D EPOSIT INSURANCE AND ITS IMPLICATIONS FOR FINANCIAL CONSUMER - - PowerPoint PPT Presentation

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D EPOSIT INSURANCE AND ITS IMPLICATIONS FOR FINANCIAL CONSUMER PROTECTION F INANCIAL C ONSUMER P ROTECTION AND F INANCIAL L ITERACY Jerzy Pruski IADI President and Chair of the Executive Council President of the Management Board, Bank Guarantee

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SLIDE 1

DEPOSIT INSURANCE AND ITS IMPLICATIONS

FOR FINANCIAL CONSUMER PROTECTION

FINANCIAL CONSUMER PROTECTION AND FINANCIAL LITERACY

Sofia, 11th June 2014

Jerzy Pruski

IADI President and Chair of the Executive Council President of the Management Board, Bank Guarantee Fund, Poland

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SLIDE 2

2

AGENDA

 Deposit insurance and wider perspective on consumer protection in financial markets  Reasons for protecting and informing consumers and possible obstacles within these processes  Global and local examples of risks associated with consumer protection  The approach to consumer protection in the EU (new Deposit Guarantee Scheme Directive)  IADI research programs on consumer protection and Core Principles for Effective Deposit Insurance Systems

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SLIDE 3

3

The deposit insurance fund is only

  • ne of the elements of a complex

consumer protection scheme in financial markets Consumer protection is an attribute

  • f not only deposit insurers but

also of other financial safety-net players as well as policymakers

PERSPECTIVE OF DEPOSIT INSURANCE

Protection needs to be linked with the large variety of products available in financial markets such as capital investments or credit

Because of the complexity of financial markets, consumer protection and the policy of informing consumers always need to be considered from a broad perspective

The financial system should be equipped with a properly designed consumer protection scheme, comprising various entities with different responsibilities

The whole mechanism contributes to the financial stability of the economy

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SLIDE 4

4

OBSTACLES TO INFORMING AND PROTECTING CONSUMERS

IN FINANCIAL MARKETS

  • Often have lack of basic market

knowledge

  • Sometimes buy complicated products

designed for professionals

  • Do not understand the risk

associated with financial products nor the intent behind their design

  • Have a strong tendency for

confirmation bias and wishful thinking – especially dangerous in financial markets

  • See only „one side” of the market
  • Are susceptible to herd instincts
  • Offer complicated products whose

construction is unclear even for their sellers

  • Do not sufficiently inform about the

undertaken risk

  • Transfer a large part of the risk to

counterparties (consumers)

  • Create uneven distribution of rights

and obligations between counterparties involved in the product (in favour of the seller)

CONSUMERS

OF FINANCIAL SERVICES

SELLERS & DESIGNERS

OF FINANCIAL PRODUCTS

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SLIDE 5

5

PROTECTION IN FINANCIAL MARKETS

In recent years more consumers and retail investors have become active in financial markets and are being offered a more complex and wide-ranging set of financial services and instruments Consumers and retail investors need to be fully protected and supplied with extensive information about products and services, investments, and especially the risk associated with their actions Why is informing and protecting consumers in financial markets crucial? This directly translates into a greater volume and value of transactions taking place in financial markets Because consumers need to:

  • understand what they are doing
  • understand the potential consequences of their decisions
  • understand and accept the risk of an investment or financial transaction

MARKET IMPERFECTIONS IN THESE AREAS CAN HAVE SERIOUS RAMIFICATIONS IN THE FORM OF

CREATION OF MARKET BUBBLES AND CAUSING DIFFERENT TYPES OF CRISES

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SLIDE 6

6 CURRENCY RATE PLN / EUR 2007-2009

CURRENCY OPTIONS AMONG POLISH COMPANIES

DEPRECIATION OF PLN

BY 53% IN 7 MONTHS POLISH COMPANIES

PURCHASING CURRENCY OPTIONS  A csteady trend of PLN appreciation encouraged Polish exporters to purchase currency options with banks, hedging the value of their revenues from abroad  In 2008 Poland was hit by an economic crisis, which triggered the process of rapid depreciation of PLN

