**POWERS**

**Abstract**

As a preliminary matter, a deposit insurer needs only those powers and
authorities necessary to fulfil its public-policy objectives
effectively. Consequently, one must first determine the specific
mandate, roles and responsibilities of the organisation responsible for
deposit insurance. Is the deposit insurer\'s role limited to reimbursing
depositors after an insured institution is closed or does it have a
broader function? If it has a broader function, does it include
intervention and resolution responsibilities, or the liquidation of
assets of failed institutions? Finally, is the deposit insurer charged
with directly supervising or regulating the institutions that it
insures, or does it have some input into the supervisory and regulatory
processes? These questions must be answered before it is possible to
determine the necessary powers for a deposit insurer to operate
effectively. In addition, it is necessary to consider the assigned
responsibilities of other safety-net participants so as to avoid
overlapping or conflicting responsibilities.

This paper discusses those powers that are necessary for a deposit
insurer to fulfil its public-policy objectives. In addition, the paper
discusses the fundamental powers related to deposit insurance systems
and examines factors and considerations that can influence decisions on
the granting of specific powers to deposit insurers. The full panoply of
powers that can be provided to deposit insurers will be explored
briefly.

**POWERS**

As a preliminary matter, a deposit insurer needs only those powers and
authorities necessary to fulfil its public-policy objectives
effectively. Consequently, one must first determine the specific
mandate, roles and responsibilities of the organisation responsible for
deposit insurance.[^1] Is the deposit insurer\'s role limited to
reimbursing depositors after an insured institution is closed by the
supervisory authorities or does it have a broader function? If it has a
broader function, does it include intervention and resolution
responsibilities, or the liquidation of assets of failed institutions?
Finally, does the deposit insurer directly supervise or regulate the
institutions that it insures, or does it have some input into the
supervisory and regulatory processes? These questions must be answered
before determining the powers necessary for a deposit insurer to operate
effectively. It also is necessary to consider the assigned
responsibilities of other safety-net participants so as to avoid
overlapping or conflicting responsibilities.

This paper, which was prepared by the Subgroup on Powers,[^2] discusses
those powers that are necessary for a deposit insurer to fulfil its
public-policy objectives effectively. It examines the factors and
considerations that can influence decisions on the granting of specific
powers to deposit insurers. The full panoply of powers that can be
provided to deposit insurers will be explored briefly. Much of the
material presented here is covered in greater detail in the other papers
prepared by the Working Group on Deposit Insurance; where appropriate,
those papers are cross-referenced.

**Basic Powers and Legal Authorities**

The responsibilities and associated powers of deposit insurers vary
greatly and depend, to a large extent, on the public‑policy objectives
established for them by law or contract. Some deposit insurers serve
only to reimburse depositors once an insured institution has been closed
(\"paybox\" systems), while others serve as the receiver and liquidator
of the assets of failed institutions. Still others have the role of
minimising risk to the deposit insurer (\"risk minimisers\") and, in a
few cases, some directly supervise the institutions they insure. As a
result, there is no single set of optimal powers or authorities suitable
for all deposit insurers.

At a minimum, however, all deposit insurers need certain basic powers
and legal authorities to ensure that they can meet their obligations to
depositors in a timely fashion and thus help to maintain public
confidence in the financial system. A paybox system requires appropriate
authority, including, access to deposit information and access to
funding, for efficient reimbursement of depositors when an institution
fails. In addition to these authorities, a risk minimiser requires the
authority to gather information---either directly from insured
institutions or from the supervisory authority---to assess risks, the
authority to limit risks through various means, and the flexibility to
access needed funding sources. These authorities may be exercised by the
deposit insurer directly, or, alternatively, mechanisms may be
instituted to ensure that the supervisor is responsive to the deposit
insurer\'s needs.

