Enhanced Powers Of MDIC To Facilitate Intervention And Failure Resolution In Malaysia

1. Enhanced Powers Of MDIC To Facilitate Intervention And Failure Resolution In Malaysia 9 May 2011

2. Objectives of this session To provide overview of MDIC’s • Intervention and failure resolution framework - Powers to undertake an intervention and failure resolution, highlighting recent enhancements made.

3. Agenda Introduction- Review of key developments at MDIC- MDIC Act 2011 MDIC’s approach to Intervention and Failure Resolution- The Framework- Intervention and Failure Resolution Powers Recap

4. Introduction 1

5. Introduction Review of Developments in relation to Intervention and failure resolution at MDIC 2005 2006 2007 2008 2009 2010 2011 Setting up operations and risk assessment system & issuance of Regulations to Member Institutions Review and enhancements to risk assessment systems and Regulations to Member Institutions Aug 2005 MDIC Act 2005 enacted Commencement of Payout Project to develop comprehensive infrastructure to effect a prompt payout. Commencement of Project Eveready to document Intervention and Failure Resolution Policies & Procedures and conduct simulations • Coverage: • All ringgit denominated deposits • Limit of RM60,000 per depositor per Member Institution • All commercial and Islamic institutions licensed by Bank Negara Malaysia • Oct 2008 – Dec 2010: • Government Deposit Guarantee • All ringgit denominated and foreign currency deposits • All deposits with commercial, Islamic and investment banks, and deposit taking development financial institutions regulated by Bank Negara Malaysia. Jan 2011 New MDIC Act enacted (took effect from 31 Dec 2010)

6. Introduction MDIC Act 2011 Increased coverage limit from RM60,000 to RM250,000 per depositor per member institution. Foreign Deposits covered Introduction of Takaful and Insurance Protection Scheme

7. Introduction MDIC Act 2011 • MDIC now administers 2 separate financial consumer protection schemes and a total of 6 insurance funds. Deposit Insurance System • Protects against loss of deposits (including foreign currency accounts) up to RM250,000 Takaful and Insurance Benefits Protection System Protects against loss of eligible takaful and insurance benefits up to prescribed limits Conventional Deposit Fund Islamic Deposit Fund Conventional Life Insurance Fund Takaful Life and Solidarity Fund Conventional General Insurance Fund Takaful General Fund • Enhancements to intervention and failure resolution powers

8. MDIC’s approach toIntervention and Failure Resolution - Intervention and Failure Resolution Framework- Intervention and Failure Resolution Powers 2

9. PUBLIC CONFIDENCE & DEPOSITOR AND POLICYHOLDER PROTECTION Competencies & Infrastructure Guiding Principles and Policies & Procedures Financial Capacity Financial Safety Net Mandate & Power MDIC’s Intervention and Failure Resolution Framework MDIC’s approach to Intervention and Failure Resolution Intervention and Failure Resolution Framework • The Framework is designed to focus on achieving the ultimate objectives of preserving public confidence in the financial system and ensuring depositor protection by: • institutionalising the mandates, legislative powers, guiding principles, policies , procedures, resources and infrastructure required during an intervention and failure resolution; and • recognising the interrelationships among the different safety net players.

10. PUBLIC CONFIDENCE & DEPOSITOR AND POLICYHOLDER PROTECTION Competencies & Infrastructure Guiding Principles and Policies & Procedures Financial Capacity Financial Safety Net Mandate & Powers MDIC’s Intervention and Failure Resolution Framework MDIC’s approach to Intervention and Failure Resolution Intervention and Failure Resolution Framework • Mandate • Administer a DIS and a TIPS; • Provide insurance against the loss of part or all deposits and provide protection against the loss of part or all of takaful or insurance benefits; • Provide incentives for sound risk management in the financial system; and • Promote or contribute to the stability of the financial system. • Powers • Special Examination Powers • Risk Mitigation Powers • Failure Resolution Powers

