mbf 705 legal and regulatory aspects of banking supervision n.
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Session: TWENTY FIVE. MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION. OSMAN BIN SAIF. Summary of last session. SECTION 6 Systemic Banking Crisis Indicators of Banking Crisis Others Causes of Banking Crisis Fundamental Factors behind most Crisis Crisis Containment Policies

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summary of last session
Summary of last session
    • Systemic Banking Crisis
    • Indicators of Banking Crisis
    • Others Causes of Banking Crisis
    • Fundamental Factors behind most Crisis
    • Crisis Containment Policies
    • Policy responses for Resolution
    • Crisis Containment Tools
    • Policy resolution Approaches
    • Guiding principles for bank resolution policy
    • Resolution Techniques
agenda of this session
Agenda of this session
  • What is Deposit Insurance
  • State of Deposit Insurance in Pakistan
  • Draft Deposit Protection ACT of Pakistan
d eposit insurance
Deposit insurance
  • Deposit insurance is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due.
  • Deposit insurance systems are one component of a financial system safety net that promotes financial stability.
deposit insurance contd
Deposit insurance (Contd.)
  • The primary purposes of the Deposit Insurance Fund (DIF) are:
    • (1) to insure the deposits and protect the depositors of insured banks and
    • (2) to resolve failed banks.
  • The DIF is funded mainly through quarterly assessments on insured banks, but also receives interest income on its securities.
deposit insurance in pakistan
Deposit Insurance In Pakistan
  • Denationalization of state owned banks coupled with entry of new private institutions has left the safety of deposits in case of a bank failure to an arbitrary and implicit deposit protection mechanism, as the Bank Nationalization Act, 1974 covers only depositors of nationalized banks
deposit insurance in pakistan contd
Deposit Insurance In Pakistan (Contd.)
  • Accordingly, need has been felt to set up a formal system of explicit deposit protection during the second half of 2008.
  • A number of steps were taken.
  • A ‘concept paper’ on the subject was developed, and the scheme was prepared after consultation with the stakeholders.
deposit insurance in pakistan contd1
Deposit Insurance In Pakistan (Contd.)
  • Additionally, a draft Act for establishment of deposit protection fund was prepared and sent to the Ministry of Finance for approval.
  • Once the Act is enacted, its formal launch will explicitly cover large number of eligible/small depositors of the banking system.
deposit insurance in pakistan contd2
Deposit Insurance In Pakistan (Contd.)
  • Further, the system will remove the burden of a bailout package, in case of a bank’s failure, on tax payers as participating banks will contribute towards the fund through regular premium payments.
deposit insurance in pakistan contd3
Deposit Insurance In Pakistan (Contd.)
  • The authorities were not pushed so far for establishing a separate deposit protection institution due to Sec 58(2) of the Banking Companies Ordinance 1962 which accorded priority payment to every depositor of the banking company a sum of one hundred thousand rupees or the balance at his credit, whichever is less.

There was added comfort from Sec 5 (4) of the Banks (Nationalisation) Act, 1974 which guarantees safety of bank deposits by the federal government.

  • The DPF Act will substitute the protection now available.

The DPF is to compensate the depositors for losses incurred by them to the extent of protected deposits in the event of failure of a ‘member’ —