**Operational issues**

*Organisational structure*

Regardless of the scope of a deposit insurer\'s responsibilities, there
are certain fundamental operational issues that must be addressed in any
law creating a deposit insurer. First, it must be determined whether the
deposit insurer should be established as a separate governmental entity,
a department of another government entity, a private entity with
government backing, or as a completely private entity. In determining
the entity\'s basic structure, it is important to maintain an
appropriate balance between the need for the deposit insurer to be
independent and for the insurer to be accountable for its actions.
Second, it is important to stipulate the duties and responsibilities of
the deposit insurer *vis‑a‑vis* the central bank and any other financial
institution supervisors or regulators. Particularly in times of crisis,
it is essential that the roles and responsibilities of all parties be
clearly defined to avoid misunderstandings and duplicative efforts on
the part of officials responsible for the financial sector. [^3]

*Operating* *procedures*

As a basic operating guide, the deposit insurer may consider developing
bylaws or some similar document to specify its corporate governance
rules clearly. Such a document should specify the manner in which the
deposit insurer's general business will be conducted and how the
authorities granted to it by law may be exercised.

*Operating powers*

In order to function efficiently and effectively, a deposit insurer must
be vested with certain legal authorities. The deposit insurer should
have the ability to employ staff on a permanent and temporary basis so
that it can adjust staffing levels quickly to address rapid changes in
the level of failures of insured institutions. Another issue is whether
the employees of the deposit insurer should be held personally liable
for the results of their official actions. Holding employees personally
liable for their official actions may cause the employees to be
reluctant to perform their official duties. Therefore, some deposit
insurance schemes provide indemnification for their employees.

In addition, the ability to enter into contracts to obtain goods and
services is an essential power that should be vested in the deposit
insurer. Undue restrictions on a deposit insurer's ability to enter into
contracts can make it difficult for the deposit insurer to fulfil its
responsibilities properly. Finally, the law creating the insurer should
specify whether the deposit insurer can sue and be sued on its own
behalf. This is a fundamental power that can be used to protect the
interests of the deposit insurer.

*Powers* *needed to* *perform the* *basic deposit insurance function*

*Control over* *entry and* *exit*

In setting up a deposit insurance system, it is necessary to determine
what types of institutions should be insured.[^4] That determination
must be made after taking into account the types of existing
institutions and considering the objectives of the deposit insurance
system. In addition, the rules for entry and exit should be clear and
transparent and should establish eligibility criteria for deposit
insurance.

In a paybox system, decisions regarding membership in the deposit
insurance scheme usually are made solely by the financial supervisory
authority. In a risk-minimising system, the deposit insurer should have
a role in determining which institutions are insured since the deposit
insurance system bears the risk of loss when a member institution fails.
A number of countries require that applications for deposit insurance be
filed concurrently with the primary supervisor and the deposit insurer.
Thus, institutions cannot gain deposit insurance without the approval of
both entities. Alternatively, some countries require that the primary
supervisor provide copies of the relevant application materials to the
deposit insurer. The deposit insurer is then permitted to add its input
to the application process.

In order to maintain a high level of confidence in the deposit insurance
system, the rules for closing an insured institution also should be
clearly specified to avoid confusion over who has the authority to act.
However, consideration should be given to providing the deposit insurer
with the opportunity to provide input into the decision-making process.
In many countries the primary supervisor has the sole power to close an
insured institution.[^5] In some countries, the decision to close an
institution is subject to judicial review, either before an institution
can be closed or subsequent to the institution being closed.

As an alternative to providing the deposit insurer with the opportunity
to provide input into the decision-making process on bank closings, the
deposit insurer could be permitted to terminate an institution\'s
deposit insurance. In some countries, where authorities have been slow
or reluctant to close insolvent institutions, the ultimate costs to the
deposit insurance system have been quite high. Granting the deposit
insurer the power to terminate deposit insurance independently may
facilitate timely closure and reduce costs to the insurance fund.
Termination of insurance does not always cause an institution to lose
its license or charter to operate. In countries where an institution can
continue to operate without deposit insurance, it is important to
specify a process for phasing out deposit insurance and informing
depositors about the status of the institution, so as to protect them
from potential losses.

> *Funding*

In order to reimburse depositors and cover its day‑to‑day operating
expenses, every deposit insurer needs the authority to obtain adequate
funding, regardless of whether there is an existing insurance fund or an
*ex-post* funding scheme.[^6] In addition, ancillary sources of funding
must be identified as insurance losses quickly can exceed available
funds. In these cases, it is important that the deposit insurer have the
authority to obtain additional resources quickly in order to maintain
public confidence.

