Governance of Deposit Insurance Systems

1. Governance of Deposit Insurance Systems Presented by:Mr. Guy Saint-PierrePresident and Chief Executive OfficerCanada Deposit Insurance Corporation IADI Fifth Annual Conference Rio de Janeiro, Brazil November 15-17, 2006

2. Governance of Deposit Insurance Systems • Subcommittee members • Canada (Chair) • France • Japan • Malaysia • Mexico • Turkey • USA • Additional Submissions received from • Nicaragua • Russia • Sweden

3. Governance of Deposit Insurance Systems **The Discussion Paper is a work in progress** Introduction to Discussion Paper: Governance Defined: “. . . the processes, structures and information used for directing and overseeing the management of an organisation. . . [and] . . . the relationship between the deposit insurance system and the authority from which it receives its mandate or other authority to which it is ultimately held accountable ”

4. Governance of Deposit Insurance Systems Four Key elements: • Operational independence is defined as the ability of an organisation to use the powers and means assigned to it without undue influence from external parties. • Accountability means that individuals and organizations should be responsible for their actions and for fulfilling their objectives. • Integrity speaks to Individual integrity, in that individuals should pursue the objectives of their organisation without compromise to self-interest and organisational integrity, such as appointment of quality governing body members and head of management and clear terms of office and criteria for removal of those individuals. • Transparency and Disclosure: Transparency is the principle fostered when the actions and decisions of an organisation, such as a deposit insurer, are revealed and clarified to the organisation’s stakeholders. Disclosure refers to the release to stakeholders of information necessary for them to judge the effectiveness of the deposit insurer’s conduct.

5. Governance of Deposit Insurance Systems I. Governance Structures • State-owned enterprises (e.g. Canada) • Subsidiaries of state-owned enterprises • Separate government agencies • Privately administered deposit insurers, run by industry associations • Departments of other safety-net organisations • Others

6. Suggested Guidance Point #1 The mandate of a deposit insurance system should be clearly defined and preferably set out in legislation. Illustration CDIC’s mandate is set out and clearly defined in the CDIC Act of 1967. The mandate has, however, been changed numerous times over the past 39 years. Currently, it calls upon CDIC to: Provide insurance against the loss of part or all of deposits; To promote and otherwise contribute to the stability of the financial system in Canada; and To pursue the objects set out in paragraphs (a) and (b) for the benefit of persons having deposits with member institutions and in such manner as will minimise the exposure of the Corporation to loss. Governance of Deposit Insurance Systems

7. Suggested Guidance Point #2 A deposit insurance system should have a governing body. Illustration Most deposit insurers have a governing body CDIC’s governing body comprises 5 ex officio public servants, 5 private-sector directors, and a private-sector Chairman Governance of Deposit Insurance Systems

8. Governance of Deposit Insurance Systems • Relationships The deposit insurance system’s relationships with: • political authorities • member banks • other safety-net organisations (particularly important for deposit insurers that are publicly administered)

9. Suggested Guidance Point #3 It is a good governance practice for a deposit insurer to have operational independence in using the powers and means accorded to it to fulfil its mandate. Illustration CDIC’s operational independence of central bank and supervisor Powers within its Act Has its own staff Can set its own budget Operational independence requires information-sharing mechanisms Financial Institutions Supervisory Committee Governance of Deposit Insurance Systems

10. Governance of Deposit Insurance Systems Suggested Guidance Point #4 The governing body of a deposit insurance system should be structured in such a way as to prevent undue influence from • political forces, • the financial services industry, or • other safety-net participants

11. Governance of Deposit Insurance Systems Preventing undue influence from Political Forces Illustration • Forbid undue political influence explicitly in law • Protect the head of the governing body against removal for undue political reasons: • In Canada, the Chairman of CDIC can only be removed for cause in law. • Structure governing body’s reporting framework such that it reports to a non- or multi-partisan authority • CDIC reports to Parliament (through the Minister of Finance)

12. Governance of Deposit Insurance Systems Preventing undue influence from Member banks: • Tradeoffs to weigh • Banking expertise v. increased potential for conflicts of interest • Illustration • Appoint non-affiliated private-sector individuals to the governing body • Allow member banks (as a collective) to elect non-affiliated individuals to the governing body • Allocate governing body seats according to type of credit institution

13. Governance of Deposit Insurance Systems Preventing undue influence from other safety-net organisations • Tradeoff to consider: • ex officio expertise and intervention coordination v. potential for undue influence from other safety-net organisations • Governing bodies for privately administered systems do not usually comprise individuals from other safety-net organisations.

14. Suggested Guidance Point #5 A deposit insurance system should be structured such that the potential for conflicts of interest respecting members of the governing body and management is minimised. Illustration Clear and separate mandates for each safety-net organisation (related to Point #1). Governing body should appoint—or have as great a role as possible in appointing--the head of management and corporate officers. Governing body members and management should be required always to act in the best interests of the DIS, which might not always be aligned with the interests of political authorities, member banks, and other safety-net organisations. Governance of Deposit Insurance Systems

15. Suggested Guidance Point #6 It is a good governance practice for governing body members, senior officers, and employees of a deposit insurance system to be subject to conflicts of interest codes and codes of conduct and ethical behaviour. Illustration In Canada CDIC Conflicts of Interest Code Code of Business Conduct and Ethical Behaviour for employees Code of Business Conduct and Ethical Behaviour for Directors Governance of Deposit Insurance Systems

