FINANCIAL STAB ILITY FORUM 

7 September 2001 

GUIDANCE FOR DEVELOPING 

EFFECTIVE DEPOSIT INSURANCE 

SYSTEMS 
 

 

 

FINANCIAL STAB ILITY FORUM 

Preface 

At its March 2000 meeting in Singapore, the FSF endorsed the report of a study group and 

concurred that, in light of the fact that many countries were considering implementing some 

form of deposit insurance, it would be desirable to set out some form of international 

guidance. Forum members underscored that the development of such guidance should be 

undertaken through a consultative process that would include all the parties that are interested 

in deposit insurance issues, so as to ensure that the guidelines are reflective of, and adaptable 

to, the broadest set of circumstances, settings and structures. 

The Forum asked Jean-Pierre Sabourin, President and Chief Executive Officer of the Canada 

Deposit Insurance Corporation, to chair a working group that would carry out the task of 

setting out guidance for effective deposit insurance systems. The final report of the Working 

Group on Deposit Insurance was discussed and endorsed by the Forum in London, on 

September 7, 2001. 

The FSF report on deposit insurance is built on three general findings. First, explicit and 

limited deposit insurance is preferable to implicit coverage if it clarifies obligations to 

depositors and creditors and limits the scope for discretionary decisions. Second, deposit 

insurance systems must be properly designed, well implemented and understood to be credible 

and avoid moral hazard. Third, to be effective, the deposit insurance function needs to be part 

of a well-designed financial safety net, supported by strong prudential regulation and 

supervision, effective laws that are enforced, and sound accounting and disclosure regimes. 

The report proposes a general method for the benefit of countries considering the adoption or 

the reform of an explicit, limited-coverage deposit insurance system. It first presents the 

contextual issues related to different forms of depositor protection and identifies the issues 

that need to be addressed when adopting or reforming a deposit insurance system. It then 

sketches out the design features that help to ensure the effectiveness and credibility of a 

system, and finally outlines the key issues and considerations involved in resolution options, 

the reimbursement of depositors, and claims and recoveries. 

It is the conviction of the FSF that this report, with such a pragmatic approach, will serve its 

role as a useful tool for policy makers who want to design deposit insurance systems that 

preserve the benefits of heightened financial stability and small depositors' protection, without 

at the same time increasing moral hazard or reducing market discipline. 

Andrew Crockett 

Chairman 

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Table of Contents 

I. Executive Summary............................................................................................................4 

II. Introduction ........................................................................................................................6 

III. Contextual Issues for Deposit Insurance Systems ...........................................................8 

1. The role of the banking sector and the financial safety net ..................................................8 

2. Forms of depositor protection ..............................................................................................8 

3. Moral hazard.........................................................................................................................9 

IV. Processes for Adopting and Maintaining a Deposit Insurance System.......................12 

1. Public-policy objectives .....................................................................................................12 

2. Situational analysis and implementation considerations....................................................13 

(a) Economic factors, the state and structure of the banking system and public 

attitudes and expectations...........................................................................................13 

(b) The state of legal, prudential regulatory, supervisory, accounting and disclosure 

regimes........................................................................................................................14 

3. Transitioning from a blanket guarantee to a deposit insurance system..............................15 

4. Self-assessment methodology (SAM) ................................................................................16 

Figure 1 (SAM) ..................................................................................................................17 

V. Structure and Design Features........................................................................................18 

1. Mandates, powers and structure .........................................................................................18 

(a) Mandates and powers .................................................................................................18 

(b) Basic structure and operational issues.......................................................................19 

(c) Basic governance arrangements.................................................................................19 

(d) Human resources and statutory indemnification........................................................20 

2. Interrelationships among financial safety-net participants.................................................20 

3. Membership and coverage..................................................................................................21 

(a) Membership.................................................................................................................21 

(i) Compulsory membership........................................................................................21 

(ii) Considerations when granting membership to banks ............................................22 

(iii) Foreign banks.........................................................................................................22 

(iv) Non-bank financial institutions ..............................................................................23 

(v) State-owned banks..................................................................................................23 

(b) Coverage.....................................................................................................................23 

(i) Scope and level.......................................................................................................23 

(ii) Coinsurance............................................................................................................25 

(iii) Adjusting coverage limits .......................................................................................25 

(iv) Foreign-currency deposits......................................................................................26 

4. Funding...............................................................................................................................26 

(a) Funding on an ex-ante or ex-post basis......................................................................27 

(b) Issues related to the establishment and size of a deposit insurance fund...................28 

(c) Deposit insurance assessments: flat-rate versus risk-adjusted differential 

premium systems .........................................................................................................28 

5. Public awareness ................................................................................................................29 

Box: Cross-Border Issues...........................................................................................................31 

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Vl. Resolutions, Reimbursements, Claims and Recoveries.................................................32 

1. Private-sector solutions ......................................................................................................32 

2. Resolving troubled banks...................................................................................................33 

(a) Options........................................................................................................................33 

(i) Liquidation and reimbursement of depositors’ claims...........................................33 

(ii) Purchase-and-assumption transactions (sales)......................................................33 

(iii) Open-bank financial assistance..............................................................................34 

(b) Costs and other considerations...................................................................................34 

3. Reimbursing depositors......................................................................................................35 

(a) Conditions for effective reimbursement......................................................................35 

(b) Eligibility for coverage ...............................................................................................35 

(c) Procedures for reimbursing depositors ......................................................................36 

(d) Payments to depositors ...............................................................................................36 

4. Claims and recoveries.........................................................................................................37 

(a) General issues.............................................................................................................37 

(b) Asset-management and disposition strategies ............................................................37 

(c) Marketing methods......................................................................................................38 

(d) Claims and litigation ..................................................................................................38 

5. Depositor ranking, collateralisation and rights of set-off...................................................39 

(a) Depositor ranking .......................................................................................................39 

(b) Collateralisation .........................................................................................................39 

(c) Rights of set-off ...........................................................................................................40 

VII. Key Points of Guidance....................................................................................................41 

Annex I: Members of the Working Group.................................................................52 

Annex II: Approach to Developing Discussion Papers .............................................53 

Annex III: Organisations that Assisted the Working Group ...................................56 

Glossary of Terms.........................................................................................................58 

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I. Executive Summary 

The Financial Stability Forum’s Working Group on Deposit Insurance has developed guidance 

for the benefit of countries considering the adoption or the reform of an explicit, limitedcoverage deposit insurance system (hereinafter referred to in this Report as “a deposit 

insurance system”). The guidance was developed through the preparation of a series of 

discussion papers and a consultative process that involved over 100 countries. In developing 

guidance, the Working Group drew heavily on the practical experience of its members and 

other countries. Thus, the guidance is reflective of, and designed to be adaptable to, a broad 

range of country circumstances, settings and structures. 

The principal objectives of a deposit insurance system are to contribute to the stability of a 

country’s financial system and to protect less-financially-sophisticated depositors from the 

loss of their deposits when banks fail. There are a variety of options available for achieving 

these objectives. 

A deposit insurance system is preferable to implicit protection if it clarifies the authorities’ 

obligations to depositors and limits the scope for discretionary decisions that may result in 

arbitrary actions. To be credible, however, and to avoid distortions that may result in moral 

hazard, such a system needs to be properly designed, well implemented and understood by the 

public. A deposit insurance system needs to be part of a well-designed financial safety net, 

supported by strong prudential regulation and supervision, effective laws that are enforced, 

and sound accounting and disclosure regimes. 

The first step in adopting a deposit insurance system or reforming an existing system is to 

specify appropriate public-policy objectives and to ensure that their implications are fully 

understood. In conjunction with identifying public-policy objectives, policymakers will need 

to assess a large variety of conditions and factors that can have a bearing on the design of the 

system. This self-assessment process is referred to in this Report as a situational analysis. 

Conditions and factors that should be taken into consideration include: the state of the 

economy, current monetary and fiscal policies, the state and structure of the banking system, 

public attitudes and expectations, the strength of prudential regulation and supervision, the 

legal framework, and the soundness of accounting and disclosure regimes. In many cases, 

country conditions may not be ideal and, therefore, it is important to identify gaps between 

existing conditions and more-desirable situations and thoroughly evaluate available options, 

since the establishment of a deposit insurance system is not a remedy for dealing with major 

deficiencies. 

Countries transitioning from a blanket guarantee to a deposit insurance system should 

undertake the same type of situational analysis as countries moving from implicit protection. 

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The transition from a blanket guarantee should be as rapid as the country’s circumstances 

permit; since adjustment can become more difficult the longer it is in place. Public awareness 

plays a particularly important role in enabling a smooth transition. 

After the self-assessment process has been completed, policymakers should turn their attention 

to specific deposit insurance system design features. The starting point should be to address 

the mandates, powers and basic organisational structure of the deposit insurer. Although no 

single set of mandates, powers and structures is suitable in all circumstances, those elements 

should be well defined, understood, and consistent with public-policy objectives, and there 

should be clear oversight and accountability for the system. It also is critical to address 

explicitly interrelationship issues among safety-net participants by specifying clear mandates, 

effective information exchange, confidentiality of information, and close coordination of the 

activities relevant to the deposit insurer. 

Policymakers then should consider membership and coverage issues. Explicit eligibility rules 

should exist and be transparent, and membership generally should be compulsory. When 

deciding on the scope and level of coverage, policymakers should consider the relative 

importance of different deposit instruments in relation to stated public-policy objectives and 

the effect that the level of coverage may have on moral hazard. The level of coverage can then 

be set through an examination of relevant data from banks. 