11. PUBLIC CONFIDENCE & DEPOSITOR AND POLICYHOLDER PROTECTION Competencies & Infrastructure Guiding Principles and Policies & Procedures Financial Capacity Financial Safety Net Mandate & Power MDIC’s Intervention and Failure Resolution Framework MDIC’s approach to Intervention and Failure Resolution Intervention and Failure Resolution Framework Guiding principles • Designed to provide the parameters for any intervention and failure resolution action that the Corporation undertakes. • Set out in a general manner in order to offer some degree of flexibility in implementation to suit the circumstances at hand as every intervention and failure resolution event is different • Policies and procedures • Formulated based on the guiding principles • Provides clarity of approach during the conduct of an intervention and failure resolution

12. PUBLIC CONFIDENCE & DEPOSITOR AND POLICYHOLDER PROTECTION Competencies & Infrastructure Guiding Principles and Policies & Procedures Financial Capacity Financial Safety Net Mandate & Power MDIC’s Intervention and Failure Resolution Framework MDIC’s approach to Intervention and Failure Resolution Intervention and Failure Resolution Framework • Competencies and Infrastructure • Premised upon maintaining a core capacity of expert employees to provide leadership in undertaking effective intervention and failure resolution. • Mechanisms to be able to quickly mobilise a larger workforce should the need arise. This would be done through the Corporation’s virtual organisation comprising a network of experienced professionals such as lawyers, accountants, investment bankers, asset management specialists, receivers and liquidators. Such an approach ensures optimal utilisation of resources while allowing the Corporation access to external expertise as and when needed.

13. PUBLIC CONFIDENCE & DEPOSITOR AND POLICYHOLDER PROTECTION Competencies & Infrastructure Guiding Principles and Policies & Procedures Financial Capacity Financial Safety Net Mandate & Power MDIC’s Intervention and Failure Resolution Framework MDIC’s approach to Intervention and Failure Resolution Intervention and Failure Resolution Framework • Financial Capacity • Adopts a hybrid funding structure that combines both ex-ante, via regular premium contributions from the MIs; and ex-post funding, via its authority to impose ex-post levies, and higher premiums. • Can borrow or obtain liquidity funding from the Government or raise funds from the capital market in such manner as the Corporation thinks fit

14. PUBLIC CONFIDENCE & DEPOSITOR AND POLICYHOLDER PROTECTION Competencies & Infrastructure Guiding Principles and Policies & Procedures Financial Capacity Financial Safety Net Mandate & Power MDIC’s Intervention and Failure Resolution Framework MDIC’s approach to Intervention and Failure Resolution Intervention and Failure Resolution Framework • Financial Safety Net • An effective financial safety net with clear mandates and well defined roles and responsibilities for each safety net player is the bedrock of a stable financial system. • An effective financial safety net also ensures that relevant players take prompt corrective action when financial institutions face emerging problems. • Clear roles and responsibilities also lead to clear accountabilities. Minister of Finance Financial Safety Net Central Bank of Malaysia Deposit Insurer

15. Financial safety net: From traditional to new definition? Regulatory and supervisory framework Guarantor of last resort

16. Premium Surcharge MDIC’s approach to Intervention and Failure Resolution Intervention and Failure Resolution Framework Non-Viability Notice by BNM Early Intervention Trigger Viability Spectrum D Viable MIs Non-Viable MIs PIDM’s Risk Categories Above Above Low Low Moderate Moderate Watch Watch Special Special Average Average Risk Risk Risk Risk List List Mention Mention Risk Risk PIDM’s Intervention Stages Going Going Early Early Viability Viability Resolution Resolution Concern Concern Warning Warning Risk Risk Regular Risk Assessment & Monitoring PIDM’s Activities PIDM’s Intervention and Failure Resolution Actions PIDM Intervention and Failure Resolution Actions Interventions: · · Due Diligence Financial Assistance · · Preparatory Examination Asset Carve-Out Failure Resolutions: · Bridge Institution · Restructuring · Closure & Liquidation · Agency Arrangement · Purchase & Assumption Mechanisms: · · Assumption of Control Receivership Legend Triggers for intervention D Intervention and Failure Resolution Actions by PIDM

17. MDIC’s approach toIntervention and Failure Resolution - Intervention and Failure Resolution Framework - Intervention and Failure Resolution Powers 2