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SLIDE 7

7 MECHANICS OF THE PROBLEM LOSSES OF POLISH COMPANIES

CURRENCY OPTIONS AMONG POLISH COMPANIES

 Companies that had purchased options were obliged to sell PLN to banks at a fixed price stipulated in contracts (e.g. PLN 3.5), also when the market price was PLN 4.8  This was in a large part a speculation game because the contracted amounts were much higher than the expected export revenues from particular companies  Negative valuation of currency derivatives issued by Polish companies amounted to PLN 16 billion  Negative valuation of currency

  • ptions amounted in total to PLN 9

billion  99 public listed companies were affected by losses on options NAME OF COMPANY CURRENCY OPTION

LOSS IN MILLIONS PLN

Krosno 300 Ciech 300 Zakłady Police 124 Cersanit 53 Rudniki 13

Source: KNF

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SLIDE 8

8

OBSTACLES TO INFORMING AND PROTECTING CONSUMERS

IN FINANCIAL MARKETS

  • „Dotcom” bubble
  • Credit boom during times of low

interest rate levels

  • Mortgage-backed securities (global

financial crisis)

  • Popularity of derivative products (currency
  • ptions)
  • Mortgage loans in foreign currencies for

households

  • Structured investment products

as a way of ordinary saving

  • Offering aggressive-strategy investment

funds for those types of consumers that particularly need to be protected (e.g. the elderly)

EXAMPLES OF MARKET BUBBLE CREATION

GLOBAL CHARACTER LOCAL CHARACTER (EXAMPLES FROM POLAND)

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SLIDE 9

9

  • 10
  • 5

5 10 15 20 25 30 35 40 45 II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Housing loans - real Corporate loans - real Consumer loans - nominal

Limited lending Expansion of housing loans Housing loans - the main factor of loan growth

DEVELOPMENT OF LOANS IN POLAND

Availability of cheap financing allowed banks to create an attractive housing loan offer, which in combination with a high demand of households for flats/houses allowed dynamic development of lending

LOANS BY CATEGORIES – QUARTERLY CHANGES (IN BILLIONS PLN)

Source: NBP

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SLIDE 10

10

  • 40%
  • 20%

0% 20% 40% 60% 80% 100%

  • 10
  • 5

5 10 15 20 25 II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132014

PLN-denominated foreign currency annual change

PLN bn

Low volume of housing loans Expansion of housing loans

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

  • 15
  • 10
  • 5

5 10 15 20 25 II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20132014

foreign funds foreign currency housing loans CHF/PLN

PLN bn

EXPANSION OF FOREIGN CURRENCY HOUSING LOANS

The dynamic growth of housing loans was possible mainly due to the growth in foreign currency loans, which were cheaper than PLN- denominated loans because of banks’ access to foreign funding

Quarterly and annual changes in housing loans (real) Quarterly changes (real) and exchange rate

Source: NBP

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SLIDE 11

11 LIABILITIES TO AN EXTERNAL FINANCIAL SECTOR

100 200 300 400 500 600 700 800 900 1 000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 2014

Stocks (PLN bn)

Loans for non-financial clients Liabilities to external financial sector

Excess liquidity in banking sector; small share of foreign funds Growth of liabilities to external financial sector

Years 2005 - 2008 – a period of increased inflow of foreign funding

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SLIDE 12

12

372 376 469 394 304 341 442 680 829 1 096 575 78 411 97

  • 94
  • 398
  • 600
  • 400
  • 200

200 400 600 800 1000 1200 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Change in loan volume (EUR bn) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 ECB MRO interest rate (right axis)