Deposit insurance systems need to have access to adequate funds in order to reimburse 

depositors promptly. The characteristics of the system and its benefits and limitations should 

be publicised regularly so that its credibility can be maintained and strengthened. 

There are a variety of methods available to safety-net participants for resolving failed banks or 

to deal with banks that are in danger of failing. The methods are: liquidation and 

reimbursement of depositors’ claims, purchase-and-assumption transactions and open-bank 

financial assistance. Asset-management and disposition strategies should be guided by 

commercial considerations and their economic merits. 

Finally, the Working Group recommends that a continuous-improvement process be instituted 

for reviewing the extent to which a deposit insurance system is meeting its objectives. In this 

way, a country can ensure that its deposit insurance system remains consistent with economic 

and social conditions and lessons learned, and is better able to deal with evolving challenges. 

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II. Introduction 

The Financial Stability Forum (FSF) was created in 1999 to promote international financial 

stability, to improve the functioning of markets, and to reduce systemic risk. In recognition of 

the increasing use of deposit insurance as an integral component of an effective financial 

safety net, the FSF established a Study Group on Deposit Insurance. The Study Group was 

asked to assess the desirability and feasibility of setting out international guidance on deposit 

insurance arrangements. The Study Group’s report was tabled at a meeting of the FSF in 

March 2000. On the basis of the conclusions in that report, the FSF invited Mr. Jean Pierre 

Sabourin, President and Chief Executive Officer, Canada Deposit Insurance Corporation, to 

constitute a Working Group on Deposit Insurance (the Working Group) to develop such 

guidance and to deliver a final report to the FSF by September 2001.1 

The mandate of the Working Group was to develop guidance on sound deposit insurance 

arrangements for countries considering the adoption of a deposit insurance system or the 

reform of an existing one. The mandate specified that such guidance should be developed 

through a consultative process that included countries interested in deposit insurance issues. 

The guidance was to be reflective of, and adaptable to, the broadest set of circumstances, 

settings and structures. 

In fulfilling its mandate the Working Group engaged in a wide range of activities. These 

included: the publication of a series of business plans and discussion papers on specific 

issues2

, outreach sessions, seminars, conferences, utilisation of a Web site to solicit feedback 

and share knowledge, and the production of this Final Report. The discussion papers identified 

critical issues associated with adopting an explicit, limited-coverage deposit insurance system 

or with reforming an existing one. The Working Group met with over 400 people from over 

100 countries and they have been kept fully informed about the development of the guidance 

topics. 

1 The Working Group was comprised of representatives from Argentina, Canada, Chile, France, Germany, 

Hungary, Italy, Jamaica, Japan, Mexico, Philippines, the United States of America, the World Bank and the 

International Monetary Fund (cf Annex I). The approach that the Working Group used to develop discussion 

papers on the guidance topics and the techniques used in the outreach activities are set out in Annex II. Annex III 

contains the organisations and countries involved in the outreach sessions, seminars and conferences. A glossary 

of terms used in this report can be found at the end of this document. A separate volume to this report (Volume 

II), which can be downloaded from the the Internat at the following Web site address 

(www.cdic.ca/international),includes the research plan, the discussion papers on the 16 guidance topics, a 

bibliography and additional information on the outreach activities. 

2 Readers should consult the discussion papers for a more in-depth examination of the topics presented in this 

report. 

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This report is organised as follows. Section III explores the contextual issues related to forms 

of depositor protection. Section IV sets out the issues and processes that need to be addressed 

when adopting or reforming a deposit insurance system. Section V presents the design features 

that help to ensure the effectiveness and credibility of a system. Section VI outlines the key 

issues and considerations involved in resolution options, the reimbursement of depositors, and 

claims and recoveries. The final section summarises the key guidance points. 

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III. Contextual Issues for Deposit Insurance Systems 

This section discusses issues that policymakers should consider when adopting or reforming a 

deposit insurance system. The first part examines the role of the banking sector and the 

financial safety net. Next, there is a discussion on the forms depositor protection can take in 

different countries. The last part focuses on how the financial safety-net participants can 

mitigate moral hazard. 

1. The role of the banking sector and the financial safety net 

Financial institutions that accept deposits from the public (hereinafter referred to as banks) are 

important in the economy because of their involvement in the payments system, their role as 

intermediaries between depositors and borrowers, and their function as agents for the 

transmission of monetary policy. Banks are in the business of assuming and managing risks. 

By their nature, banks are vulnerable to liquidity and solvency problems, among other things, 

because they transform short-term liquid deposits into longer-term, less-liquid loans and 

investments. They also lend to a wide variety of borrowers whose risk characteristics are not 

always readily apparent. 

The importance of banks in the economy, the potential for depositors to suffer losses when 

banks fail, and the need to mitigate contagion risks, lead countries to establish financial safety 

nets. A financial safety net usually includes prudential regulation and supervision, a lender of 

last resort and deposit insurance. The distribution of powers and responsibilities between the 

financial safety-net participants is a matter of public-policy choice and individual country 

circumstances. For example, some countries incorporate all financial safety-net functions 

within the central bank, while others assign responsibility for certain functions to separate 

entities. 

2. Forms of depositor protection 

Policymakers have many choices regarding how they can protect depositors. Some countries 

have implicit protection that arises when the public, including depositors and perhaps other 

creditors, expect some form of protection in the event of a bank failure. This expectation 

usually arises because of the government’s past behaviour or statements made by officials. 

Implicit protection is, by definition, never formally specified. There are no statutory rules 

regarding the eligibility of bank liabilities, the level of protection provided or the form which 

reimbursement will take. By its nature, implicit protection creates uncertainty about how 

depositors, creditors and others will be treated when bank failures occur. Funding is 

discretionary and often depends on the government’s ability to access public funds. Although 

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a degree of uncertainty can lead some depositors to exert greater effort in monitoring banks, it 

can undermine stability when banks fail. 

Statutes or other legal instruments usually stipulate explicit deposit insurance systems. 

Typically, there are rules governing insurance coverage limits, the types of instruments 

covered, the methods for calculating depositor claims, funding arrangements and other related 

matters. A deposit insurance system is preferable to implicit protection if it clarifies the 

authorities’ obligations to depositors and limits the scope for discretionary decisions that may 

result in arbitrary actions. A deposit insurance system can also provide countries with an 

orderly process for dealing with bank failures. 

The introduction of a deposit insurance system can be more successful when a country’s 

banking system is healthy. A deposit insurance system can contribute effectively to the 

stability of a country’s financial system if it is part of a well-designed safety net. To be 

credible, a deposit insurance system needs to be properly designed, well implemented and 

understood by the public. It also needs to be supported by strong prudential regulation and 

supervision, sound accounting and disclosure regimes, and the enforcement of effective laws. 

A deposit insurance system can deal with a limited number of simultaneous bank failures, but 

cannot be expected to deal with a systemic banking crisis by itself. 

3. Moral hazard 

A well-designed financial safety net contributes to the stability of a financial system; however, 

if poorly designed, it may increase risks, notably moral hazard. Moral hazard refers to the 

incentive for excessive risk taking by banks or those receiving the benefit of protection. Such 

behaviour may arise, for example, in situations where depositors and other creditors are 

protected, or believe they are protected, from losses or when they believe that a bank will not 

be allowed to fail. In these cases, depositors have less incentive to access the necessary 

information to monitor banks. As a result, in the absence of regulatory or other restraints, 

weak banks can attract deposits for high-risk ventures at a lower cost than would otherwise be 

the case. 

Moral hazard can be mitigated by creating and promoting appropriate incentives through good 

corporate governance and sound risk management of individual banks, effective market 

discipline and frameworks for strong prudential regulation, supervision and laws. These 

elements involve trade-offs and are most effective when they work in concert. 

Good corporate governance and sound risk management of individual banks help to ensure 

that business strategies are consistent with safe-and-sound operations, and thus can act as the 

first line of defence against excessive risk taking. Good corporate governance and sound risk 

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management includes standards, processes, and systems for ensuring appropriate direction and 

oversight by directors and senior managers, adequate internal controls and audits, management 

of risks, the evaluation of bank performance, the alignment of remuneration with appropriate 

business objectives, and management of capital and liquidity positions. 

Moral hazard can be mitigated by market discipline exercised by shareholders as well as by 

larger creditors and depositors who are exposed to the risk of loss from the failure of a bank. 

However, for market discipline to work effectively, these groups must have the knowledge 

required to assess the risks they face. Information should be readily available and be generally 

understandable by the public. Sound accounting and disclosure regimes are required, as well 

as ongoing attention to a bank’s soundness by ratings agencies, market analysts, financial 

commentators and other professionals. 

Many countries rely heavily on prudential regulatory and supervisory discipline to mitigate 

moral hazard and control excessive risk taking. Regulatory discipline can be exercised through 

sound and effective regulations covering the establishment of new banks, the implementation 

of minimum capital requirements, the qualifications of directors and managers, soundbusiness activities, fit-and-proper tests for controlling shareholders, standards for risk 

management, strong internal controls, and external audits. Supervisory discipline can be 

exercised by ensuring that banks are monitored for safety and soundness as well as 

compliance issues and that corrective actions are taken promptly when problems surface, 

including the closure of banks when necessary. 

Specific deposit insurance design features can also mitigate moral hazard. These features may 

include: placing limits on the amounts insured; excluding certain categories of depositors from 

coverage; using certain forms of coinsurance; implementing differential or risk-adjusted 

premium assessment systems; minimising the risk of loss through early closure of troubled 

banks; and demonstrating a willingness to take legal action, where warranted, against directors 

and others for improper acts. 

Many of the methods used to mitigate moral hazard require certain conditions to be in place. 

