Enhanced Powers Of MDIC To
Facilitate Intervention And Failure
Resolution In Malaysia
9 May 2011
Objectives of this session
To provide overview of MDIC’s
- Intervention and failure resolution framework
- Powers to undertake an intervention and failure resolution,
highlighting recent enhancements made.
Page 2
Agenda
(1) Introduction
- Review of key developments at MDIC
- MDIC Act 2011
(2) MDIC’s approach to Intervention and Failure Resolution
- The Framework
- Intervention and Failure Resolution Powers
(3) Recap
Page 3
Introduction
Page 4
Introduction
Review of Developments in relation to Intervention and
failure resolution at MDIC
2005
2006
2007
2008
2009
Setting up operations and risk assessment system & issuance of
Regulations to Member Institutions
2010
2011
Review and enhancements to risk assessment systems and
Regulations to Member Institutions
Aug 2005
MDIC Act 2005
enacted
Commencement of Payout Project to develop comprehensive infrastructure to effect a prompt payout.
Commencement of Project Eveready to document
Intervention and Failure Resolution Policies &
Procedures and conduct simulations
Coverage:
• All ringgit denominated deposits
• Limit of RM60,000 per depositor per Member Institution
• All commercial and Islamic institutions licensed by Bank
Negara Malaysia
Oct 2008 – Dec 2010:
Government Deposit Guarantee
• All ringgit denominated and foreign
currency deposits
• All deposits with commercial, Islamic
and investment banks, and deposit
taking development financial
institutions regulated by Bank Negara
Malaysia.
Page 5
Jan 2011
New MDIC Act enacted
(took effect from 31 Dec 2010)
Introduction
MDIC Act 2011
• Increased coverage limit from RM60,000 to RM250,000 per
depositor per member institution.
• Foreign Deposits covered
• Introduction of Takaful and Insurance Protection Scheme
Page 6
Introduction
MDIC Act 2011
• MDIC now administers 2 separate financial consumer protection
schemes and a total of 6 insurance funds.
Deposit Insurance System
Takaful and Insurance Benefits Protection System
Protects against loss of deposits (including
foreign currency accounts) up to RM250,000
Protects against loss of eligible takaful and insurance benefits up
to prescribed limits
Conventional
Deposit Fund
Islamic Deposit
Fund
Conventional
Life Insurance
Fund
Takaful Life and
Solidarity Fund
Conventional
General
Insurance Fund
Takaful
General Fund
• Enhancements to intervention and failure resolution powers
MDIC’s approach to
Intervention and
Failure Resolution
- Intervention and Failure Resolution Framework
- Intervention and Failure Resolution Powers
Page 8
MDIC’s approach to Intervention and Failure Resolution
Intervention and Failure Resolution Framework
The Framework is designed to focus on
achieving the ultimate objectives of
preserving public confidence in the
financial system and ensuring depositor
protection by:
PUBLIC CONFIDENCE
&
DEPOSITOR AND POLICYHOLDER PROTECTION
Mandate
& Power
Guiding
Principles
and Policies
&
Procedures
Competencies
& Infrastructure
Financial
Capacity
Financial
Safety
Net
• institutionalising the mandates,
legislative powers, guiding principles,
policies , procedures, resources and
infrastructure required during an
intervention and failure resolution; and
MDIC’s Intervention and Failure Resolution Framework
• recognising the interrelationships
among the different safety net players.
Page 9
MDIC’s approach to Intervention and Failure Resolution
Intervention and Failure Resolution Framework
Mandate
• Administer a DIS and a TIPS;
• Provide insurance against the loss of part or all
deposits and provide protection against the loss of
part or all of takaful or insurance benefits;
PUBLIC CONFIDENCE
&
DEPOSITOR AND POLICYHOLDER PROTECTION
Mandate
& Powers
Guiding
Principles
and Policies
&
Procedures
• Provide incentives for sound risk management in
the financial system; and
• Promote or contribute to the stability of the
financial system.
Competencies
& Infrastructure
Financial
Capacity
Financial
Safety
Net
Powers
• Special Examination Powers
• Risk Mitigation Powers
MDIC’s Intervention and Failure Resolution Framework
• Failure Resolution Powers
Page 10
MDIC’s approach to Intervention and Failure Resolution
Intervention and Failure Resolution Framework
Guiding principles
• Designed to provide the parameters for any
intervention and failure resolution action that the
Corporation undertakes.
PUBLIC CONFIDENCE
&
DEPOSITOR AND POLICYHOLDER PROTECTION
Mandate
& Power
Guiding
Principles
and Policies
&
Procedures
Competencies
& Infrastructure
Financial
Capacity
• Set out in a general manner in order to offer some
degree of flexibility in implementation to suit the
circumstances at hand as every intervention and
failure resolution event is different
Financial
Safety
Net
Policies and procedures
• Formulated based on the guiding principles
• Provides clarity of approach
during the conduct of
an intervention and
failure resolution
MDIC’s Intervention and Failure Resolution Framework
Page 11
MDIC’s approach to Intervention and Failure Resolution
Intervention and Failure Resolution Framework
Competencies and Infrastructure
• Premised upon maintaining a core capacity of expert
employees to provide leadership in undertaking effective
intervention and failure resolution.
