimal Deposit Insurance Mandate within the context of the identified public policy objectives of Deposit Insurance Systems and the specific findings of the research undertaken in the General Guidance for Effective Deposit Insurance Mandate.
The other major consideration for the Deposit Insurer and other financial safety net institutions which assist in the public policy objective of contributing to financial system stability is the reduction of Moral Hazard which is inherent in safety net systems.
Once the public policy objectives are agreed by the proper authorities, then the Mandate can be determined accordingly and the specific roles and responsibilities and powers and authorities publicly disclosed.
PUBLIC POLICY OBJECTIVES
ROLES AND RESPONSIBILITIES
POWERS AND AUTHORITIES
All Deposit Insurance Systems (PAYBOX, PAYBOX WITH EXTENDED POWERS AND RISK MINIMIZER) reimburse depositors where financial institutions become insolvent and are unable to do so.
This is within a context of the overarching public policy objective for contribution to financial system stability.
(I) THE DEPOSIT INSURER MUST HAVE THE POWER TO REIMBURSE DEPOSITORS IN THE EVENT OF THE INSOLVENCY OF A FINANCIAL INSTITUTION TAKING INTO ACCOUNT MORAL HAZARD ISSUES
(IV) THE DEPOSIT INSURER SHOULD HAVE THE POWER TO MAKE A DETERMINATION THAT THE REIMBURSEMENT IS NECESSARY AND THE LEAST COSTLY COURSE OF RESOLUTION
The roles of the financial safety net institutions are potentially conflicting and which conflicts are more likely to be patent and costly when a financial institution crisis becomes imminent or occurs. The autonomy of the various safety net institutions then allows for the synergies that results in the best resolution strategy within the context of the overreaching public policy objective of contributing to financial system safety and soundness.
Is the optimal deposit insurance Mandate one that is achieved with a PAYBOX WITH EXTENDED POWERS?