For example, differential or risk-adjusted differential premium assessment systems may be 

difficult to design and implement in new systems and in emerging or transitional economies. 

Early intervention, prompt corrective action and, when warranted, bank closure require that 

supervisors and deposit insurers have the necessary legal authority, in-depth information on 

bank risk, financial resources, and incentives to take effective action. Personal-liability 

provisions and availability of sanctions can reinforce incentives of bank owners, directors, and 

managers to control excessive risk, but they depend on the existence of an effective legal 

system that provides the necessary basis for action against inappropriate behaviour. 

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Policymakers should consider a country’s conditions and factors that may determine the 

effectiveness of particular measures for mitigating moral hazard, the commitment and the 

ability to implement them, and the advancement of a reform agenda to eliminate gaps that may 

limit their effectiveness. 

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IV. Processes for Adopting and Maintaining a Deposit Insurance System 

This section sets out the general policy issues and processes that need to be addressed when 

adopting or reforming a deposit insurance system. The discussion begins with a focus on the 

public-policy objectives of a deposit insurance system. It is then suggested that policymakers 

conduct a situational analysis to guide their deliberations. Some special issues related to 

transitioning from a blanket guarantee to a deposit insurance system are discussed in the 

penultimate part of this section. In the final part, a six-step iterative self-assessment 

methodology is presented. 

1. Public-policy objectives 

The first step in designing a deposit insurance system is to identify the public-policy 

objectives that it is expected to achieve and these objectives must be well understood. The 

principal objectives for deposit insurance systems are to contribute to the stability of the 

financial system and to protect less-financially-sophisticated depositors. Although the 

determination of such objectives is the responsibility of governments, the private sector can 

play a role in their achievement. The choice of how a deposit insurance system is to be 

operated depends on many factors that are unique to each country and its governmental and 

financial systems. 

A well-designed and well-understood deposit insurance system contributes to the stability of a 

country’s financial system by reducing the incentives for depositors to withdraw their insured 

deposits from banks because of a loss of confidence. Policymakers should ensure that the 

authorities and the public view all components of the deposit insurance system as credible. 

The level and scope of coverage, the speed with which insured deposits are repaid, and the 

credibility of the underlying guarantee will affect the deposit insurance system’s ability to 

enhance the stability of the financial system. Public attitudes and expectations play a 

particularly important role in reinforcing the credibility and the effectiveness of a deposit 

insurance system. 

Deposit insurance protects insured depositors against the consequences associated with the 

failure of a bank but it is not designed to protect banks from failing. The provision of deposit 

insurance relieves insured depositors of the difficult tasks of monitoring and assessing the 

condition of banks and their asset quality. At the same time, deposit insurance contributes to 

the maintenance of confidence, so that less-financially-sophisticated depositors, or those who 

find it hard to assess the financial condition of a bank, are less likely to participate in bank 

runs. 

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A continuous-improvement process should exist for reviewing the extent to which a deposit 

insurance system is meeting its public-policy objectives and its mandate. Also, the 

appropriateness of the mandate, powers and elements that make up a deposit insurance system 

should be periodically reviewed. In this way, countries can ensure that their deposit insurance 

arrangements remain consistent with economic and social conditions and lessons learned, and 

that financial safety-net participants are better able to deal with the challenges they may 

encounter. 

2. Situational analysis and implementation considerations 

In conjunction with the identification of public-policy objectives, policymakers should 

conduct a situational analysis to guide their decision-making. Among the conditions and 

factors that should be taken into consideration are: the level of economic activity; current 

monetary and fiscal policies; the state and structure of the banking system; public attitudes and 

expectations; the legal framework; prudential regulatory, supervisory, accounting and 

disclosure regimes. Where existing conditions and factors are not ideal, it is important to 

identify gaps and thoroughly evaluate the options available since the establishment of a 

deposit insurance system is not a remedy for dealing with major deficiencies. If actions are 

necessary, they can be taken before, or in concert with, the adoption or reform of a deposit 

insurance system. 

(a) Economic factors, the state and structure of the banking system and public attitudes 

and expectations 

The establishment of a deposit insurance system is more difficult if underlying issues relating 

to the stability of the financial system have not been addressed. Policymakers should 

undertake an analysis of conditions and factors such as the level of economic activity, current 

monetary and fiscal policies, inflation and the condition of financial markets. These conditions 

and factors affect the banking system and will influence the effectiveness of a deposit 

insurance system. A situational analysis also requires an assessment of the soundness of the 

banking system, including a detailed evaluation of the condition of banks’ capital, liquidity, 

credit quality, risk-management policies and practices, and the extent of any problems. When 

problems exist, an assessment should be made as to whether they are confined to individual 

banks or are systemic in nature. 

The number, type and characteristics of banks will have design implications for a deposit 

insurance system and so the structure of the banking system should be analysed. Policymakers 

also may need to examine the extent of competition, concentration, and the degree of state 

ownership as well as state direction. The issue of concentration is of growing importance for 

deposit insurance systems given the globalisation of capital markets and financial industry 

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consolidation. For example, in a concentrated system the capacity of a deposit insurance 

system to fund or cope with the failure of a large and complex bank may be problematic. 

When resource distribution and credit decisions are directed mainly by the state, the state is 

viewed as being responsible for the results of such operations. Deposits in such systems 

generally are perceived as having a full government guarantee. 

It is advisable to undertake an analysis of public attitudes and expectations before adopting or 

reforming a deposit insurance system. If there are significant gaps between expectations and 

planned systems or reforms, they will need to be addressed through greater public awareness. 

Public awareness plays a particularly important role in enhancing the credibility and the 

effectiveness of a deposit insurance system. 

(b) The state of legal, prudential regulatory, supervisory, accounting and disclosure 

regimes 

It is important for policymakers to assess the state of legal, prudential regulatory and 

supervisory, accounting and disclosure regimes. Policymakers have a wider range of options 

available for designing a deposit insurance system if these regimes are robust. 

A critical element of a sound legal regime is the ability to enforce laws. Deposit insurance 

systems cannot be effective if relevant laws do not exist or if the legal regime is characterised 

by inconsistencies. The situational analysis should focus on the level of enforcement, the 

efficiency of the judicial system, and the effectiveness of creditors’ redress mechanisms. 

Additional factors that should be considered include: the ability of a legal regime to support 

early intervention and prompt corrective action, the ability to close troubled banks promptly, 

and provisions for the clear and orderly liquidation of assets and resolution of creditors’ 

claims. 

The strength of prudential regulation and supervision will have implications for the 

effectiveness of a deposit insurance system. Strong prudential regulation and supervision 

should allow only viable banks to operate. Banks should be well capitalised and follow soundand-prudent risk management, governance and other business practices. Other characteristics 

include an effective licensing or chartering regime for new banks, regular and thorough 

examinations, and the risk assessment of individual banks. 

Sound accounting and financial reporting regimes are necessary for an effective deposit 

insurance system. Accurate, reliable and timely information reported by these regimes can be 

used by management, depositors, the marketplace, and authorities to make decisions regarding 

the risk profile of a bank, and thereby increase market, regulatory and supervisory discipline. 

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Attributes of a sound accounting regime include accurate and meaningful assessments of 

information in areas such as asset valuation, the measurement of credit exposures, loan-loss 

provisioning, measurement of nonperforming loans, the treatment of unrealised losses, offbalance-sheet exposures, capital adequacy, and bank earnings and profitability. In many 

countries, increased market discipline has been fostered by the adoption of sound and prudent 

accounting principles and practices, and methods to ensure compliance with agreed-upon 

accounting conventions. 

Comprehensive disclosure regimes also enhance the effectiveness of a deposit insurance 

system. This can be accomplished by requiring banks to release timely, detailed and useful 

financial information so the market can assess the performance of a bank. 

3. Transitioning from a blanket guarantee to a deposit insurance system 

Some countries have introduced an explicit blanket guarantee during a financial crisis to fully 

protect all bank depositors and creditors. The provision of such guarantees may be 

unavoidable in periods of extreme financial distress to maintain domestic and international 

confidence in the banking system. However, blanket guarantees can have a number of adverse 

effects if retained too long, notably an increase in moral hazard. If a country decides to 

transition from a blanket guarantee to a deposit insurance system, the transition should be as 

rapid as a country’s circumstances permit. 

A country considering transitioning from a blanket guarantee to a deposit insurance system 

should undertake the same type of situational analysis as a country moving from implicit 

protection. In addition, countries transitioning from a blanket guarantee will need to consider 

three special issues. 

The first issue arises from the fact that protection for depositors and other creditors is being 

reduced. This may present a concern to the public. Therefore, policymakers should pay 

particular attention to public attitudes and expectations. In addition, countries with a high 

level of capital mobility, and/or a regional integration policy, should consider the effects of 

different countries’ protection levels and other related policies. 

Second, policymakers should consider the capacity of the banking system to fund a new 

deposit insurance system. The final issue concerns how fast the transition should proceed. 

Some countries have implemented so-called fast-track transitions successfully soon after the 

crisis has passed. These are countries that have restored the banking system to financial health 

rapidly; and where strong prudential regulation and supervision, effective legal frameworks, 

and sound accounting and disclosure regimes were already in place. When a fast-track 

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approach is adopted, policymakers should consider phase-in provisions such as continuing to 

protect deposits with maturities extending beyond the expiration date of a blanket guarantee. 

In other countries, the implementation of a blanket guarantee has been associated with a 

comprehensive post-crisis bank restructuring strategy and measures to improve prudential 

regulation and supervision, the legal framework, and the accounting and disclosure regimes. 