In some countries, the deposit insurer has the authority to determine
the appropriate regular and special assessment amounts collected from
insured institutions, while in other countries, the primary supervisor
either determines those amounts or approves the amounts proposed by the
deposit insurer. In collecting assessments, the deposit insurer should
be granted broad authority to determine the manner and means of
collection, which may include determining the frequency of payments.
Although the base upon which the assessment is levied and the rate to be
applied may be specified in the law, there are often many practical
issues about how the actual amounts are to be collected and the deposit
insurer generally would be in the best position to make the necessary
determinations. If an insured institution should fail to make a required
payment, either by nonpayment or underpaying the amount due, the deposit
insurer or the primary supervisory authority should have the legal
authority to pursue payment by the institution.

If there is no deposit insurance fund, then the deposit insurer needs a
mechanism by which it can obtain funds in order to facilitate the timely
reimbursement of depositors at failed insitutions. In addition, at some
point there is a limit to the amount of money that insured institutions
reasonably can be expected to contribute without causing additional
insolvencies and burdening the deposit insurance system. Thus, the
deposit insurer should have the authority to borrow funds when necessary
to cover its expenses and meet its obligations. Possible sources for
borrowing funds include the government, the central bank, private banks
and the capital markets. It is often deemed prudent to place limits on
such borrowings and to specify in the law the terms and conditions under
which funds can be borrowed. If there is a government guarantee that
stands behind the deposit insurer, then the procedures for invoking that
guarantee should be clear to prevent uncertainty.

*Managing a fund*

If there is an insurance fund, then it is necessary to determine how the
fund can be invested. Many countries limit the investment authority of
the deposit insurer. Generally, the requirement is to invest in only the
safest and most highly liquid instruments to ensure that funds are
available to fulfil the deposit insurer's responsibilities.

*Reimbursement*

The most basic and common function of deposit insurers around the world
is to reimburse depositors for losses they would otherwise suffer when
an insured institution is closed.[^7] The law creating the deposit
insurance system should specify the amount of insurance coverage
provided for each depositor, who is eligible for deposit insurance, and
the types of bank liabilities that are to be covered by the scheme. The
deposit insurer should have broad authority to administer the deposit
insurance rules. In order to perform the reimbursement function quickly
and efficiently, the deposit insurer should be able to perform the
payout function through various means such as cash disbursements,
checks, electronic transfers, or other means, as appropriate.

**Information** **requirements**

The type and amount of information required by a deposit insurer to
fulfil its mandate is directly related to the scope of the insurer\'s
responsibilities. In the simplest case---that of a paybox system---the
insurer needs to have access to the names and deposit account balances
of all depositors in the insured institution before it can reimburse
depositors. This information should be provided as of the date and time
of failure and should include information about transactions that
occurred before the failure, but which were not included in the account
balances. Information may come from the institution itself or from the
primary supervisor. It is often easier and more efficient to convey the
information in an electronic format. That information should be obtained
as quickly as possible from the failed institution to enable the deposit
insurer to begin the deposit payout.

As the scope of the deposit insurer\'s responsibilities is
broadened---for example, if it is responsible for setting
assessments---it will need additional powers. In order to determine the
appropriate assessment amounts, the deposit insurer must have the
information necessary to calculate the assessments. In a number of
countries, assessments are calculated on the basis of an institution\'s
total deposits, total insured deposits, or total assets, and may vary
with an institution\'s risk. The depositor insurer must have the ability
to obtain that information, on a regular and timely basis, either from
the insured institutions directly or from the supervisory authority. In
addition, the deposit insurer should have the ability to verify the
information. This can be done through either targeted or random audits
performed by the deposit insurer, the primary supervisor or an outside
audit firm.

If the deposit insurer is involved in resolving failed institutions,
then it must have detailed and accurate information not only about the
institution\'s deposit liabilities, but also about its assets. This
information could come from either the institution itself or through the
primary supervisor. The insurer also needs the best possible information
about potential acquirers of the institution so that only those entities
that have the requisite financial resources and qualified management can
acquire failed institutions. Finally, the deposit insurer needs
information about contractual obligations, other agreements, and
potential litigation to estimate least-cost solutions.

