Session 2(b) Management of Deposit Insurance Funds – MALAYSIA Wan Ahmad Ikram Chief Financial Officer Malaysia Deposit Insurance Corporation (MDIC) 1

MDIC: A government statutory body … with legislated mandate to: – administer a deposit insurance system – protect part or all deposits in member institutions – provide incentives to promote sound risk management – contribute to the stability of the financial system and carry out its mandate in such a manner as to minimise costs to the financial system with no capital structure therefore, no dividend payable exempted from income tax subject to: – audit (by the National Audit Department) – financial reporting requirements (tabling of annual financial statements to Parliament) – compliance with approved Financial Reporting Standards fully backed by the Government 2

Deposit Insurance Funds: Conventional and Islamic Two separate and distinct Deposit Insurance Funds (DIFs): Both run parallel and managed by MDIC Clear segregation, no co-mingling Islamic DIF managed in accordance with Shariah principles Separate financial statements for conventional and Islamic DIF Premiums: Ex-ante & risk-based premiums assessed on total insured deposits Premiums assessed/collected by MDIC and investment income build up the Deposit Insurance Funds Investments: Legislative provisions and Board-approved investment policy (reviewed annually) set out the parameters within which MDIC invests surplus funds Investment policy: – Funds in the DIFs are invested in safe and liquid investment instruments to enable easy access when the need arises – Key drivers: Capital preservation and liquidity – Types of investment: Short-term government and central bank papers – Islamic funds managed in accordance with Shariah principles 3

Management of Deposit Insurance Funds (DIFs) 4

FUNDING FRAMEWORK 5

MDIC’s Funding Framework Objectives: To cover day-to-day operating expenditures To build funds available for meeting future obligations to depositors Framework takes into consideration: MDIC’s role in the financial safety net Legislative powers relating to sources of funding Clear objectives for internal and external sources of funding 6

Funding Framework 7 INTERNAL FUNDING Deposit Insurance Funds (“DIFs”) – Conventional and Islamic INTERNAL FUNDING Deposit Insurance Funds (“DIFs”) – Conventional and Islamic EXTERNAL FUNDING Borrowings from Government Ex-ante premiums To cover operating expenses To build DIFs over time to reach “Target Funds” To cover operating expenses To build DIFs over time to reach “Target Funds” Sources of Funds Purpose Investment income Ex-post premiums To address liquidity needs in case of an intervention and failure resolution (“IFR”) Raise funds from capital market

INTERNAL FUNDING: TARGET FUNDS 8

Target Fund Framework MDIC is currently developing a Target Fund framework Best practice: – Comprehensive approach using Value-at-Risk method for estimating Target Funds to reflect expected net losses taking into consideration the regulatory and supervisory approach as well as MDIC’s approaches for risk assessment and monitoring and IFR 9

Challenges … in building MDIC’s Funding Framework: Sufficiency to meet MDIC’s financial obligations Financial impact on profitability of member institutions MDIC’s approach, therefore, is to develop Target Funds to cover deposit insurance losses 10

Guiding Principles FIRST PRINCIPLE The Target Fund should be built to address periodic failures and not systemic failures 11 SECOND PRINCIPLE The Target Fund should cover the net insurance losses arising from IFR, supported by external funding arrangements to address liquidity needs for IFR THIRD PRINCIPLE Determination of Target Fund for MDIC should take into consideration impact on profitability of member institutions FOURTH PRINCIPLE The Target Fund size should be specified as a “range” of amounts rather than an absolute amount

Approach While MDIC lacks relevant historical loss data: – there exists other external information from rating agencies and other organisations that may be useful in estimating the variables needed – these data can be assessed together with MDIC’s internal risk assessment methodology which may be used to estimate some of the noted variables Scenario analysis to be incorporated into robust modelling, taking into consideration: – Strong and proactive regulatory and supervisory regime – MDIC’s comprehensive risk monitoring and assessment framework – MDIC’s legislative powers to intervene early and minimising losses to financial system – MDIC’s extensive legislative powers to conduct failure resolutions with speed and efficiency Other considerations: – Alignment and integration to the premium setting process – Approach in dealing with assessment of annual premiums once Target Fund level has been achieved – Continuous review and calibration of model 12

EXTERNAL FUNDING 13

Overview Objective: To supplement MDIC’s internal funding Powers to seek external funding: – Legislative power to borrow from the Government – Legislative power to raise funds in any manner as MDIC deems fit Forms of external funding: – Borrowing from the Government – Government guaranteed borrowings from the capital market 14

Government Borrowings GUIDING PRINCIPLES PurposeTo fulfil MDIC’s legislated mandate Types of borrowing Islamic Conventional AmountSufficient to enable MDIC to carry out its IFR activities TenureSufficiently long to enable MDIC to raise funds from the market, in the most effective and efficient manner possible Borrowing terms Commercial or arms-length: Government borrowing rate To be repaid by: Annual premiums (increase in premiums assessed) Realisation of failed bank assets and Funds raised in the capital market TimingBorrowings to be made available to MDIC in a timely and prompt manner On demand structure Being addressed currently - Operationalisation of processes: Pre-arranged agreements and documentation, setting up of operational accounts, etc. 15

Capital market fund raising CONCEPT PurposeTo replace liquidity funding TimingTo be used when the operating environment is conducive to raise funds from the capital market StructureGovernment guaranteed: Fixed Income Securities – bonds, promissory notes, etc (Conventional) Sukuk (Islamic) TenureSufficiently long to match cash flows from annual premiums and realisation of failed bank’s assets Structured program Pre-arranged standby facility which can be drawn or called upon as and when required Planning: Need to have in place so that it can be used when necessary 16

THANK YOU 17