This has implications both for the length of time that the blanket guarantee needs to stay in 

place and for the speed of the transition. The gradual removal of a blanket guarantee allows 

banks time to adjust to new prudential standards. In addition, a gradual transition permits bank 

managers to be trained in a risk-management culture and gives depositors time to become 

accustomed to the new arrangements. A major disadvantage, however, is that the transition 

period might be perceived as being too long, raising doubts among depositors and creditors 

about the government’s commitment to withdraw the blanket guarantee. In addition, the 

longer the blanket guarantee remains in place, the more likely it is to give rise to additional 

moral hazard. 

4. Self-assessment methodology (SAM) 

In its outreach sessions the Working Group suggested that policymakers use an iterative “selfassessment methodology” as a tool to design, implement, modify and continually assess a 

deposit insurance system. The six-step methodology presented below allows policymakers to 

begin from general principles and then modify, as appropriate, the specific design features to 

meet their own country’s needs. 

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Figure 1 (SAM) 

1. Setting out the public-policy objectives. The process begins with an articulation of the relevant public-policy objectives to 

be attained. This analysis should take into account the conditions and factors that are present in a given country. A publicpolicy paper should outline the mandate and the role that the deposit insurer is expected to achieve within the financial safety 

net and set out the key attributes and important elements of the system. 

2. Situational analysis of conditions and factors. The analysis should consider: economic factors, current monetary and 

fiscal policies, the state and structure of the banking system, public attitudes and expectations, the state of the legal, prudential 

regulatory and supervisory, and the accounting and disclosure regimes. The analysis should expose the strengths, weaknesses, 

opportunities and threats of the system and identify the changes required in constructing a deposit insurance system. 

3. Validation. A review and validation process of the proposed public-policy objectives, key attributes and important 

elements should be undertaken and adjustments made if necessary. 

4. Strategic action plan. A strategic action plan should be developed after the validation phase has been completed This plan 

should set out the goals and their priorities, time frames, critical paths, communication strategies, and consultative processes. 

It should define how the deposit insurance system will be made operational and how it will deal with transitional issues. 

When transitioning from a blanket guarantee, care must be taken to ensure that the banking system is not disrupted. 

Policymakers should have contingency plans to deal with any adverse developments. It is critical that the public understand 

the planned changes and the time frame for completion. 

5. Implementation and acceptance phase. Implementation and other changes should be supported by mechanisms to track 

progress and identify required adjustments. The purpose of this phase is to make the system operational and deal with 

transitional issues. For example, appropriate corporate governance arrangements (the governing body, senior management, 

internal controls, and an accountability regime) will need to be put in place. Also, budgets, funding, and access to information, 

including information-exchange arrangements, will need to be addressed at the outset. 

6. Ongoing evaluations and validation. Ongoing evaluation and validation is needed to ensure the effectiveness of a deposit 

insurance system, and to make changes when required. This continuous-improvement process should incorporate new 

developments in the financial system and the lessons learned at home and abroad. Deposit insurance systems should be 

reviewed in a timely fashion. Benchmarking against core principles, guidelines and best practices enhances the continuousimprovement process. 

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V. Structure and Design Features 

This section focuses on the structure and design features of a deposit insurance system. After 

policymakers have completed a situational analysis, as part of a self-assessment process, 

attention should turn to issues such as the mandate, powers and structure of the deposit 

insurance system. In recognition of the interconnectedness of a deposit insurance system with 

the other safety-net functions, it is critical to address interrelationship issues among financial 

safety-net participants. Once those issues have been addressed, design features such as 

membership, coverage, funding and public awareness can be considered. At the end of this 

section there is a discussion of cross-border deposit insurance issues. 

1. Mandates, powers and structure 

(a) Mandates and powers 

A mandate is a set of official instructions or statement of purpose. There is no single mandate 

or set of mandates suitable for all deposit insurers. Existing deposit insurers have mandates 

ranging from narrow, so-called “paybox” systems to those with broader powers and 

responsibilities, such as risk-minimisation, with a variety of combinations in between. 

Whatever the mandate selected, it is critical that there be consistency between the stated 

objectives and the powers and responsibilities given to the deposit insurer. 

Paybox systems largely are confined to paying the claims of depositors after a bank has been 

closed. Accordingly, they normally do not have prudential regulatory or supervisory 

responsibilities or intervention powers. Nevertheless, a paybox system requires appropriate 

authority, as well as access to deposit information and adequate funding, for the timely and 

efficient reimbursement of depositors when banks fail. 

A “risk-minimiser” deposit insurer has a relatively broad mandate and accordingly more 

powers. These powers may include: the ability to control entry and exit from the deposit 

insurance system, the ability to assess and manage its own risks, and the ability to conduct 

examinations of banks or request such examinations. Such systems also may provide financial 

assistance to resolve failing banks in a manner that minimises losses to the deposit insurer. 

Some risk-minimisation systems have the power to set regulations, as well as to undertake 

enforcement and failure-resolution activities. 

Formally specifying the mandate of a deposit insurer (either in law, in a formal policy 

statement, an agreement, or by private contract) clarifies the role of deposit insurance within 

the financial safety net. Clarity of the mandate reinforces the stability of the financial system 

and contributes to sound governance and greater accountability. 

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As a general principle, a deposit insurer should have all powers necessary to fulfil its mandate. 

All deposit insurers require the ability to enter into contracts, set appropriate requirements, 

and access timely and accurate information to ensure that they can meet their obligations to 

depositors promptly. 

(b) Basic structure and operational issues 

Regardless of the scope of a deposit insurer’s mandate, there are certain structural and 

operational issues that must be addressed. One of the first tasks is to determine whether the 

deposit insurance function should be assigned to an existing organisation or whether a 

separate entity should be established. 

Assigning the deposit insurance function to an existing entity, (for example adding a 

department to a central bank), has the advantage of allowing the deposit insurer to draw on 

staff resources and skills from the larger organisation. However, this approach also has 

drawbacks. The primary disadvantage is that a larger organisation may have difficulties 

separating its other responsibilities and interests from the deposit insurance function. Whether 

or not the deposit insurer is a separate organisation, it is vitally important to set clearly the 

responsibility and accountability of each safety-net function. 

(c) Basic governance arrangements 

There are a variety of forms of governance that can be used by a deposit insurance system. The 

form of governance utilised should reflect the mandate and the degree to which the deposit 

insurer is legally separated from the other financial safety-net participants. 

The governing body of the deposit insurance system should include individuals with the 

requisite knowledge who understand the organisation’s activities as well as the environment in 

which it operates, and they should have the authority to make decisions. The deposit insurer 

should have access to the input and views of the other safety-net participants and relevant 

interested parties. Members of the governing body and management of the deposit insurer 

should be subject to a fit-and-proper test, and they should be free from conflicts of interest. 

Governance systems and practices should be developed on the basis of sound strategic 

planning, risk-management processes, and good internal control and audit systems. The 

governance structure should be transparent and subject to clear oversight and accountability. 

Rules specifying corporate governance practices should be developed. 

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(d) Human resources and statutory indemnification 

The ability to attract and retain qualified employees is a key challenge for most deposit 

insurers. Indeed, a lack of skilled staff, capable of dealing with the complex and rapidly 

evolving issues that characterise periods of financial stress, has increased costs for a number 

of governments and deposit insurers. 

Several approaches have been employed to ensure the availability of qualified people to meet 

the operational objectives of deposit insurance systems. They include the use of dedicated 

resources, access to the resources of other financial safety-net participants and/or reliance on 

outside service providers. 

The importance of statutory indemnification should be recognised and employees should 

receive legal protection against lawsuits for their actions taken in good faith. The lack of legal 

protection for employees can reduce incentives to be vigilant in carrying out their 

responsibilities, particularly in cases where mandates emphasise early detection, intervention 

and closure of troubled banks. 

2. Interrelationships among financial safety-net participants 

Policymakers should address the deposit insurer’s relationships and coordination with the 

other safety-net participants. A need for close coordination exists in any institutional setting 

and information sharing among safety-net participants is essential. 

When a single organisation performs all of the safety-net functions the smooth resolution of 

potential tensions is dependent on clarity of mandates and an adequate accountability regime 

among the relevant departments. However, when the functions are assigned to different 

organisations, issues related to information sharing, allocation of powers and responsibilities, 

and coordination of actions among different functions are more complex and need to be 

addressed clearly and explicitly. 

The supervisory authority usually is the primary source of information on banks. In order to 

ensure that the deposit insurer obtains the information it needs, while minimising reporting 

burdens on banks, it is important to closely coordinate the collection and sharing of 

information. Depending on the breadth of their individual mandates, deposit insurers may 

need to supplement information provided by supervisors with information collected directly 

from banks. 

A deposit insurer’s information needs vary significantly according to its mandate and powers. 

All deposit insurers need information to be able to reimburse depositors’ claims when 

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necessary, including information on the amount of insured deposits held by individual 

depositors. A deposit insurer should have ready access to specific information related to 

banks’ deposit base, including the amount of insured and total deposits, so that plans for 

resources and funding needs can be developed. Accordingly, guidelines may need to be issued 

to ensure that banks maintain and safeguard appropriate records. 

A deposit insurer with a risk-minimisation mandate must have access to timely and accurate 

information so that it can assess the financial condition of individual banks, as well as the 

banking industry. It also must anticipate the financial troubles of individual banks and deal 

with them effectively when they arise. The deposit insurer also needs information regarding 

the value of the bank’s assets and the expected time frame for the liquidation process, given 

that the value of a bank’s assets depends, in part, on the time necessary to liquidate them. 