Intensive growth of bank lending to Non-MFIs in pre-crisis period

Source: ECB

5 6 7 8 9 10 11 12 1997Sep 1998Feb 1998Jul 1998Dec 1999May 1999Oct 2000Mar 2000Aug 2001Jan 2001Jun 2001Nov 2002Apr 2002Sep 2003Feb 2003Jul 2003Dec 2004May 2004Oct 2005Mar 2005Aug 2006Jan 2006Jun 2006Nov 2007Apr 2007Sep 2008Feb 2008Jul 2008Dec 2009May 2009Oct 2010Mar 2010Aug 2011Jan 2011Jun 2011Nov 2012Apr 2012Sep 2013Feb 2013Jul 2013Dec

Loans for Non-MFIs – change in volume Loans for Non-MFIs (EUR trillions) In 2005-2008 annual change in volume between 0.6-1.1 EUR bn, in comparison to 0.3-0.4 EUR bn in 1998-2004

LOANS FOR NON-MFIS – EURO AREA

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SLIDE 13

13

837 1 318 1 164 1 505 645 991 1 554 2 280 2 319 3 540 2 336

  • 686

1 063 1 327

  • 839
  • 2 250
  • 3 000
  • 2 000
  • 1 000

1 000 2 000 3 000 4 000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Change in asset volume (EUR bn) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 ECB MRO interest rate (right axis)

10 15 20 25 30 35 1997Sep 1998Mar 1998Sep 1999Mar 1999Sep 2000Mar 2000Sep 2001Mar 2001Sep 2002Mar 2002Sep 2003Mar 2003Sep 2004Mar 2004Sep 2005Mar 2005Sep 2006Mar 2006Sep 2007Mar 2007Sep 2008Mar 2008Sep 2009Mar 2009Sep 2010Mar 2010Sep 2011Mar 2011Sep 2012Mar 2012Sep 2013Mar 2013Sep 2014Mar

Total assets – change in volume Total assets (EUR trillions) Intensive growth of total euro area bank assets in pre-crisis period

Source: ECB

TOTAL BANK ASSETS – EURO AREA

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SLIDE 14

14

0.1 2.3 1.4 1.5 0.9 0.0 0.5 1.0 1.5 2.0 2.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Structured finance (total) - outstanding MBS - outstanding 76 130 115 155 141 223 309 369 529 93

  • 137
  • 165
  • 273
  • 197
  • 400
  • 300
  • 200
  • 100

100 200 300 400 500 600 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Change in structured finance volume excl. MBS (EUR bn) Change in MBS volume (EUR bn) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 ECB MRO interest rate (right axis)

Source: Sifma

European structured finance 1999-2014 (EUR trillions) European structured finance – change in volume 2005-2008 – dynamic growth of

  • utstanding balance of European

securitized products (including mortgage-backed securities) In 2008 the annual increase in volume was 4 times higher than in 2004

EUROPEAN STRUCTURED FINANCE

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SLIDE 15

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European 3-5 Yr AAA RMBS Prices After intensive growth in the volume of securitized products, the prices of residential mortgage-backed securities (RMBS) started to decrease in 2008

POTENTIAL MBS-RELATED LOSSES IN EUROPE

European 3-5 Yr BBB RMBS Prices 2008/2009 – decline in RMBS prices

Source: Afme.

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16

422 581 917 1 170 997

  • 263
  • 61
  • 72

67

  • 227
  • 95
  • 400
  • 200

200 400 600 800 1 000 1 200 1 400 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Change in mortgage-related securities volume (USD bn) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 Federal Fund Rate (right axis)

5.3 9.4 8.7 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 5.3 9.4 8.7 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Sifma, Reuters.

U.S. Mortgage-Related Securities 2002-2013 (USD trillions) U.S. Mortgage-Related Securities – change in volume Intensive growth

  • f U.S.

mortgage-related securities market in the pre-crisis period

U.S. MORTGAGE-RELATED SECURITIES

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SLIDE 17

17

DGS DIRECTIVE

DIRECTIVE 94/19/EC

ON DEPOSIT-GUARANTEE SCHEMES

„ […] increasing the stability of the banking system and protection for savers ”

Tools:

