The government on Thursday tabled the Deposit Insurance Bill 2018 which could see coverage for bank account holders up to $2m dollars.
Over the years several banking institutions have faced difficulties and have left depositors in the lurch, most notably Globe Trust.
The explanatory memorandum of the bill notes that deposit insurance is one of the components of the financial sector safety net, alongside supervision and emergency liquidity assistance. It said that the Bill seeks to address the “inherent instability of maturity transformation in the banking sector, that is, the financing of long-term assets through the issuance of demand or short-dated deposits, which makes banks vulnerable to depositor runs and to contagion from less sound institutions. The advent of deposit insurance has proven to prevent major banking crises the world over and plays a central role in maintaining financial stability”.
Clauses 26 to 36 seek to provide that funding for the proposed Deposit Insurance Scheme is provided on an ex-ante basis (which is based on the forecasted need for funding as opposed to the actual need for funding) there giving the Corporation immediate access to the necessary resources to reimburse depositors right away.
Start-up funds are provided by the Central Bank, with a government guarantee, and by the member financial institutions though initial contributions. In addition, regular premiums are proposed to be assessed biannually on the member financial institutions at a rate of 0.2 – 1.5% of covered deposits, as determined by the Board.
These clauses also seek to provide that the resources of the Fund must be managed so as to ensure their immediate availability should an insured event occur. Therefore, the funds must be invested in safe assets and be subject to adequate risk management and internal control mechanisms.
Clauses 37 to 43 seek to provide that insurance coverage be set at a level that is low enough to be credible but high enough to afford protection to small depositors.
“Based on these considerations, the Act sets the coverage limit at 2 million dollars. Certain classes of deposits are excluded from coverage, such as deposits of financial institutions, deposits of government authorities, deposits held at overseas branches of financial institutions, deposits of persons affiliated with a failed financial institution, and deposits of individuals engaged in money laundering or financing of terrorism.
“These clauses also seek to provide that to avoid bank runs and panics, the Corporation must be able to complete the payout process shortly after a financial institution is placed in liquidation”, the explanatory memorandum said.
Clause 42 seeks to authorise the Corporation to extend funds for resolution, provided the amounts involved are less than what would be necessary should the financial institution be liquidated. “Financing can be provided to fill a balance-sheet gap in the event of a transfer of assets and liabilities to a willing purchaser or to a bridge bank, up to 50% of the minimum target size of the Fund. Here, too, the Corporation is entitled to recover from the liquidation estate with the same rights and rank as insured depositors”, the bill said.
Because advance planning is vital for the Corporation to be able to react promptly to an insured event, clause 38 seeks to provide that the Corporation is entitled to receive supervisory data from the Bank with a view to monitoring the possibility and magnitude of an insured event.
Clause 45 also empowers the Corporation to obtain, by regulations, other relevant information directly from the member financial institutions, in particular their depositor records.
Clause 44 seeks to provide that the Corporation has the authority to share information and cooperate with other domestic and foreign safety-net participants.
The explanatory memorandum says that Clause 43 seeks to provide that in general, all private information obtained by the Corporation in the discharge of its duties must be kept confidential. Exceptions apply, nonetheless, where information is released to law enforcement authorities, to a court of law, to the external auditors, to domestic or foreign safety-net participants, or is used in the interest of the proposed Deposit Insurance Corporation in legal proceedings.
Clause 54 seeks to provide transitional provisions to establish a timetable for the implementation of the Act. Actions that are expected to be implemented in one to 12 months include the appointment of the independent Directors of the corporation, the appointment of the CEO, the approval of the employment and the salary schedule, the appointment of the external auditor, the approval of policies and regulations on a number of matters, the approval of the initial disbursement plan and the disbursement procedures, and the determination of the regular insurance premiums.