Although informal arrangements for information sharing and coordination can work well, 

clearly specified agreements are highly desirable, given the sensitivity of bank-specific 

information and the need to maintain confidentiality. The challenge of maintaining open 

communication channels suggests that it may be useful to formalise these arrangements either 

through legislation, memoranda of understanding, legal agreements, or a combination of these 

techniques. These arrangements also may be useful in providing a general framework for 

safety-net participants to coordinate their related activities. Rules regarding confidentiality of 

information should apply to all safety-net participants. 

3. Membership and coverage 

This subsection deals with specific design features, such as which institutions should be 

eligible for membership, what financial instruments should be covered, and the level of 

coverage. A number of different factors should be taken into consideration to determine which 

financial institutions should be members of a deposit insurance system. Of particular 

importance is whether they are subject to strong prudential regulation and supervision. 

Explicit eligibility rules for membership should exist and membership should be compulsory, 

in most circumstances. In addition, it is important to define clearly in law or private contract 

what is an insurable deposit. 

(a) Membership 

(i) Compulsory membership 

In general, membership should be compulsory to avoid adverse selection. There are some 

cases, however, where a strong commitment of banks to participate in a deposit protection 

system can be observed and broad participation of banks may be achieved without a legal 

obligation. This can occur if depositors are aware of and sensitive to the existence of deposit 

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insurance, thus creating strong incentives for banks to be part of a system. In other cases, if 

depositors are less concerned about deposit insurance or are not aware that coverage is limited 

to certain banks, then the stronger banks may opt out. Further, in a voluntary system strong 

banks may opt out if the cost of failures is high and this may affect the financial solvency and 

the effectiveness of a deposit insurance system. 

(ii) Considerations when granting membership to banks 

There are two circumstances that may require different approaches to granting membership to 

banks. First, when a deposit insurance system is established and second, when membership is 

granted to new banks in an existing system. 

When a deposit insurance system is created, policymakers are faced with the challenge of 

minimising the risks to the deposit insurer, while granting extensive membership. Generally, 

two options are available: automatic membership or requiring banks to apply for entry. 

Automatic membership for all banks may be the simplest option in the short term. However, 

the deposit insurer may then be faced with the difficult task of having to accept banks that 

create an immediate financial risk or that pose other adverse consequences for the deposit 

insurance system. 

Alternatively, banks may be required to apply for membership. This option provides the 

deposit insurer with the flexibility to control the risks it assumes by establishing entry criteria. 

It also can serve to enhance compliance with prudential requirements and standards. In such 

cases, an appropriate transition plan should be in place that details the criteria, process and 

time frame for attaining membership. The criteria should be transparent. 

The way that policymakers grant membership in existing deposit insurance systems varies. In 

some countries, the licensing or chartering of new banks and the granting of membership in a 

deposit insurance system are separate functions of different safety-net participants. In other 

countries the relevant safety-net participants jointly approve new members and in others, 

membership is automatic with the issuance of a bank charter or license. Whichever option is 

chosen, appropriate mechanisms are necessary to ensure that membership requests are handled 

expeditiously and effectively, and that eligible banks meet minimum prudential standards and 

entry requirements. 

(iii) Foreign banks 

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Although domestically incorporated or chartered banks are the principal members of most 

deposit insurance systems, some countries require foreign-bank subsidiaries and branches to 

participate in the system as well. Several arguments are made for their inclusion: the stability 

of the domestic financial system; the goal of providing a minimum level of deposit insurance 

to all depositors; the notion that foreign banks benefit from a stable domestic financial system 

and should therefore participate in the deposit insurance system as part of doing business in a 

country; the desire to minimise competitive issues by placing foreign banks on the same 

footing as domestic banks; and the diversification that arises from wider membership and 

expansion of the funding base. 

(iv) Non-bank financial institutions 

Policymakers take different approaches to non-bank financial institutions that offer deposits 

and deposit-like products. The rationales for expanding membership beyond banks include: 

the desire not to introduce competitive distortions among different types of institutions 

offering similar products; the objective of enhancing the stability of the financial system by 

including all institutions that accept deposits or deposit-like products; and the desire to apply 

prudential regulatory and supervisory rules to all such institutions. 

There are many cases, however, where non-bank financial institutions are excluded from 

membership. The most common reasons are that such institutions may not be as relevant as 

banks to a country’s financial stability, that they may be subject to different regulatory and 

supervisory standards, and they may have different authorities overseeing their affairs. In such 

circumstances, policymakers may establish separate protection schemes to cover non-bank 

financial institutions. 

(v) State-owned banks 

State-owned banks present unique issues for deposit insurance systems. These banks are 

usually the beneficiaries of an implicit or full government guarantee that may make their 

inclusion in a deposit insurance system appear unnecessary. Nevertheless, some countries 

have chosen to include them in their systems. Some of the reasons are: to facilitate 

privatisation; to ensure competitive equality with private-sector banks in terms of the level of 

coverage and premium contributions; to provide a mechanism to bring such banks under the 

same prudential regulatory and supervisory rules applicable to other banks; and to diversify 

the deposit insurer’s risks and increase its funding base. 

(b) Coverage 

(i) Scope and level 

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Policymakers should define clearly in law or by private contract what is an insurable deposit. 

In doing so, they should consider the relative importance of different deposit instruments, 

including foreign-currency deposits and the deposits of non-residents in relation to the publicpolicy objectives of the system. Once the relevant deposits are selected, exclusions of specific 

deposits and/or depositors can be determined. 

Many deposit insurance systems exclude deposits held by depositors who are deemed capable 

of ascertaining the financial condition of a bank and exerting market discipline. Examples 

include deposits held by banks, government bodies, professional investors such as mutual 

funds, and deposits held by bank directors and officers. In some cases, deposits held by 

individuals who bear responsibility for the financial well-being of a bank are excluded from 

reimbursement. Also, deposits with extremely high yields are sometimes excluded from 

coverage; or reimbursement may be limited to the principal owed, with a lower rate of interest 

applied. Many countries exclude bearer deposits because it is difficult to establish ownership 

of the account and to ensure that coverage limits are respected. 

Once the scope is determined, the level of coverage can be set. This can be done through an 

examination of relevant data, such as statistical information describing the size distribution of 

deposits held in banks. This gives policymakers an objective measure, such as the fraction of 

depositors covered, with which to assess the adequacy of a certain level of coverage. 

Whatever coverage level is selected, it must be credible and internally consistent with other 

design features, and meet the public-policy objectives of the system. Policymakers should 

consider the relationship between coverage levels and moral hazard. 

There are a number of ways to apply coverage limits. Usually coverage limits are applied per 

deposit or per depositor. Using the per deposit method may be incompatible with ensuring 

limited coverage since a depositor can easily circumvent the limit by opening multiple 

accounts in a single bank for an amount equal to or below the insured limit. Focusing the 

coverage limit solely on the depositor avoids that pitfall but information requirements are 

greater since all deposit accounts held by a single depositor need to be identified and 

aggregated for deposit insurance purposes. 

Coverage limits can also be applied per bank or across all member banks. Although coverage 

across all banks is likely to instill more market discipline, depositors may be affected by 

multiple bank failures even though they had diversified their risks among member banks. As a 

result, this approach may increase the potential for bank runs. Providing deposit insurance 

across all member banks requires detailed data of all depositor accounts in all banks. This type 

of coverage is highly difficult and costly to administer as it requires not only a great deal of 

information regarding ownership of deposit instruments but also requires a process for 

combining depositor accounts at different banks when they fail. It also requires that a time 

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element be attached to the coverage limit- such as per calendar year. A mechanism would also 

be needed to track depositor reimbursements to determine when a particular depositor reached 

the coverage limit. This option is seldom used because of its complexity and its potential to 

undermine depositor confidence. 

Given the importance of effectively limiting coverage and contributing to financial system 

stability, as well as keeping the requirement for information reasonable, it is preferable to 

apply deposit insurance on a per depositor per bank basis. 

(ii) Coinsurance 

One approach to foster market discipline and to reduce somewhat the costs of deposit 

insurance is the use of coinsurance, whereby a pre-specified proportion of deposits is insured. 

Depositors in a limited-coverage deposit insurance system should be aware that they may 

suffer losses if their deposits exceed the limit when a bank fails. This awareness will be 

heightened under coinsurance because depositors may suffer losses if their deposits are below 

the insurance limit. However, even under a coinsurance system, individuals who have small 

account balances may not exercise market discipline because of a lack of financial incentives 

or sophistication, or because the costs of doing so exceed the benefits. In this case, individuals 

bear a cost for bank failure without increasing market discipline. As well, for coinsurance to 

be effective, extensive information needs to be provided to the public regarding the financial 

condition of banks. 

A negative consequence of coinsurance is that depositors may opt out of the banking system. 

One way to protect against these potentially adverse effects is to apply it above a certain 

amount so that individuals holding small account balances are protected fully against the risk 

of loss, while maintaining the incentive for depositors holding larger account balances to 

monitor banks. 

(iii) Adjusting coverage limits 

Inflation, the growth of real income, the development of new financial instruments, and the 

way in which these factors influence the composition and size of deposits may require the 

adjustment of coverage limits. A trade-off exists, however, between the goal of maintaining 

the level of deposit insurance constant for a sufficiently long period of time so that depositors 

know the coverage limit with certainty, and the goal of setting the level of coverage that is 

appropriate to meet the objectives of the system. This problem is especially acute for highinflation countries. 

Adjustments to the level of deposit insurance coverage may take place either on a 

discretionary basis or they may be made systematically through automatic or periodic 

indexing. Indexed adjustments may be automatically implemented, which requires care in 

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choosing the frequency and amounts of adjustments. If adjustments occur too often, or for odd 

amounts, this could confuse the public. Alternatively, if adjustments occur too infrequently, 

the deposit insurance system may be unable to meet its stated public-policy objectives. 

