Knowing Early and Enough Prevents Bank Runs

1. Knowing Early and Enough Prevents Bank Runs Presented by: Jean Pierre Sabourin, CEO International Financial Planning Advisors Conference 23 February 2008

2. Discussion • Importance of public awareness on deposit insurance • Lessons learnt from the Northern Rock bank run • Deposit insurance – a form of consumer protection and its importance in financial planning

3. Importance of public awareness Better awareness & understanding Better appreciation of DI system Higher confidence in PIDM & a more effective DI system Contribute to financial system stability

4. Northern Rock Bank, UK Northern Rock Bank requested emergency funding from the Bank of England after facing a liquidity crunch. Reportedly a temporary financial hiccup – Northern Rock was still solvent!

5. Worst bank run in recent British history Depositors rushed to withdraw their deposits. News of bank run further created unease in financial markets – shares fell about 30%. In total, Government provided approximately RM 81 billion in loans.

6. Contributing factors • Lack of awareness and understanding • Financial Services Compensation Scheme (FSCS): compensation limit is £31,700 per depositor • First £2,000 – fully covered • Next £33,000 – 90% covered (or £29,700) • If an institution fails, depositors must file claims to FSCS • Payment could take up to 6 months or longer

7. Contributing factors (cont’d) 2. Lack of confidence Depositors • do not fully understand how the scheme worked • felt that they had to wait too long for their deposits to be reimbursed • also felt that the coverage limit was inadequate Subsequently, guarantee increased to 100% (up to £35,000).

8. What can we learn from Northern Rock? LESSON NO. 1 Peace of mind only works if you know you are adequately protected. LESSON NO. 2 Never say "don't panic”.

9. Deposit Insurance – a form of consumer protection • A system that protects depositors against loss of their insured deposits placed with member institutions in the unlikely event of a member institution failure • In such situations, depositors will be reimbursed promptly up to the coverage limit • A national Government sponsored scheme • It is not a commercial insurance policy • Depositors need not pay premium

10. Importance of deposit insurance • Deposit insurance contributes to the overall economic growth by building public confidence in the banking system • PIDM is committed in building public awareness • It is crucial for depositors to know how deposit insurance works for them • In bad times, such knowledge gives certainty and comfort to depositors in the face of rumours of bank failure

11. Deposit insurer’s fundamental role • One of a deposit insurer’s fundamental role –wealth protection • Our role complements the major role of the financial planning profession – wealth creation and management • Most clients’ investment portfolio would also include deposit products offered by banks

12. To enhance your profession • Financial Education – ‘snow ball’ effect • It is essential to ensure clients understand the investments they are making and the level of risks involved • It is crucial for your clients to have an adequate understanding of deposit insurance • Greater understanding of deposit insurance enables financial advisors to be more equipped to make proper assessment of financial risks

13. Financial literacy promotes market discipline • A well-informed public less susceptible to unsubstantiated rumours, hence preventing such rumours from creating consumer panic • Financial literacy aims to educate consumers • ability to make informed decisions on financial products • access to information and ability to compare information • capability to scrutinise conduct of banking institutions

14. Value of the deposit insurance system • A well-designed deposit insurance system forms a stable financial system • The establishment of an effective deposit insurance system can also mitigate the problem of moral hazard, the existence of which often undermines the value of deposit insurance system

15. Implemented worldwide since 1934 Africa Asia Europe Western Hemisphere Latvia Liechtenstein Lithuania Luxembourg Macedonia Malta Moldova Montenegro Netherlands Norway Poland Portugal Romania Russia Serbia Slovak Rep. Slovenia Spain Sweden Switzerland Turkey Ukraine UK Algeria Kenya Nigeria Sudan Tanzania Uganda Zimbabwe Bangladesh Hong Kong India Indonesia Japan Kazakhstan Korea Lao PDR Malaysia Marshall Isl. Micronesia Philippines Singapore Sri Lanka Taiwan Tajikistan Uzbekistan Vietnam Austria Albania Armenia Bosnia- Herzegovina Belgium Bulgaria Croatia Cyprus Czech Rep. Denmark Estonia Finland France Germany Gibraltar Greece Hungary Iceland Ireland Isle of Man Italy Argentina Bahamas Brazil Canada Chile Colombia Dominican Rep. Ecuador El Salvador Guatemala Honduras Jamaica Mexico Nicaragua Paraguay Peru Puerto Rico Trinidad & Tobago Uruguay USA Venezuela Middle East Bahrain Jordan Lebanon Morocco Oman In total, 96 countries with a deposit insurance system