    • a banking company or a financial institution
    • which may be notified and required to pay premium to it under the provisions of this Act.
deposit insurance in pakistan contd4
Deposit Insurance In Pakistan (Contd.)
  • All scheduled banks, unless, exempted by the DPF board, shall compulsorily be DPF members and liable to pay the prescribed premium.
deposit insurance in pakistan contd5
Deposit Insurance In Pakistan (Contd.)
  • Regardless of the number and size of various deposits, the DPF shall provide protection up to an amount determined by it from time to time.
deposit insurance in pakistan contd6
Deposit Insurance In Pakistan (Contd.)
  • The protected amount shall be inclusive of any interest accrued or return due as on the notification date by the SBP to the effect that normal operations of a member has been closed or suspended as a result of its insolvency or any judicial or regulatory action.
deposit insurance in pakistan contd7
Deposit Insurance In Pakistan (Contd.)
  • The DPF has no role in the issue of such notification or monitoring and supervision of the scheduled banks, for which the SBP is solely responsible.
  • As and when the SBP declares a protected institution as a failed institution, DPF will come into play.
deposit insurance in pakistan contd8
Deposit Insurance In Pakistan (Contd.)
  • It is feared that if there is delay in issue of notification or proper regulation and supervision of such a protected bank, the depositors may blame the central bank for loss of their deposits in excess of the protected deposits.
deposit insurance in pakistan contd9
Deposit Insurance In Pakistan (Contd.)
  • The respective roles of DPF and the SBP may be further reviewed to avoid such complications in future.
deposit insurance in pakistan contd10
Deposit Insurance In Pakistan (Contd.)
  • The DPF shall pay the liabilities of the failed institution to its depositors up to the amount protected and the DPF shall owe no interest on these amounts.
deposit insurance in pakistan contd11
Deposit Insurance In Pakistan (Contd.)
  • The maximum amount of deposit protected under Section 58(2/3) of the Banking companies Ordinance, 1962 is Rs100,000.
  • The DPF may consider revising this amount upwards after thorough analysis of existing deposits of which at least 90 per cent should be fully protected.
deposit protection act
Deposit Protection ACT
  • Short title, extent and commencement.-
    • (1) This Act may be called the Deposit Protection Fund Act, 2008.
    • (2) It extends to the whole of Pakistan.
    • (3) It shall come into force at once.
deposit protection act contd
Deposit Protection ACT (Contd.)
  • Objective of the Fund.
    • (1) The objective of the Fund is to compensate the depositors for losses incurred by them to the extent of protected deposits in the event of failure of a member.
deposit protection act contd1
Deposit Protection ACT (Contd.)
  • (2) All banks scheduled under Section 37 (2) of the State Bank of Pakistan Act, 1956, unless, exempted or excluded by the board, shall compulsorily be members of the Fund and liable to pay the prescribed premium.
deposit protection act contd2
Deposit Protection ACT (Contd.)
  • Business and functions of the Fund. –
  • The Fund under the overall supervision and control of the board, may transact and carry on all or any of the following functions namely:-
    • (a) Collect premiums and contributions from members and others;
    • (b) Manage resources of the Fund;
deposit protection act contd3
Deposit Protection ACT (Contd.)
  • (c) Assess claims made against the Fund;
  • (d) Make payments to eligible depositors to the extent of protected deposits;
  • (e) Recover the payments made from the assets of failed institutions, and
deposit protection act contd4
Deposit Protection ACT (Contd.)
  • (f) The carrying on of any business and discharging of any functions and power as are incidental to, or in connection with, the affairs of the Fund,
deposit protection act contd5
Deposit Protection ACT (Contd.)
  • Share capital and limited liability.-
    • (1) The authorized share capital of the Fund shall be one billion rupees or such other amount as the State Bank may, from time to time, determine by order in writing and shall be divided into shares of one million rupees each.
deposit protection act contd6
Deposit Protection ACT (Contd.)
  • (2) The paid-up capital of the Fund shall be such amount as may, from time to time, by order in writing be determined and contributed by the State Bank..
  • (3) The share capital may be divided into different kinds and classes as may be prescribed
deposit protection act contd7
Deposit Protection ACT (Contd.)
  • (4) The liability of shareholders of the Fund shall be limited to the amount, if any, not fully paid-up on the shares held by them in the capital of the Fund.