Deposit insurers that also act as receivers or liquidators of failed
institutions need even more detailed information about the assets and
liabilities of the institutions under their control to manage the
receiverships properly. In addition, the deposit insurer would have to
be aware of all contractual obligations and other agreements of the
failed institution as well as any pending litigation. In such cases, the
deposit insurer often succeeds to the rights, titles, powers and
privileges of the insured institution and therefore must carefully
identify every obligation and all of the rights and interests that the
insured institution had before it failed.

In addition to the powers discussed above, deposit insurers that have
supervisory and/or regulatory responsibilities have expanded information
needs, including specific information about each individual institution
as well as industry and macroeconomic data. Such information can enable
the deposit insurer to spot trends and anticipate problem areas before
they develop into substantial losses. All information should be current
and specific.

**Additional Powers and Authorities**

**Intervention**

Often when the financial condition of an insured institution begins to
deteriorate there are steps that can be taken to try to prevent or limit
its further deterioration.[^8] Such steps may prevent the failure of the
institution or can limit the losses to the insurance system should the
institution fail. In most countries, these actions generally are taken
by the primary supervisor of the insured institution. However, if the
deposit insurer has broad responsibilities, then, as the entity most
directly concerned with limiting losses to the insurance system, it
should be granted the authority---either indirectly or directly---to
participate in an intervention involving a troubled insured institution.
For example, if the deposit insurer has no supervisory or regulatory
responsibilities, it could be granted the authority to make
recommendations to the primary supervisor. By contrast, if the deposit
insurer is involved actively in the supervision and regulation of
insured institutions, it could be granted independent authority to take
appropriate actions against the insured institutions to prevent or limit
losses to the insurance system. A middle ground would be to allow the
deposit insurer to take such actions with the consent of the primary
supervisor.

A number of countries have adopted, or are considering adopting, certain
corrective measures that automatically take effect as the condition of
an insured institution deteriorates.[^9] Such measures, frequently known
as \"prompt corrective action,\" become progressively more severe as the
condition of the institution continues to deteriorate. Although the use
of automatic corrective measures tends to limit the flexibility to
intervene in a troubled institution, they can limit losses to the
insurance system.

Another issue that should be considered carefully in establishing any
deposit insurance scheme is whether, and under what circumstances, the
deposit insurer should intervene or participate in the restructuring of
a troubled institution. In some circumstances, it may be desirable to
restructure a troubled institution with direct financial assistance from
the deposit insurer in order to prevent the institution from failing.
Such financial assistance might take the form of loans or loan
guarantees from the deposit insurer to the troubled institution.
Alternatively, the deposit insurer could be granted the authority to
make direct equity investments in an insured institution that is in need
of financial assistance. If the deposit insurer is a government agency,
such assistance could be viewed as the government assisting one
private-sector enterprise at the expense of others and spreading
protection beyond deposits. Moreover, the deposit insurer may find it
difficult subsequently to determine the best possible time and price at
which to sell the equity investment, assuming the institution recovers.

**Resolutions**

If the deposit insurer has responsibility for arranging resolution
transactions, it will need a number of powers in addition to the
information requirements discussed above.[^10] Specifically, it will
need the legal authority to engage in the most appropriate resolution
method, including implementing purchase-and-assumption transactions,
establishing bridge banks, and facilitating open-bank assistance. Since
every financial institution is different, the deposit insurer should be
granted considerable flexibility in structuring resolution transactions.
Ideally, in such cases, the deposit insurer should be granted on-site
access to the records of the failing institution before its closure so
that the deposit insurer can become familiar with, and properly estimate
the value of, the assets and liabilities involved.

**Receivership and** **liquidation**

A deposit insurer that has responsibility for serving as a receiver or
liquidator of a failed institution has a fiduciary duty to try to obtain
as much value as possible from that institution. In order to maximise
recoveries on claims held in a failed institution, a deposit insurer
needs broad authority to acquire, manage and dispose of assets. In these
cases, the deposit insurer should have the authority to collect all
obligations due to the failed institution, sell or otherwise dispose of
its assets, administer the claims notification and review and
determination process, and deal with all contractual obligations and
pending litigation. In order to accomplish this, the law should provide
that the deposit insurer succeeds to all of the rights, titles, powers
and privileges of the institution. The deposit insurer also should be
able to hire outside experts whenever it lacks the expertise or
resources to manage or dispose of assets properly or otherwise carry out
its responsibilities as a receiver or liquidator.