16. In Malaysia • In Malaysia, deposit insurance was proposed in 2001 as part of the Financial Sector Master Plan • Akta Perbadanan Insurans Deposit Malaysia 2005 (PIDM Act) enacted by Parliament in July 2005 • Perbadanan Insurans Deposit Malaysia (PIDM) established to administer a deposit insurance system in Malaysia • PIDM is an operationally independent statutory body, accountable to the Parliament through the Minister of Finance

17. PIDM’s responsibilities • Statutory Mandate • Administer a deposit insurance system under the PIDM Act; (b) Provide insurance against the loss of part or all deposits of a member institution; (c) Provide incentives for sound risk management in the financial system; and (d) Promote or contribute to the stability of the financial system In achieving objects under (b) and (d), PIDM will act in such manner as to minimise costs to the financial system.

18. PIDM’s responsibilities [cont’d] • Functions (a) Assess and collect premiums from member institutions • Manage Deposit Insurance Funds • Undertake resolution of non-viable banks • Reimburse depositors should a member institution fail • Comply with Shariah principles in respect of Islamic deposits and funds • Create and enhance public awareness on the deposit insurance system

19. Role of PIDM in the financial system • BNM remains the primary supervisor and regulator of the financial system • PIDM complements BNM’s role in promoting financial stability • Strategic Alliance Agreement between PIDM and BNM with respect to exchange of information and collaboration • PIDM may undertake resolution on member institutions upon notification of non-viability by BNM

20. Features of deposit insurance system • Dual System • PIDM administers both Islamic and conventional deposit insurance systems under a single organisation • Membership • All licensed commercial banks (22) and all licensed Islamic banks (12) • Membership is mandatory under the PIDM Act

21. Who are our members? Commercial Banks • ABN Amro Bank • Affin Bank • Alliance Bank Malaysia * • AmBank • Bangkok Bank • Bank of America Malaysia • Bank of China (Malaysia) • Bank of Tokyo-Mitsubishi UFJ (Malaysia) • CIMB Bank • Citibank * • Deutsche Bank (Malaysia) • EON Bank • Hong Leong Bank • HSBC Bank Malaysia * • J. P. Morgan Chase Bank • Malayan Banking Berhad • OCBC Bank (Malaysia) * • Public Bank * • RHB Bank • Standard Chartered Bank Malaysia * • The Bank of Nova Scotia • United Overseas Bank (Malaysia) * With Islamic windows

22. Who are our members? (cont’d) Islamic Banks • Affin Islamic Bank   • Al Rajhi Bank • AmIslamic Bank • Asian Finance Bank • Bank Islam Malaysia • Bank Muamalat Malaysia • CIMB Islamic Bank • EONCAP Islamic Bank • Hong Leong Islamic Bank • Kuwait Finance House • Maybank Islamic Berhad • RHB Islamic Bank

23. Membership decal

24. Coverage • Automatic coverage for all depositors with RM deposits • Depositors need not apply or pay premiums • Eligible deposits include Ringgit-denominated savings and current accounts and fixed deposits • Coverage limit • RM60,000 per depositor per member institution • Separate coverage • Based on legal ownership of deposit

25. Funding • Annual insurance premiums are paid by member institutions • PIDM administers two separate funds • Islamic Deposit Insurance Fund • Conventional Deposit Insurance Fund • Flat rate premium assessment – 2005 to 2007 • Differential premium systems from 2008 onwards

26. Payment to depositors • Depositors will be promptly reimbursed on their insured deposits • Based on records of member institution • According to PIDM Act, PIDM shall reimburse depositors within 3 months from date of winding-up order • Depositors can file a claim with the bank’s liquidator for uninsured amount

27. Reaching out to the public • Integrated Communications Plan 2007-2011 • Print and broadcast advertising • Training for member institutions • Media events, interviews and articles • Briefings and roadshows • Website, publications and information video • Collaboration with Bank Negara Malaysia and other partner agencies in public awareness and consumer education

28. Moving forward • Provision of Information on Deposit Insurance • Regulations will be issued to ensure member institutions provide relevant deposit insurance information to customers • Focus on building greater financial literacy • Development and implementation of educational programme for schools, colleges and universities

29. Conclusion • Awareness and knowledge of deposit insurance benefits everyone • Important to engage the public for which the deposit insurance system is created • Responsibility of deposit insurer, depositors and other stakeholders to find out about deposit insurance • PIDM continues to enhance the deposit insurance system to remain current and relevant to depositors

30. Contact For further information on deposit insurance: • Contact our Customer Service Call Centre:1-800-88-1266 (Toll-free) 8.30 a.m. to 5.30 p.m. (Monday-Friday) • Visit our Web site at: http://www.pidm.gov.my • Email us at:info@pidm.gov.my

31. Thank You