  • (5) No dividend shall be payable to the shareholders of the Fund.
deposit protection act contd8
Deposit Protection ACT (Contd.)
  • The Act mentions a number of exceptions to the protected deposits by persons such as:
    • (a) persons who have been granted preferential interest or return by the bank in deviation from the announced terms and conditions;
    • (b) members of the board of directors and senior management of a bank including chief executive officer and key executives;
deposit protection act contd9
Deposit Protection ACT (Contd.)
  • (c) partners of auditing firms responsible to certify the bank’s financial statements;
  • (d) persons having acquired rights to a deposit after the SBP notification regarding closure or suspension of bank’s operations;
deposit protection act contd10
Deposit Protection ACT (Contd.)
  • (e) spouse, dependent lineal ascendants and descendants and dependent brothers and sisters of persons specified in items (b), (c) and (d) above;
  • (f) any bank whose deposits are in its name and on its account; and
deposit protection act contd11
Deposit Protection ACT (Contd.)
    • (g) government or government institutions.
  • Also, protected deposits shall not cover deposits arising out of or related to transactions or actions constituting money laundering.
deposit protection act contd12
Deposit Protection ACT (Contd.)
  • The exceptions particularly those specified in items (b), (c), (d) and (e) in the preceding slides may be not be easy to be administered by DPF/SBP.
deposit protection act contd13
Deposit Protection ACT (Contd.)
  • The board, chief executive and key executives of the bank as well as the partners of the auditing firms may not like exemptions of their respective deposits from the protected deposits.
deposit protection act contd14
Deposit Protection ACT (Contd.)
  • In case such persons open their personal accounts with other protected banks, this may give a wrong impression about their own bank.
deposit protection act contd15
Deposit Protection ACT (Contd.)
  • The draft Act provides that the general superintendence, direction and management of the affairs and business of DPF and overall policy making in respect of its operations shall vest in the board.
management of dpf
Management Of DPF
  • Chairman
  • Managing Director
  • Board of Directors
management of dpf contd
Management Of DPF (Contd.)
  • The board shall consist of the following five members:
    • (a) a SBP deputy governor nominated by the SBP;
    • (b) Three members appointed by the SBP central board, and
    • (c) managing director.
  • DPF will be a fully owned corporation of the SBP.
demand of dpf
Demand of DPF
  • The scheduled banks are sitting smug due to existing deposit protection in the Banking Companies Ordinance, 1962 and there is no demand to enforce deposit insurance.
demand of dpf1
Demand of DPF
  • They presently are not paying any premium or fee for protection.
  • Enforcement of the DPF Act will oblige them to pay the premium and to comply with other requirements.
demand of dpf2
Demand of DPF
  • There is potential for dispute on matters such as the determination of deposit amount and the premium due on such deposits from the protected bank.
  • There should be a provision and forum for the resolution of such disputes.
revision of laws
Revision of Laws
  • Presently, the SBP is working with the government for major revision in applicable laws, namely the draft Banking Act and the draft Banking Companies Act.
revision of laws contd
Revision of Laws (Contd.)
  • For financial stability purposes it is considered appropriate that application of DPF may wait for enactment of the relevant laws and prudential regulations which may be revised due to banking debt trouble in many countries.
deposit protection fund resources
Deposit Protection Fund Resources

The sources of the Fund’s resources shall consist of:

  • (a) The paid-up share capital
  • (b) initial premiums from members;
  • (c) periodic premiums from members;
deposit protection fund resources contd
Deposit Protection Fund Resources (Contd.)
  • (d) return on the investments ;
  • (e) proceeds received from a member’s property in case of sale or liquidation;
  • (f) other sources including loans, donations, grants and foreign assistance.
dpf account
DPF Account

The Fund shall open and maintain account with State Bank of Pakistan,

  • Banking Services Corporation (Bank), established under the State Bank of Pakistan Banking Services Corporation Ordinance 2001.
summary of this session
Summary of this session
  • What is Deposit Insurance
  • State of Deposit Insurance in Pakistan
  • Draft Deposit Protection ACT of Pakistan