Session 2(b) Management of Deposit Insurance Funds – Malaysia

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

2. 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

3. 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

4. Management of Deposit Insurance Funds (DIFs)

5. FUNDING FRAMEWORK

6. 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

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

8. INTERNAL FUNDING: TARGET FUNDS

9. 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

10. 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

11. Guiding Principles

12. 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

13. EXTERNAL FUNDING

14. 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

15. Government Borrowings

16. Capital market fund raising

17. THANK YOU