Contributions to deposit insurance - Outline of a new model - - PowerPoint PPT Presentation

Contributions to deposit insurance

• Outline of a new model

1 PRESENTATION

Presentation to IADI International Conference, Manila Thierry Dissaux, Chairman, French DIA

June, 16th 2015

How to pour some more water…

3 PRESENTATION

How do DIs calculate contributions?

Answer : usually like non-life insurers

Contribution = Contribution Rate x Risk factors x Covered Deposits For instance, contribution of member bank i for year n is: Aiming at a target for the DI’s level of resources

, = × , × , with

• contribution rate for year n for all member banks
• , weight (in %) of the aggregated risk factors of member bank i in year n

, covered deposits of member bank i in year n

= × ∑ ,

• with
• DI’s total resources for year n
• DI’s target level for year n

∑ ,

• Total covered deposits in the banking system for year n

e.g. = % %

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• Resolution actions : an off-market mechanism for preventive risk limitation
• Ex post contributions: a capacity to replenish reserves without any room for

member banks to escape

• Ex ante resources: defined on a regulatory basis
• Level of resources: an open issue, which may lead DIs to opt for stabilizing

the level of their resources and stopping raising contributions

PRESENTATION

Are DIs non-life insurers?

Answer : … at least disputable

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• How do they keep on influencing member banks’ risk taking policy?
• Don’t they encourage risks instead of limiting them?
• More generally, how do they maintain member banks’ accountability?

Additional concern:

• Isn’t it somewhat awkward and unfair vis-à-vis member banks in changing

contribution formulas depending on the DIs’ resources accumulation?

PRESENTATION

Moral hazard issues

Question : what happens when DI cease to raise contributions (or significantly reduces their rhythm) after they have reached a “satisfying” level of resources?

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A DI reaches its resources target level and almost stops raising

contributions

A new member bank starts implementing a risky policy It collects a growing portion of the deposits, fails and triggers a

costly payout Consequences:

Other member banks pay the price The failed bank has not contributed to the system Worse, it has not been discouraged by the DI in its risky policy

PRESENTATION

Moral hazard issues

A puzzling case:

Deposit Insurer Resources Need to have a closer look…

Year 3 Year 2 Year 1

= × ∑ ,

• … and an even closer look, inside…

NB : Year 0 = last time the Deposit Insurer drew on its resources Year 3 Year 2 Year 1 4 1 2 3 Year 4?

= × ∑ ,

• … an ordered look

How to spend it?

Then the question is…

12 PRESENTATION

STEP 1

How to spend it

1st option

= × ∑ ,

2nd option

3rd option

A better option

Year 3 Year 2

A better option

Year 4 4 1 2 3

= × ∑ ,

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Refreshing the contribution base (covered deposits base, risk factors) Discarding “old” contributions which served to mitigate moral hazard

in the past...

... while raising new contributions so they could mitigate moral

hazard now…

… and keeping the same formulas for calculating contributions all

along, before and after reaching the target level How?

Accepting that a part of the contributions are “refundable”

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What does it mean?

It means:

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Option 1: the DI simply pays the claims

(while raising new contributions so as to keep its level

• f resources the same)

Option 2: the DI keeps the money, but the member banks use

their claims to pay their future contributions (if the new contribution of the year is lower than the claim, the difference will be used the year after)

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What does it mean, « refundable »?

Refundable means that members banks get claims on the DI (with two options)

Why not…?

Could a DI really do that?

21 PRESENTATION

STEP 2

How to spend it

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at the way each bank has contributed to the DI’s resources along the

years

at the “pile” of each bank contributions (a stock made of yearly flows

• f contributions)

at constantly “refreshing” those piles in relation with each member

bank’s risk factors and covered deposits base Question:

What should be the refreshment period? 10, 5, 3 years?

PRESENTATION

Some further thoughts

We are actually looking:

What about every year?

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Calculating each year the total contribution expected from a member

bank within the DI’s total resources targeted that year… … based on each bank covered deposits and risk factors of that year

Going from a “flow base” approach to a “stock base“ approach Getting a resource base constantly related to its current risk base Efficiently mitigating current risks in the system, with a contribution

system targeting the riskiest banks

PRESENTATION

A new contribution model

For the Deposit Insurer, a complete refreshment each year means:

4 1 2 3

= × ∑ ,

• Year

after year

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The DI does not set a premium rate each year… … it sets the target level it wants (either progressive over time, or

constant), using (or not) risk factors, e.g.

• … this target level allows to directly calculate members banks

total contribution (TC) for each year

PRESENTATION

A new contribution model

Changing the DI’s resources monitoring

, = × , × ,

= × ∑ (, × , )

• , = × , × ,

“Old”:

A contribution model close to non-life insurance’s one… … adapted to deposit insurance’s unique moral hazard specificities

26 PRESENTATION

,

• ,

,

A new contribution model

27 PRESENTATION

Thanks! For any question…