(iv) Foreign-currency deposits 

The decision whether to cover deposits denominated in foreign currencies depends heavily on 

a country’s usage of foreign currency. When usage is high, it would be of little value to 

institute a deposit insurance system without covering these deposits. 

If foreign-currency deposits are to be covered by deposit insurance, it is important to consider 

whether these deposits are to be reimbursed in local or foreign currency when a bank fails. 

This decision is important because it has implications as to who bears the foreign-exchange 

risk. If reimbursements are made in foreign currency, the deposit insurer may bear this risk. If 

foreign-currency deposits are converted into local currency before reimbursing depositors after 

a bank failure, the risk is transferred to the depositors. If reimbursements are made in local 

currency, a transparent rule should be set out in advance with respect to the date chosen for the 

exchange rate that will be used to calculate the amount to be reimbursed. At a minimum, a 

system that offers to repay depositors in a foreign currency must have access to sufficient 

foreign assets or other sources of foreign-currency funding to make this commitment credible. 

To mitigate foreign-exchange risk, policymakers should ensure that banks have sound foreignexchange risk-management systems and controls in place. Furthermore, the deposit insurer 

should develop sound policies and procedures to prudently manage any foreign-exchange risk 

it faces. In designing such policies and procedures, the deposit insurer may wish to draw on 

the expertise residing in banks. 

4. Funding 

Sound funding arrangements are critical to the effectiveness of a deposit insurance system and 

the maintenance of public confidence. A deposit insurance system should have available all 

funding mechanisms necessary to ensure the prompt reimbursement of depositors’ claims after 

a bank failure. Inadequate funding can lead to delays in resolving failed banks, to significant 

increases in costs and a loss of credibility of the deposit insurance system. Funding can be 

assured in many ways, such as government appropriations, levies or premiums assessed 

against member banks, market borrowings, or a combination thereof. 

Premiums or levies can be assessed on an ex-ante or ex-post basis. Beyond the decision of 

how to fund a deposit insurance system, some additional issues should be considered by 

policymakers. Among these are: how deposit insurance assessments should be determined, 

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verified, and collected; and whether it is appropriate to establish separate deposit insurance 

funds for different types of deposit-taking institutions. 

Member banks should pay the cost of deposit insurance since they and their clients directly 

benefit from having an effective deposit insurance system. Policymakers should consider the 

effect of premium levels on the financial health of the banking industry, and an assessment 

base should be chosen against which a given premium rate will be applied. One choice is 

insured deposits; alternatively, a bank’s total deposit liabilities may be used. Although the use 

of total deposit liabilities may be easier administratively, there may be issues of equity since 

banks that rely more heavily on uninsured deposits for funding could be required to pay a 

disproportionate share of premiums. 

(a) Funding on an ex-ante or ex-post basis 

Ex-ante funding, which refers to the accumulation of a reserve or a fund, provides an 

opportunity to smooth the premiums paid by banks over the course of a business cycle. 

Because all banks contribute to building and maintaining a reserve or fund, banks that 

subsequently fail will have contributed to paying for the cost of their failure. Ex-ante funding 

sources may be supplemented by measures such as ex-post levies or premium assessments on 

member banks, draws on government lines of credit, and/or government guarantees. Ex-ante 

funding has the potential to remove capital from the banking system because premiums paid to 

the deposit insurer cannot be used for other purposes. If policymakers decide to use ex-ante 

funding, the deposit insurer should ensure that funds are well managed and readily available to 

cover losses as they arise. This can be accomplished by implementing appropriate investment 

policies and procedures, and by instituting sound internal controls, disclosure and reporting 

systems. 

Ex-post funding requires member banks to pay premiums or levies only after failures occur 

and are most likely to be assessed during an economic downturn. Ex-post funding may 

improve inter-bank monitoring because each bank has an incentive to avoid the costs 

associated with the failure of a member. Such incentives may be particularly strong in banking 

systems characterised by a small number of large banks. Because assessments and collections 

occur post-failure, prompt reimbursement of insured depositors may be more problematic if 

other funding mechanisms are unavailable at the time. Moreover, banks that fail will not have 

contributed to funding the costs associated with their failure. 

Failures often occur during an economic downturn and, in some circumstances, this may 

create pressure to provide forbearance because the banking system’s ability to pay is 

weakened. In some cases, this can be offset if the deposit insurer has access to other resources 

such as government assistance through temporary funding mechanisms, guarantees or 

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backstops. The costs associated with providing such assistance should be recovered through 

future assessments against banks. 

In practice, deposit insurance systems often are funded on a combined ex-ante and ex-post 

basis. The advantages and disadvantages associated with ex-ante and ex-post funding are 

generally applicable to hybrid funding arrangements. 

(b) Issues related to the establishment and size of a deposit insurance fund 

In principle, there are two approaches available to establishing a deposit insurance fund. First, 

banks may be assessed a steady premium rate over a long period. This approach allows a 

deposit insurance fund to fluctuate in response to insurance losses and movements in the 

deposit insurance fund do not trigger automatic changes in premium rates. Using this approach 

the insurer could be dependent on government or other financial support in times when the 

fund is inadequate to meet obligations to depositors. 

Second, a premium assessment system can be designed to maintain a target fund ratio or 

range. Using this approach, premiums could be set and adjusted over time by taking into 

account some ratio of the deposit insurance fund to insured deposits, for example. This 

approach helps to mitigate the loss exposure that the deposit insurer is assuming. In principle, 

the target fund ratio should be sufficient to reduce the probability of the fund’s insolvency to 

an acceptable minimum, although estimating probabilities of loss is very complicated in 

practice. Policymakers in economies that are subject to greater financial-system volatility 

should take this into account when determining their funding needs. 

Using a target fund ratio method could lead to a de facto ex-post system after the deposit 

insurance fund achieves a certain level. This method can also result in banks paying few 

premiums in good economic times, but paying higher premiums during an economic 

downturn. 

A case can be made either for establishing and maintaining one fund or for establishing and 

maintaining separate funds for different types of financial institutions that accept deposits 

from the public. If separate funds are established, policymakers should ensure that distinctions 

among the institutions and their funds do not contribute to competitive distortions. 

(c) Deposit insurance assessments: flat-rate versus risk-adjusted differential premium 

systems 

Policymakers have a choice between adopting a flat-rate premium system or a premium 

system that is differentiated on the basis of individual-bank risk profiles. The primary 

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advantage of a flat-rate premium system is the relative ease with which assessments can be 

calculated and administered. However, in a flat-rate system, low-risk banks effectively pay for 

part of the deposit insurance benefit received by high-risk banks. 

Most newly established systems initially adopt a flat-rate system given the difficulties 

associated with designing and implementing a risk-adjusted differential premium system. 

However, because flat-rate premiums do not reflect the level of risk that a bank poses to the 

deposit insurance system, banks can increase the risk profile of their portfolios without 

incurring additional deposit insurance costs. As a result, flat-rate premiums may be perceived 

as encouraging excessive risk taking by some banks, unless there is a mechanism to impose 

financial sanctions or penalties. 

Risk-adjusted differential premium systems can mitigate such criticisms and may encourage 

more prudent risk-management practices at member banks. When the information required to 

implement a risk-adjusted differential premium system is available, relating premiums to the 

risk a bank poses to the deposit insurer is preferable. 

The information-intensive nature of the intermediation process, however, makes risk 

measurement a complicated task. The particular difficulties related to risk-adjusted differential 

premium systems include: finding appropriate and acceptable methods of differentiating bank 

risk; obtaining reliable and timely data; ensuring that rating criteria are transparent; and 

examining the potential destabilising effects of imposing high premiums on already troubled 

banks. As well, risk-adjusted differential premium systems require resources necessary to 

administer the system appropriately. An important but delicate issue that policymakers should 

consider is whether to allow the release of information related to the risk profile of each bank, 

or to restrict this information for confidentiality or other reasons. 

5. Public awareness 

In order for a deposit insurance system to be effective, it is essential that the public be 

informed about its benefits and limitations. Experience has shown that the characteristics of a 

deposit insurance system need to be publicised regularly so that its credibility can be 

maintained and strengthened. 

A well-designed public-awareness program can achieve several goals, including the 

dissemination of information that promotes and facilitates an understanding of the deposit 

insurance system and its main features. Also, a public-awareness program can build or help 

restore confidence in the banking sector. Additionally, such a program can help to disseminate 

vital information when failures occur, such as guidance regarding how to file claims and 

receive reimbursements. 

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When designing a public-awareness program, it is critical to identify the target audience. Bank 

employees, especially those in operations, as well as those on the front-line, are important 

conduits for providing information about deposit insurance. 

Care should be taken to select strategies that meet the goals set in the public-awareness 

program. A public-awareness plan that addresses issues related to failures should be carefully 

developed before an actual failure occurs. A well-designed public-awareness program helps to 

counteract the potentially disruptive effects of bank failures and helps maintain confidence in 

the stability of the financial system. 

In countries where public confidence in the banking system is high and awareness of an 

existing deposit insurance system is very low, special communication strategies need to be 

developed to ensure that the stated goals are achieved while public confidence is maintained. 