18. MDIC’s approach to Intervention and Failure Resolution Intervention and Failure Resolution Powers

19. MDIC’s approach to Intervention and Failure Resolution Intervention and Failure Resolution Powers Special Examination Powers MDIC may conduct examinations of: Whether proper and adequate records of its deposits are maintained Whether reports made by member institutions on its premiums are substantially correct Compliance with terms and conditions or any other requirements of membership MDIC may conduct a special examination of a member institution where MDIC has reason to believe* that a due diligence or other examination should be made for the purposes of: Exercise of its risk mitigation and failure resolution powers Payout of depositors * Enhancements in MDIC Act 2011

20. MDIC’s approach to Intervention and Failure Resolution Intervention and Failure Resolution Power Risk Mitigation Powers MDIC may acquire shares of a member institution MDIC may :(a) provide loans or advances with or without security, or guarantee with or without security any loan or advance provided to a member institution (b) make a deposit with a deposit taking member* (c) Impose a premium surcharge on the member institution. Shareholders MDIC may acquire assets from a member institution Failed Bank comprises of: MDIC may guarantee or assume all or part of the liability of a deposit taking member in respect of a deposit. Assets Liabilities • MDIC may make a loan, whether with or without security, to a corporation other that a • member institution * • For the purpose of or in connection with the implementation of any resolution actions; or • For purpose of reducing or averting a risk to the financial system or a threatened loss to the Corporation. Employees Business Undertakings * Enhancements in MDIC Act 2011

21. MDIC’s approach to Intervention and Failure Resolution Intervention and Failure Resolution Power Failure Resolution Powers MDIC may acquire shares of a member institution from its existing shareholders. MDIC may reduce share capital and cancel shares of member institutions under assumption of control (subject to conditions and with Court approval) MDIC may subscribe to shares issued by the member institution (new money) Shareholders • MDIC may: • (a) Require a member institution: • To take any steps/action as MDIC considers necessary • Cease soliciting , taking or repaying deposits • Restructure the whole or part of its business • (b) Terminate membership of member institution • (c) Present a petition to the High Court for the winding up of the member institution. Failed Bank comprises of: Assets MDIC may: Assume control of the whole or part of the assets, liabilities, business and affairs of the member institution Apply to the High Court to appoint a receiver, manager or receiver and manager to manager the whole or part of the assets, liabilities, business and affairs of the member institution Transfer such assets, liabilities, business and affairs of the member institution to a bridge institution.* Liabilities Employees Business Undertakings * Enhancements in MDIC Act 2011

22. MDIC’s approach to Intervention and Failure Resolution Review of Intervention and Failure Resolution Power Failure Resolution Powers • MDIC Act was also designed to facilitate MDIC in undertaking failure resolution actions more efficiently. • Example of such enhancements include: • Approvals of shareholders, creditors and government authorities are not required • Powers for MDIC to vest assets and liabilities on to Bridge Institution without having to go to Court • More control over the liquidation process

23. Re-cap and conclusion 3

24. Re-cap and conclusion We have today looked at….. The Intervention and Failure Resolution Framework adopted by MDIC which conceptualises the building blocks for an effective resolution of a member institution. Some of the main powers of MDIC to undertake an intervention and failure resolution action together with a review of recent amendments designed to: Provide MDIC autonomy in conducting Examinations Provide wide powers to avert any risk to the financial system or cost to the Corporation. Facilitate prompt and efficient execution of failure resolution in line with international best practices.

25. Re-cap and conclusion Policies and Procedures under development 2. Intervention and Failure Resolution Options 3. Mechanisms 1. Assessment Tools Due Diligence Going Concern Options Assumption of Control Liquidation Option Preparatory Examination Financial Assistance Receivership Closure Asset Carve Out / Asset Management and Disposition Payout Least Cost Analysis Liquidation Purchase & Assumption Agency Agreement Restructuring Bridge Bank

26. Re-cap and conclusion Review of Objectives of this session To provide overview of MDIC’s • Intervention and failure resolution framework - Powers to undertake an intervention and failure resolution, highlighting recent enhancements made.

27. Thank You