  • protection of all depositors in the entire EU
  • min. level of protection – 20 000 euro
  • banks provide customers with information about the rules concerning deposit

guarantee schemes

Goal

DIRECTIVE 2009/14/EC

AMENDING DGSD

„ […] restore confidence and proper functioning of the financial sector” „ […] take all necessary measures to protect the deposits of individual savers” „ […] improvement of that coverage”

Goal

Tools:

  • increasing level of protection to 50 000 euro and later to 100 000 euro
  • faster pay-out - up to 20 working days
  • eliminating the possibility of depositor co-insurance
  • strengthening information rules (additionally banks inform customers if financial

instrument is not covered)

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SLIDE 18

18

DGS DIRECTIVE NEW DGS DIRECTIVE

2014

„As a result of this Directive, depositors will benefit from significantly improved access to DGSs, thanks to a broadened and clarified scope of coverage, faster repayment periods, improved information and robust funding requirements. This will improve consumer confidence in financial stability throughout the internal market.”

Goal

Tools:

  • shortening pay-out

period to 7 working days

  • unified scope of

coverage

  • better information for

customers: e.g. information template circulated to depositors at least annually

Basic information about the protection of deposits

Deposits in „Example Bank” are protected by:

Bank Guarantee Fund

Limit of protection:

EUR 100 000 per depositor per credit institution

If you have more deposits at the same credit institution:

All your deposits at the same credit institution are "aggregated" and the total is subject to the limit of EUR 100 000

If you have a joint account with (an)other person(s):

The limit of EUR 100 000 applies to each depositor separately

Reimbursement period in case of a credit institution’s failure:

7 working days

Currency of reimbursement:

*

Contact:

Bank Guarantee Fund

  • ul. ks. Ignacego Jana Skorupki 4

00-546 Warszawa

More information:

www.bfg.pl

Acknowledgement of receipt by the depositor:

* Possible options: the currency of the Member State where the DGS is located; the currency of the Member State where the account holder is a resident; euro; the currency

  • f the account; the currency of the Member State where the account is located
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IADI CORE PRINCIPLES A high degree of compliance with the Core Principles should contribute to financial system stability and enhance depositor protection. The focus of protection should be on those depositors who are generally not in a position to make an informed assessment of the risk that the bank to which their funds are entrusted may fail (e.g. retail and small business depositors). In order for a deposit insurance system to be effective it is essential that the public be informed on an ongoing basis about the benefits and limitations of the deposit insurance system.

 the deposit insurer is responsible for promoting public awareness  the deposit insurer works closely with member banks and

  • ther safety-net participants

 the deposit insurer receives or conducts a regular evaluation

  • f the effectiveness of its public awareness program

Public awareness

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IADI RESEARCH PROGRAMS Enhanced Guidance for Effective Deposit Insurance Systems: Public Awareness of Deposit Insurance Systems

Bank customers, in particular depositors, have the right to be informed and educated In order to reinforce consumer protection, some deposit insurers have already shifted the focus of their public awareness campaigns from promoting awareness of the deposit insurance system to promoting safe banking practices A well-informed public is less susceptible to rumors, and public confidence in the safety of deposits is a powerful force in preventing bank runs Consumers who are financially informed and know their rights can impose additional discipline on the banking system

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IADI RESEARCH PROGRAMS

Financial Inclusion and Deposit Insurance

Financial inclusion is enhanced by introducing or extending explicit deposit insurance protection Access to deposit insurance should provide a measure of protection to small savers, provided they are informed about safe places to store their money Small savers should find the protection of deposit insurance appealing, provided there is public awareness and understanding of its benefits and limitations

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CONCLUSIONS

 Historical examples show that consumers are often not aware of the undertaken risk related to the financial products they use, which may contribute to the creation of market bubbles and, in consequence, lead to consumers bearing losses  A clear information policy targeting consumers and investors is necessary for the protection of financial market retail clients  Well-informed consumers and investors are important factors in maintaining stability of the financial system as a whole  However, consumers and investors must be supported by a comprehensive network of financial safety-net institutions, which includes an infrastructure of micro- and macro-supervision as well as a highly robust deposit insurance system