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Box: Cross-Border Issues 

Deposit taking is usually a domestic business, but cross-border issues are increasing in many jurisdictions. In some 

countries, cross-border issues already play a considerable role in the creation and design of a deposit insurance 

system. This is the case, for example, where banking systems are characterised by a significant presence of foreignbank branches. In weak banking systems (especially after a crisis), the outflow of deposits to other countries may 

have to be taken into account when establishing or reforming a deposit insurance system. In regions where 

economies are closely related, or in closely integrated regions, such as in the European Union (EU), special 

considerations may apply. The EU minimum requirements for deposit insurance are harmonised and the 

responsibility for providing deposit insurance rests primarily with the home country. 

Relevant laws, regulations and other provisions applicable to banks, their customers and deposit insurers are 

generally those of the bank’s country of incorporation or charter. However, if a bank operates branches in other 

jurisdictions or provides services to customers’ abroad, the laws and regulations of other countries may apply. 

Depending on the volume of these activities, the implementation of policies by home and host countries regarding 

issues such as coverage and asset disposition can be crucial for the effective operation of deposit insurance systems 

and for the achievement of public-policy objectives. 

Deposits collected from individuals located in countries where a bank has not established a physical presence (that 

is, a branch or subsidiary) normally are covered by the deposit insurance system the bank belongs to in its home 

country. Deposits at foreign branches may be protected by the bank’s home-country 

deposit insurance system, by the host-country system where the branch is located, by a combination of both systems, 

or not protected at all. Where deposits are covered by a combination of both systems, the home-country system may 

provide basic coverage that is supplemented by the host country. 

Foreign banks may expose the deposit insurer to risks that it has a limited capacity to mitigate. Additionally, they 

may complicate the recovery process in the event of a failure, because assets located abroad may be subject to 

another country’s bankruptcy/insolvency regime. 

Foreign branches participating in a host country deposit insurance system should conform generally to the 

membership criteria of the host-country system, which may possibly include the application of supervisory 

requirements on a stand-alone basis. If the host-country system provides supplementary coverage, multiple 

reimbursements of insured depositors should be avoided. The deposit insurance already provided by the homecountry system should be recognized in the determination of levies and premiums. 

In general, information received by safety-net participants in other jurisdictions should be subject to the same strict 

confidentiality rules applicable to information received from other domestic safety-net participants. Provided 

confidentiality is ensured, all relevant information should be exchanged between deposit insurers in different 

jurisdictions and possibly between deposit insurers and other foreign safety-net participants when appropriate. In any 

case, deposit insurers should receive all information necessary to enable a prompt reimbursement of claims of 

depositors and to enable them to meet their mandate. 

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Vl. Resolutions, Reimbursements, Claims and Recoveries 

Timely and effective exit strategies for handling failed banks enhance confidence in a deposit 

insurance system, help contain costs, and avoid adverse effects on other safety-net 

participants, the government, the public, the banking industry, and the economy. Cooperation 

among the various financial safety-net participants, both before and after a failure, is essential 

if these results are to be achieved. 

It is critical to determine when a bank is in serious financial difficulty. This determination 

should be made on the basis of well-defined and transparent criteria by a safety-net participant 

with authority to act. Prompt and decisive actions are crucial to reduce the cost of a bank 

failure but care needs to be taken to address confidentiality issues to protect the exchange of 

information among financial safety-net participants. There are a number of steps necessary to 

liquidate a bank’s business and affairs. These steps include the resolution or disposition of the 

failed bank, reimbursement of insured depositors, liquidation of the bank’s assets, settlement 

of claims in accordance with applicable laws, and disposition of pending or outstanding 

litigation. 

From a deposit insurance perspective, the objectives of an effective failure-resolution process 

are to: meet the deposit insurer’s obligations; ensure depositors are reimbursed promptly and 

accurately; minimise resolution costs and disruption of markets; maximise recoveries on 

assets; settle bona-fide claims on a timely and equitable basis; and reinforce discipline through 

legal actions in cases of negligence or other wrongdoings. There are potential tensions and 

trade-offs among these objectives that need to be addressed by policymakers. 

1. Private-sector solutions 

Before a troubled bank reaches the point of failure, it usually has been the subject of various 

efforts to strengthen its operations. Such actions may have included restructuring efforts that 

are broadly similar to resolution transactions, in that they involve a merger with, or acquisition 

by, a healthy bank. These efforts are frequently described as private-sector solutions and do 

not impose a cost on the deposit insurer. 

Private-sector solutions require that action be taken early while acquirers are still willing to 

take over the troubled bank. They also require the existence of healthy banks, which have the 

financial and managerial capabilities to combine with weaker ones and that can continue to 

comply with regulatory and supervisory requirements. Finally, the responsible authority must 

be prepared to close a troubled bank if the private-sector solution fails, otherwise the bank's 

bondholders and shareholders may have little incentive to make the financial concessions 

necessary to help make a solution work. 

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2. Resolving troubled banks 

A resolution may be defined as a method of disposing of a failed bank, which is directed by 

the responsible safety-net participant, and generally is designed to reimburse insured 

depositors while minimising costs to the deposit insurer. 

(a) Options 

Three basic resolution options exist: liquidation and reimbursement of depositors’ claims, 

purchase-and-assumption transactions (sales) and open-bank financial assistance. 

Bankruptcy/insolvency and other laws may heavily influence the choice of resolution methods 

since such laws vary considerably among countries and, in some cases, may make a particular 

resolution method difficult to implement. Because of the special significance of banks and 

bank failures, policymakers may wish to review whether bankruptcy/insolvency laws facilitate 

the orderly exit of troubled banks. 

(i) Liquidation and reimbursement of depositors’ claims 

Reimbursement of depositors’ claims occurs when an acquisition or merger is unattractive to 

potential acquirers or merger partners. The failed bank is closed and the assets and uninsured 

claims are transferred to a receiver/liquidator for liquidation and settlement. Reimbursing 

claims may be accomplished by directly paying depositors or by transferring their insured 

deposits to another bank. 

(ii) Purchase-and-assumption transactions (sales) 

In a purchase-and-assumption transaction, a healthy bank or group of investors assumes some 

or all of the obligations, and purchases some or all of the assets, of the failed bank. Assets 

purchased by the acquirer typically include performing loans and other good-quality 

investments. Assets not sold to the acquirer at resolution are passed on to the 

receiver/liquidator for disposition. Clearly, acquirers must have sufficient resources to absorb 

the acquisition, sufficient capital to handle the new bank’s costs, and qualified management. 

Variants of the purchase-and-assumption method include the “bridge bank,” or other interim 

arrangements, which have been used primarily to manage failures of large and complex banks. 

In such arrangements, the responsible safety-net participant takes ownership or control of the 

failed bank and operates it for a period of time. The goals are to prevent further deterioration 

of the bank, give the authorities more time to seek a permanent resolution, and provide 

potential acquirers a greater opportunity to review the quality of the bank’s assets. If the bank 

remains too long under official control, however, it may lose value and may draw deposits 

away from other banks. The authorities, as well, may be tempted to postpone a permanent 

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solution unduly. As a result, it may be desirable to establish limits on the length of time that 

such arrangements remain in operation. 

(iii) Open-bank financial assistance 

Financial assistance may be provided to an operating bank that is in danger of failing. The 

deposit insurer may retain ownership rights in the bank and additional capital from outside 

investors and replacement of managers and directors may be required. Uninsured depositors 

and certain other creditors are generally fully protected, although bondholders and 

shareholders may be required to bear significant losses.3 Open-bank assistance usually is 

provided to banks when it is believed that closing them would pose significant risks for the 

stability of the financial system. 

Open-bank assistance has features that some countries regard as undesirable. Bondholders and 

shareholders, while suffering losses, may receive compensation or benefits that they would not 

otherwise receive. Depending on the legal system, closed-bank transactions also may have 

other advantages. For example, the appropriate authority may have the right to abrogate 

certain contracts without penalty. Finally, where small banks are generally ineligible for openbank assistance, they may believe that they are being treated unfairly. 

(b) Costs and other considerations 

Choices among resolution methods involve various considerations, including statutory 

requirements and mandates. Where least-cost resolutions are mandated to the deposit insurer, 

the chosen method must be demonstrated to be less costly than any other possible method. 

Alternatively, a less-stringent cost test might require that the chosen method be less expensive 

than a liquidation and reimbursement of depositors’ claims. An implicit assumption in costtest calculations is that the resolution of one failed bank will not affect the cost of 

subsequently resolving other banks. This is most likely to be true in countries where 

occasional bank failures are regarded as a normal occurrence and the failed bank does not 

represent a major proportion of the banking industry. 

There may be special provisions for large and complex banks that are perceived to have 

special significance from the standpoint of financial-system stability or for banks whose 

closure would result in a harmful interruption of banking services in particular markets or 

regions. Such banks often have been resolved in ways that are not designed primarily to 

minimise resolution costs. In such circumstances, consideration should be given as to how 

these costs should be allocated. 

3 In some countries the deposit insurer may have significant legal exposure to dissatisfied creditors. 

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3. Reimbursing depositors 

Determining who should be reimbursed and ensuring that deposit insurance limits are 

respected are the most crucial steps in the reimbursement process and are important to the 

effectiveness of a variety of resolution methods. This is most evident in a liquidation process 

where depositors’ claims need to be reimbursed up to their insured limits. In other resolution 

transactions, determining the insurance status of individual accounts is also necessary, if such 

resolutions are to meet a least-cost test or when acquirers of failed banks assume only insured 

deposits. A determination of the status of individual accounts is also necessary when 

applicable statutes mandate the priority of insured depositor claims. 

Systems and processes should be developed in order to undertake preparatory reviews of 

deposit liabilities held by troubled banks. This requires development of administrative 

practices and procedures and the ongoing review of the quality and security of bank deposit 

records. 