PUBLIC CONFIDENCE
&
DEPOSITOR AND POLICYHOLDER PROTECTION
Mandate
& Power
Guiding
Principles
and Policies
&
Procedures
Competencies
& Infrastructure
Financial
Capacity
Financial
Safety
Net
• Mechanisms to be able to quickly mobilise a larger
workforce should the need arise. This would be done
through the Corporation’s virtual organisation comprising a
network of experienced professionals such as lawyers,
accountants, investment bankers, asset management
specialists, receivers and liquidators.
MDIC’s Intervention and Failure Resolution Framework
Such an approach ensures optimal utilisation of resources
while allowing the Corporation access to external expertise
as and when needed.
Page 12
MDIC’s approach to Intervention and Failure Resolution
Intervention and Failure Resolution Framework
Financial Capacity
• Adopts a hybrid funding structure that combines
both ex-ante, via regular premium contributions
from the MIs; and ex-post funding, via its
authority to impose ex-post levies, and higher
premiums.
PUBLIC CONFIDENCE
&
DEPOSITOR AND POLICYHOLDER PROTECTION
Mandate
& Power
Guiding
Principles
and Policies
&
Procedures
• Can borrow or obtain liquidity funding from the
Government or raise funds from the capital
market in such manner as the Corporation
thinks fit
Competencies
& Infrastructure
Financial
Capacity
Financial
Safety
Net
MDIC’s Intervention and Failure Resolution Framework
Page 13
MDIC’s approach to Intervention and Failure Resolution
Intervention and Failure Resolution Framework
Financial Safety Net
• An effective financial safety net with clear mandates and
well defined roles and responsibilities for each safety net
player is the bedrock of a stable financial system.
PUBLIC CONFIDENCE
&
DEPOSITOR AND POLICYHOLDER PROTECTION
Mandate
& Power
Guiding
Principles
and Policies
&
Procedures
• An effective financial safety net also ensures that relevant
players take prompt corrective action when financial
institutions face emerging problems.
• Clear roles and responsibilities also lead to clear
accountabilities.
Competencies
& Infrastructure
Financial
Capacity
Financial
Safety
Net
Minister of
Finance
Financial
Safety Net
MDIC’s Intervention and Failure Resolution Framework
Deposit Insurer
Page 14
Central Bank of
Malaysia
Financial safety net: From traditional
to new definition?
Lender
Lender
of
of
last resort
last resort
Deposit
insurance
(and other
failure
resolution)
Regulatory
and
supervisory
framework
Guarantor
of
last resort
Regulatory
and
supervisory
framework
Deposit
insurance (and
other failure
resolution)
MDIC’s approach to Intervention and Failure Resolution
Intervention and Failure Resolution Framework
Viability Spectrum
Early Intervention
Trigger
D
Viable MIs
PIDM’s
Risk
Categories
PIDM’s
Interventi
on Stages
Low
Risk
Moderate
Risk
Going
Concern
PIDM’s
Activities
Above
Average
Risk
Non-Viability
Notice by BNM
Non-Viable MIs
Watch
List
Special
Mention
Early
Warning
Viability
Risk
Resolution
Regular Risk Assessment & Monitoring
Premium Surcharge
PIDM’s
Intervention
and Failure
Resolution
Actions
PIDM Intervention and Failure Resolution Actions
Interventions:
 Due Diligence
Preparatory Examination
Legend
D
Triggers for intervention
Intervention and Failure Resolution Actions by PIDM
Page 16
 Financial Assistance
 Asset Carve-Out
Failure Resolutions:
 Restructuring
 Agency Arrangement
 Purchase & Assumption
 Bridge Institution
Closure & Liquidation
Mechanisms:
 Assumption of Control
 Receivership
MDIC’s approach to
Intervention and
Failure Resolution
- Intervention and Failure Resolution Framework
- Intervention and Failure Resolution Powers
Page 17
MDIC’s approach to Intervention and Failure Resolution
Intervention and Failure Resolution Powers
(1) Special Examination Powers
• Powers that allow for detailed assessment and investigation to be undertaken early
when the MI shows signs of distress. These powers are fundamental in facilitating
MDIC’s readiness to determine and implement the least costly IFR option.
(2) Loss Mitigation Powers
• Powers that allow for corrective intervention actions to be undertaken with the
objective of reducing or averting a risk to the financial system or a threatened loss to
MDIC.