16. Governance of Deposit Insurance Systems III. The Governing Body and Management • Governing body selection authority and appointment processes • Member training and performance evaluation • Role of governing body in setting DIS strategy • Usefulness of governing body charters or policy documents

17. Suggested Guidance Point # 7 It is a good governance practice for governing practice for a deposit insurance system to maintain a profile of desired skills for its governing body and senior executive team and for governing body members to be knowledgeable of and adequately trained in matters related to deposit insurance and the financial services industry. Illustration In Canada, CDIC’s Chairman, board members, and CEO are recommended by the Minister of Finance for appointment by Cabinet. Historically, in recommending CDIC’s CEO, the Minister has also considered the advice of CDIC’s Board of Directors In appointing the Chairperson and board members, the government has usually accepted a profile of desired skills-sets to inform it in its selection process. Principle 3 of CDIC’s Board Charter calls upon the Board to “arrange for orientation of new directors and ongoing training appropriate to the Board’s governance responsibilities and needs” CDIC provides offsite ongoing training to new Board members. New CDIC directors are provided with a comprehensive “Director’s Manual” Governance of Deposit Insurance Systems

18. Suggested Guidance Point #8 It is a good governance practice for the governing body to conduct meaningful self-assessments. Illustration Governing body should assess its conformity with relevant practices from the private sector and should assess its own performance A governing body might also consider engaging an external consultant to assist it in its self-assessment. CDIC has done this in the past with goodresults. Governance of Deposit Insurance Systems

19. Suggested Guidance Point #9 It is a good governance practice that the governing body set the strategic direction of the deposit insurance system and that management take action to carry out that strategic direction. Illustration The governing body should direct and supervise; management should manage. Not the other way around Governance of Deposit Insurance Systems

20. Suggested Guidance Point #10 It is a good governance practice for the governing body to have a charter or policy in place that lays out the governing body’s responsibilities. Illustration This can assist the governing body in understanding its responsibilities and ensure that those responsibilities are being carried out. CDIC’s Board Charter lays out 20 principles of governance and specific obligations of the Board of Directors in fulfilling those 20 principles. Governance of Deposit Insurance Systems

21. CDIC’s Board Charter Principle 1: Independent judgment Principle 2: Understanding CDIC objects, powers and governance responsibilities Principle 3: Orientation and training of directors Principle 4: Board profile Principle 5: Delegation to Board committees and Management Principle 6: Responsibilities of Chairperson and CEO Principle 7: Standards of business conduct and ethical behaviour Principle 8: Recommendation on appointment of CEO Principle 9: Appointment of Corporate Officers Principle 10: Succession of CEO and corporate officers Principle 11: Compensation for non-ex officio directors, corporate officers and employees Principle 12: Objectives and evaluation of CEO Principle 13: Human Resources Principle 14: Strategic management process Principle 15: Enterprise risk management Principle 16: Control environment Principle 17: Internal audit function Principle 18: CDIC “in control” Principle 19: Effective communication Principle 20: Review of Board Charter Governance of Deposit Insurance Systems

22. Governance of Deposit Insurance Systems IV. Audit and Legal Protection • Use of external and internal auditing • Legal protection issues for individuals working for a deposit insurance system

23. Suggested Guidance Point #11 It is a good governance practice for a deposit insurance system to be subject to regular external audits and examinations and for those audits and examinations to be made public. Illustration External examinations and audits provide comfort to the governing body—and, when made public, to stakeholders—that the deposit insurer’s operations are being carried out effectively and efficiently. CDIC is subject to ongoing internal audit, annual external audit, and to a special external examination every five years, the results of which CDIC posts on its website. Governance of Deposit Insurance Systems

24. Suggested Guidance Point #12 It is a good governance practice for a deposit insurance system’s internal audit function to report to the audit committee of the governing body. Illustration This is increasingly a best practice in the private sector. At CDIC, the internal audit division reports to the Audit Committee of the Board of Directors with a “dotted line” to the CEO for administrative issues. CDIC’s Internal Auditor cannot be removed without Board Approval. The internal auditor’s reports are provided to the Audit Committee Governance of Deposit Insurance Systems

25. Suggested Guidance Point #13 Governing body members, senior officers and employees of a deposit insurance system should be provided with legal protection for decisions made, omissions, and actions taken in good faith and while discharging the mandate of the deposit insurance system. Illustration Preexisting Guidance from the 2004 APEC Policy Dialogue Crucial to the proper function of a DIS: Without legal protection, those working for a deposit insurance system will be reluctant to act. Should only be provided in respect of decisions taken in good faith Governance of Deposit Insurance System

26. Governance of Deposit Insurance Systems V. Transparency and Disclosure • General disclosure regimes to which a DIS is subject • Disclosure of pertinent financial and non financial details about operations • Tradeoffs between transparency and confidentiality

27. Suggested Guidance Point #14 A deposit insurer should be as transparent as possible and disclose appropriate information on its activities, governance practices, structure, and financial results. This disclosure can take the format of a public annual report. Illustration Necessary to balance the sometimes competing aims of transparency and the need to protect confidentiality “Freedom of Information” statutes Governance of Deposit Insurance System

28. Governance of Deposit Insurance Systems Presented by:Mr. Guy Saint-PierrePresident and Chief Executive OfficerCanada Deposit Insurance Corporation IADI Fifth Annual Conference Rio de Janeiro, Brazil November 15-17, 2006