Contributions to deposit insurance - Outline of a new model Presentation to IADI International Conference, Manila Thierry Dissaux, Chairman, French DIA June, 16 th 2015 1 PRESENTATION
How to pour some more water…
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: � �,� = �� � × ��� �,� × �� �,� 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 � Aiming at a target for the DI’s level of resources � � = �� � × ∑ �� �,� with � � � DI’s total resources for year n e.g. �� � = �% �� �% �� � DI’s target level for year n ∑ �� �,� Total covered deposits in the banking system for year n � 3 PRESENTATION
Are DIs non-life insurers? Answer : … at least disputable 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 4 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? 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? 5 PRESENTATION
Moral hazard issues A puzzling case: � 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 6 PRESENTATION
Need to have a closer look… Deposit Insurer Resources
… and an even closer look, inside… Year 1 Year 3 Year 2 � � = �� � × ∑ �� �,� �
… an ordered look 2 3 1 4 Year 4? Year 3 Year 2 NB : Year 0 = Year 1 last time the Deposit Insurer drew on its � � = �� � × ∑ �� �,� resources �
Then the question is… How to spend it?
How to spend it STEP 1 12 PRESENTATION
1 st option � � = �� � × ∑ �� �,� �
2 nd option
3 rd option
A better option
A better option 2 3 1 4 Year 4 Year 3 Year 2 � � = �� � × ∑ �� �,� �
What does it mean? It means: � 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” 18 PRESENTATION
What does it mean, « refundable »? Refundable means that members banks get claims on the DI (with two options) � Option 1: the DI simply pays the claims (while raising new contributions so as to keep its level of 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) 19 PRESENTATION
Could a DI really do that? Why not…?
How to spend it STEP 2 21 PRESENTATION
Some further thoughts We are actually looking: � 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 of 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? What about every year? 22 PRESENTATION
A new contribution model For the Deposit Insurer, a complete refreshment each year means: � 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 23 PRESENTATION
2 3 1 4 Year after year � � = �� � × ∑ �� �,� �
A new contribution model Changing the DI’s resources monitoring � 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 �� �,� = �� � × ��� �,� × �� �,� � �,� = �� � × ��� �,� × �� �,� “Old”: 25 PRESENTATION
A new contribution model A contribution model close to non-life insurance’s one… �,� �,� � �,� … adapted to deposit insurance’s unique moral hazard specificities 26 PRESENTATION
Thanks! For any question… 27 PRESENTATION
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