**Supervision and regulation**

Few deposit insurers have direct supervisory and regulatory
responsibilities over insured institutions, although some have input
into the supervisory process. If, however, such responsibility is vested
in the deposit insurer, then it will need to have the authority to set
and enforce standards through regulations, policy statements, guidelines
and other similar pronouncements for the institutions it insures.
Examples of such standards include minimum capital standards,
limitations on loans to insiders, internal or external audit
requirements, as well as other prudential standards to maintain the
safety and soundness of insured institutions. In order to supervise
insured institutions properly, the deposit insurer should have the
authority to request and obtain detailed and timely information on any
aspect of their operations through either regular or special
examinations or audits as well as from reports filed by the
institutions.

A deposit insurer that serves as a supervisor and regulator of insured
institutions must have sufficient authority to enforce any rules setting
forth standards for insured institutions. For instance, if an
institution does not meet its minimum capital requirements or fails to
provide information requested promptly, the deposit insurer must have an
adequate mechanism to force compliance. This could be accomplished
through an informal administrative proceeding or through a more formal
judicial proceeding, although the latter is usually more time-consuming
and expensive. Vesting the deposit insurer with the authority to impose
monetary penalties, or to remove directors and officers of an insured
institution, under certain circumstances, may provide adequate
incentives for institutions to comply with any rules or directives
issued by the deposit insurer.

**Conclusions**

A deposit insurer must be vested with adequate powers and sufficient
legal authority to fulfil its public-policy objectives. There are
certain basic powers and legal authorities that all deposit insurers
need to ensure that they can meet their obligations to depositors in a
timely fashion and thus help maintain public confidence. Beyond these, a
deposit insurer needs all of the powers and legal authorities required
to meet its assigned responsibilities efficiently and effectively.

As noted above, deposit insurers have widely varying mandates and
responsibilities. Consequently, there is no single set of optimal powers
or authorities for all deposit insurers. Deposit insurers that function
as paybox systems do not need extensive powers. By contrast, deposit
insurers that directly supervise and regulate the institutions they
insure need a wide range of powers. Between these extremes are deposit
insurers that particpate in the resolution process and/or serve as the
receiver and liquidator of the assets of failed institutions. To perform
these functions effectively, deposit insurers need more powers than
those of a paybox system, but fewer than those of a full-fledged bank
supervisor or regulator. Providing the optimal legal framework and
powers for a new deposit insurer will help to ensure the stability of a
country's financial system.

[^1]: See discussion of the varying mandates, roles and responsibilites
    of deposit insurers in the paper on structure and organisation.

[^2]: The Subgroup on Powers is comprised of representatives from the
    United States (coordinator), Argentina, France, Hungary, Italy,
    Japan, and the International Monetary Fund. Members of the Subgroup
    contributed information on their deposit insurance systems for this
    paper.

[^3]: See paper on structure and organisation.

[^4]: Many different types of companies act as financial intermediaries
    throughout the world, including banks, savings associations, credit
    unions, finance companies, industrial loan companies, and postal
    savings institutions, among others. This issue is covered in the
    paper on membership.

[^5]: In 1991, in the United States, the U.S. Congress granted the
    deposit insurer independent authority to close any insured
    institution when certain conditions, as specified in the law, are
    satisfied. However, this authority is expected to be used rarely and
    only in very unusual circumstances.

[^6]: For a full discussion of this issue, see the paper on funding.

[^7]: See the paper on reimbursing depositors for a full discussion of
    the conditions necessary to establish an efficient reimbursement
    process.

[^8]: Examples of such steps include setting restrictions on asset
    growth and payment of dividends, and requiring changes in management
    or additional capital.

[^9]: Such corrective measures can include provisions that prevent
    institutions from taking certain actions without the express consent
    of the supervisor or the deposit insurer.

[^10]: In some countries, the deposit insurer is required to select the
    least-costly transaction method for resolving failed or failing
    institutions so as to minimise the losses to the insurance system.