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

Enhanced Powers Of MDIC To Facilitate Intervention And Failure Resolution In

Malaysia

9 May 2011

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.

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Agenda

(1) Introduction- Review of key developments at MDIC- MDIC Act 2011

(2) MDIC’s approach to Intervention and Failure Resolution- The Framework- Intervention and Failure Resolution Powers

(3) Recap

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1Page 4

Introduction

Review and enhancements to risk assessment systems and Regulations to Member Institutions

Review of Developments in relation to Intervention and failure resolution at MDIC

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2005 2006 2007 2008 2009 2010 2011

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.

Aug 2005MDIC Act 2005enacted

Coverage:• All ringgit denominated deposits• Limit of RM60,000 per depositor per Member Institution• All commercial and Islamic institutions licensed by Bank Negara Malaysia

Jan 2011New MDIC Act enacted(took effect from 31 Dec 2010)

Setting up operations and risk assessment system & issuance of Regulations to Member Institutions

Commencement of Project Eveready to document Intervention and Failure Resolution Policies &

Procedures and conduct simulations

Commencement of Payout Project to develop comprehensive infrastructure to effect a prompt payout.

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

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Introduction

Deposit Insurance System

Protects against loss of deposits (including foreign currency accounts) up to RM250,000

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

Takaful and Insurance Benefits Protection System

Protects against loss of eligible takaful and insurance benefits up to prescribed limits

MDIC Act 2011

Introduction

Conventional Deposit Fund

Islamic DepositFund

Conventional Life Insurance

Fund

Conventional General

Insurance Fund

Takaful Life and Solidarity Fund

Takaful General Fund

• MDIC now administers 2 separate financial consumer protection schemes and a total of 6 insurance funds.

• Enhancements to intervention and failure resolution powers

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

Intervention and Failure Resolution Framework

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MDIC’s approach to Intervention and Failure Resolution

Mandate & Power

Guiding Principles

and Policies &

Procedures

Competencies & Infrastructure

Financial Capacity

Financial Safety

Net

PUBLIC CONFIDENCE

&DEPOSITOR AND POLICYHOLDER PROTECTION

MDIC’s 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.


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Mandate & Powers

Guiding Principles

and Policies &

Procedures


Financial Capacity

Financial Safety

Net

PUBLIC CONFIDENCE



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


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Mandate & Power

Guiding Principles

and Policies &

Procedures


Financial Capacity

Financial Safety

Net

PUBLIC CONFIDENCE



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

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.


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Mandate & Power

Guiding Principles

and Policies &

Procedures


Financial Capacity

Financial Safety

Net

PUBLIC CONFIDENCE



Such an approach ensures optimal utilisation of resources while allowing the Corporation access to external expertise as and when needed.


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Mandate & Power

Guiding Principles

and Policies &

Procedures


Financial Capacity

Financial Safety

Net

PUBLIC CONFIDENCE



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


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Mandate & Power

Guiding Principles

and Policies &

Procedures


Financial Capacity

Financial Safety

Net

PUBLIC CONFIDENCE



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.

Central Bank of Malaysia

Minister of Finance

Deposit Insurer

Financial Safety Net

Financial safety net: From traditional to new definition?

Lender of

last resort

Deposit insurance (and other

failure resolution)

Lender of

last resort

Regulatory and

supervisory

framework

Deposit insurance (and other

failure resolution)

Regulatory and

supervisory framework

Guarantor of

last resort


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Triggers for intervention Intervention and Failure Resolution Actions by PIDMD

PIDM’s Activities

Non-Viability Notice by BNM

Early Intervention Trigger

Viable MIs Non-Viable MIsD

Legend

Regular Risk Assessment & Monitoring

Failure Resolutions:· Restructuring · Agency Arrangement· Purchase & Assumption

Interventions:

PIDM Intervention and Failure Resolution Actions

· Due Diligence·Preparatory Examination

· Financial Assistance· Asset Carve-Out

· Bridge Institution·Closure & Liquidation

Mechanisms:· Assumption of Control · Receivership

Low Risk

Moderate Risk

Special Mention

Watch List

Above Average

Risk

Low Risk

Moderate Risk

Special Mention

Watch List

Above Average

Risk

Going Concern

Early Warning

Viability Risk

ResolutionGoing Concern

Early Warning

Viability Risk

Resolution

Premium Surcharge

PIDM’s Risk Categories

PIDM’s Interventi

on Stages

PIDM’s Intervention and Failure Resolution

Actions

Viability Spectrum

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

Intervention and Failure Resolution Powers

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• Powers that allow for detailed assessment and investigation to be undertaken early when the MI shows signs of distress. These powers are fundamental in facilitating MDIC’s readiness to determine and implement the least costly IFR option.

(1) Special Examination Powers

• Powers that allow for corrective intervention actions to be undertaken with the objective of reducing or averting a risk to the financial system or a threatened loss to MDIC.

(2) Loss Mitigation Powers

• Powers that allow for the execution of resolution actions to resolve MIs promptly which are consequential to the issuance of a Non-Viability Notice by Bank Negara Malaysia.

(3) Failure Resolution Powers


Intervention and Failure Resolution Powers

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Special Examination Powers

Risk Mitigation Powers

Failure Resolution Powers

MDIC may conduct examinations of:

(a) Whether proper and adequate records of its deposits are maintained (b) Whether reports made by member institutions on its premiums are substantially correct(c) Compliance with terms and conditions or any other requirements of membership

MDIC may conduct a special examination of a member institution where MDIC has reasonto believe* that a due diligence or other examination should be made for the purposes of:(d) Exercise of its risk mitigation and failure resolution powers (e) Payout of depositors



* Enhancements in MDIC Act 2011

Intervention and Failure Resolution Power

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Shareholders

Failed Bank comprises of:

Assets

Liabilities

Employees

Business Undertakings

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.

MDIC may acquire assets from a member institution

MDIC may guarantee or assume all or part of the liability of adeposit taking member in respect of a deposit.

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.


Intervention and Failure Resolution Power






Shareholders

Failed Bank comprises of:

AssetsLiabilities

EmployeesBusiness

Undertakings

(a) MDIC may acquire shares of a member institution from its existing shareholders.(b) 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)

MDIC may:(a) Assume control of the whole or part of the assets, liabilities, business

and affairs of the member institution(b) 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

(c) Transfer such assets, liabilities, business and affairs of the member institution to a bridge institution.*


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.

Review of Intervention and Failure Resolution Power

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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



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Re-cap and conclusion

We have today looked at…..

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Special Examination Powers Risk Mitigation Powers Failure Resolution Powers

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.

(1) The Intervention and Failure Resolution Framework adopted by MDIC which conceptualises the building blocks for an effective resolution of a member institution.

(2) Some of the main powers of MDIC to undertake an intervention and failure resolution action together with a review of recent amendments designed to:

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Policies and Procedures under development1. Assessment Tools 2. Intervention and Failure Resolution Options 3. Mechanisms

Due Diligence

Preparatory Examination

Least Cost Analysis

Assumption of Control

Receivership

Liquidation

Going Concern Options

Financial Assistance

Asset Carve Out / Asset Management and Disposition

Purchase & Assumption

Agency Agreement

Restructuring

Bridge Bank

Liquidation Option

Closure

Payout

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.

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Thank You

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

Documents

mdic page

mdic mdic act

document intervention

introduction slide

deposit insurance system

introduction of takaful

insurance funds

enhanced powers of mdic