(3) Failure Resolution Powers
• Powers that allow for the execution of resolution actions to resolve MIs promptly
which are consequential to the issuance of a Non-Viability Notice by Bank Negara
Malaysia.
Page 18
MDIC’s approach to Intervention and Failure Resolution
Special Examination
Powers
Risk Mitigation
Powers
Failure Resolution
Powers
Intervention and Failure Resolution Powers
Special Examination Powers
MDIC may conduct examinations of:
(a) Whether proper and adequate records of its deposits are maintained
(b) Whether reports made by member institutions on its premiums are substantially correct
(c) Compliance with terms and conditions or any other requirements of membership
MDIC may conduct a special examination of a member institution where MDIC has reason
to believe* that a due diligence or other examination should be made for the purposes of:
(a) Exercise of its risk mitigation and failure resolution powers
(b) Payout of depositors
* Enhancements in MDIC Act 2011
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MDIC’s approach to Intervention and Failure Resolution
Special Examination
Powers
Risk Mitigation
Powers
Intervention and Failure Resolution Power
Risk Mitigation Powers
MDIC may acquire shares of a member institution
MDIC may :
(a) provide loans or advances with or without security,
or guarantee with or without security any loan or advance provided
to a member institution
(b) make a deposit with a deposit taking member*
(c) Impose a premium surcharge on the member institution.
Shareholders
MDIC may acquire assets from a member institution
Failed Bank comprises of:
MDIC may guarantee or assume all or part of the liability of a
deposit taking member in respect of a deposit.
MDIC may make a loan, whether with or without security, to a corporation other that a
member institution *
• For the purpose of or in connection with the implementation of any resolution
actions; or
• For purpose of reducing or averting a risk to the financial system or a threatened
loss to the Corporation.
* Enhancements in MDIC Act 2011
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Failure Resolution
Powers
MDIC’s approach to Intervention and Failure Resolution
Special Examination
Powers
Risk Mitigation
Powers
Failure Resolution
Powers
Intervention and Failure Resolution Power
Failure Resolution Powers
(a) MDIC may acquire shares of a member institution from its existing shareholders.
(b) MDIC may reduce share capital and cancel shares of member institutions under
assumption of control (subject to conditions and with Court approval)
MDIC may subscribe to shares issued by the member institution (new money)
Shareholders
MDIC may:
(a) Require a member institution:
• To take any steps/action as MDIC considers necessary
• Cease soliciting , taking or repaying deposits
• Restructure the whole or part of its business
(b) Terminate membership of member institution
(c) Present a petition to the High Court for the winding up of the member
institution.
MDIC may:
(a) Assume control of the whole or part of the assets, liabilities, business and
affairs of the member institution
(b) Apply to the High Court to appoint a receiver, manager or receiver and
manager to manager the whole or part of the assets, liabilities, business
and affairs of the member institution
(c) Transfer such assets, liabilities, business and affairs of the member
institution to a bridge institution.*
* Enhancements in MDIC Act 2011
Failed Bank comprises of:
MDIC’s approach to Intervention and Failure Resolution
Special Examination
Powers
Risk Mitigation
Powers
Failure Resolution
Powers
Review of Intervention and Failure Resolution Power
Failure Resolution Powers
MDIC Act was also designed to facilitate MDIC in undertaking failure resolution actions
more efficiently.
Example of such enhancements include:
• Approvals of shareholders, creditors and government authorities are not required
• Powers for MDIC to vest assets and liabilities on to Bridge Institution without having to
go to Court
• More control over the liquidation process
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Re-cap and conclusion
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Re-cap and conclusion
We have today looked at…..
(1) The Intervention and Failure Resolution Framework adopted by MDIC
which conceptualises the building blocks for an effective resolution of a member
institution.
(2) Some of the main powers of MDIC to undertake an intervention and failure resolution
action together with a review of recent amendments designed to:
Special Examination Powers
Provide MDIC autonomy in
conducting Examinations
Risk Mitigation Powers
Provide wide powers to
avert any risk to the financial
system or cost to the
Corporation.
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Failure Resolution Powers
Facilitate prompt and
efficient execution of failure
resolution in line with
international best practices.
Re-cap and conclusion
Policies and Procedures under development
1. Assessment Tools
Due Diligence
Preparatory Examination
Least Cost Analysis
2. Intervention and Failure Resolution Options
Going Concern Options
Liquidation Option
Financial Assistance
Closure
Asset Carve Out / Asset
Management and
Disposition
Payout
Liquidation
Purchase & Assumption
Agency Agreement
Restructuring
Bridge Bank
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3. Mechanisms
Assumption of Control
Receivership
Re-cap and conclusion
Review of Objectives of this session
To provide overview of MDIC’s
- Intervention and failure resolution framework
- Powers to undertake an intervention and failure resolution,
highlighting recent enhancements made.
Page 26
Thank You
Page 27