(a) Conditions for effective reimbursement 

Depositors need to know when and under what conditions the deposit insurer will start the 

reimbursement process, as well as the applicable coverage limits. If reimbursement does not 

occur immediately after closure of the bank, depositors should be told the time frame over 

which reimbursement will take place. The deposit insurer should know, as soon as possible, 

when a bank will be closed. Access to the necessary deposit data before the bank is closed 

lessens the risk of record manipulation, shortens the time for completing the reimbursement 

process, and helps preserve public confidence. The deposit insurer must decide whether to 

maintain adequate resources internally or whether it will outsource the function by employing 

contractors to handle reimbursements as they arise. 

(b) Eligibility for coverage 

The deposit insurer must assess the amount in each deposit account at the time of closure and 

determine whether the accounts are within the scope and limits of the deposit insurance 

system. In making such a determination, the deposit insurer must apply the laws governing 

ownership rights and capacities with respect to coverage of single accounts, joint accounts, 

business accounts, retirement accounts, and fiduciary accounts. In some countries, the deposit 

insurance limit is applied by combining all deposit accounts held by a depositor, while in 

others, deposit accounts held under different rights and capacities are insured separately. Other 

important steps in the reimbursement process include the need to reconcile suspense accounts, 

process deposit and other items in transit and deal with clearing and settlement issues. 

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As discussed later in this section, rules regarding set-off and collateral must be applied in 

determining the amount of coverage. If the depositor reimbursement and claims/liquidation 

functions are administered separately, close cooperation between the responsible organisations 

is necessary in applying any set-off and collateralisation rules. 

(c) Procedures for reimbursing depositors 

The deposit insurer’s administrative practices and procedures should specify the necessary 

steps to ensure the accuracy of the reimbursement process. An important consideration is 

whether the verification and reconciliation of accounts can be achieved on the basis of the 

bank’s own records, or whether the depositor is required to submit a claims form, effectively 

proving ownership of the account. In some cases requiring submission of a claims form may 

be inconvenient for depositors and can delay the reimbursement process, but this procedure 

may be necessary if the quality of the bank records is suspect or poor, or if bank-secrecy laws 

prevent accurate identification of depositors and their accounts. 

Another important consideration is whether to pay depositors quickly or only after extensive 

verification of account data. A reasonable position would be to issue payments after best 

efforts to ensure accuracy and completeness have been made. In some situations, a possible 

remedy is to make partial payments to insured depositors before all the steps necessary for an 

accurate reimbursement process have been completed. The final action before reimbursement 

is the preparation of reconciliation statements specifying the amount to be paid to depositors 

and claimed from the liquidator/receiver. The reimbursement process should be evaluated expost to incorporate lessons learned. 

(d) Payments to depositors 

Actual reimbursement can proceed after the deposit records, claims and rights have been 

reconciled. Reimbursements may be simplified if another bank agrees to make the payments. 

If this option is not available, the deposit insurer must select a method of payment such as: 

providing cash or issuing some other form of payment; mailing cheques; transferring funds to 

another bank designated by the depositor; issuing a debit card; or making a postal transfer. 

Open communication channels through press releases, the news media, advertisements, 

posters, the Internet, and other means are crucial in maintaining public confidence in the 

deposit insurance system. The public should receive practical and accurate information about 

when and how they will receive reimbursement of their claims. Direct communication through 

letters and telephone calls are necessary to respond to depositors’ questions and complaints. 

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4. Claims and recoveries 

(a) General issues 

After a troubled bank has been closed, the responsible entity effectively inherits the bank’s 

assets and liabilities. The remaining tasks in winding up the affairs of the bank are the 

management and liquidation of its assets and settlement of bona-fide claims. The ability to 

accomplish these tasks effectively is an essential part of a country’s financial safety net. The 

powers provided to the entity responsible for the claims-and-recoveries function should be 

guided by applicable laws and should include control of the failed bank’s assets; contract 

rights and privileges; the ability to allow or disallow claims; the capability to enforce or 

repudiate certain contractual obligations; and the ability to challenge fraudulent transfers and 

transactions. At the same time, fiduciary responsibilities imposed on the entity may limit its 

ability to fulfil other responsibilities.4 

(b) Asset-management and disposition strategies 

Asset-management and disposition strategies should be guided by commercial considerations 

and their economic merits, given the quality of the assets, the depth and condition of markets, 

the availability of expertise in asset management and disposition, legal requirements relating 

to the disposition of assets, and public-policy objectives. The goal of maximising recoveries 

may conflict with other goals, such as environmental considerations, or the pursuit of actions 

to enhance standards of business conduct. 

Performing assets may be sold as part of the resolution transaction or as soon as possible 

thereafter, because they are marketable and have little or no potential for additional value. 

This also has the advantage of returning assets to the market quickly, thereby, distributing 

funds earlier to the deposit insurer, minimising carrying costs while assets are in the hands of 

the receiver/liquidator, and minimising government involvement. Other assets may be sold or 

otherwise liquidated over a period of time under professional management, with a view to 

optimising recoveries and reducing costs. Negotiations with borrowers also may be effective 

in the disposition of hard-to-sell assets. With respect to assets not sold immediately, it is vital 

that their value be preserved through effective asset-management procedures in an effort to 

minimise costs to the financial system. 

4 There is considerable variation in the claims-and-recoveries roles played by deposit insurers and other safety-net 

participants. Where deposit insurance payments are made upon the liquidation of a bank, the deposit insurer 

usually is subrogated to the rights of the insured depositors, and is likely to file and actively manage the claim 

arising from the deposit insurance payment. In some instances, deposit insurers have significant roles in the riskminimisation or recovery processes, for example as a lender, creditor, or possibly receiver. In other cases, these 

functions are the responsibility of other entities. 

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Effective asset management should include tools for validating assumptions used in valuing 

assets and developing disposition plans. Risks relating to market fluctuations, particular assetdisposition strategies, and asset-specific and legal issues should be identified, quantified, 

managed or hedged. The use of discounted cash-flow analysis or other appropriate valuation 

techniques is required to take into account differences in timing of recoveries and expenses 

and differences in risk among asset types. Consideration also may be given to differences in 

valuation among potential purchasers that arise from differences in plans and financing costs. 

(c) Marketing methods 

Transparency and access to information are key factors in marketing failed-bank assets. The 

quality of the information may have an important bearing on the price. Therefore, information 

should be available, complete and arranged in as orderly a manner as possible. 

In principle, a wide range of methods is available for disposition of the assets of failed banks. 

They include: asset-by-asset sales; auctions or sealed bids; asset pools; securitisation; assetmanagement companies; and equity partnerships. 

In some instances, recoveries may be enhanced with seller financing, put-back arrangements 

that provide the buyer with the option of returning certain assets for refund within a specified 

period, or limited guarantees against loss. Guarantees will generally result in increased market 

prices because of the reduced risk to the purchaser, but have the disadvantage of creating 

contingent liabilities, which may be mitigated by limiting their duration and total value. 

(d) Claims and litigation 

Claims and litigation advanced by the failed bank or the receiver/liquidator against directors, 

officers, auditors and other parties related to the bank failure are potentially important assets. 

These claims may result in significant recoveries and may serve as a tool for fostering 

discipline in the banking sector. For these reasons, potential claims should be identified and 

investigated carefully to determine the appropriateness and potential for recovery before being 

pursued. 

It is important to identify claims and to distribute the proceeds of the liquidation of assets in a 

fair and cost-effective manner, and in accordance with applicable laws. This involves 

notifying potential claimants of the reimbursement process, reviewing and resolving asserted 

claims, distributing dividends to proven claimants, and transferring unclaimed dividends to 

the appropriate authority. Claims include those of the deposit insurer, uninsured depositors, 

and other unsecured creditors. They also include legal actions against the failed bank and the 

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cost of any financial assistance that may have been provided by safety-net participants. 

Litigation instituted by creditors, shareholders, or other claimants and plaintiffs against the 

failed bank or the liquidator/receiver may result in significant costs and delays. In this regard, 

it may be advisable to conduct regular evaluation of the claims in order to estimate the 

potential liability exposure and consider alternative means for resolution. 

5. Depositor ranking, collateralisation and rights of set-off 

How funds are distributed among claimants is heavily influenced by legal provisions regarding 

the ranking of depositors and other creditors, collateralisation of the bank’s obligations, and 

the extent to which a creditor’s debts to a bank are set-off against the creditor’s claims. The 

rules governing these matters vary among countries, reflecting differences in laws, traditions 

and public-policy objectives, and are typically not subject to change by the deposit insurance 

system. Such rules can have important effects on the deposit insurer’s costs and on the 

behaviour of safety-net participants, depositors and other creditors. 

(a) Depositor ranking 

Policymakers should be aware of the potential effects of existing depositor priority laws or 

statutes on failure-resolution costs and the incentive for depositors or other creditors to exert 

market discipline. If depositors rank equally with other unsecured creditors, they will receive 

pro-rata shares of recoveries from asset liquidation. If depositors and the deposit insurer are 

accorded some superior right to share in such recoveries, their claims must be paid in full 

before other unsecured claimants are compensated. However, depositor priority does not 

necessarily reduce the losses of uninsured depositors or the deposit insurer. Lower-ranking 

creditors have incentives to protect themselves by collateralising their claims, shortening 

terms of maturity, exercising early-withdrawal provisions, or imposing additional penalties or 

charges. Such actions may offset the effects of preferential ranking. 

If uninsured depositors believe they will not sustain losses because of their priority ranking, 

they may have less incentive to exercise market discipline. Also, safety-net participants may 

have reduced incentives to act promptly in dealing with problem banks. The net effects 

depend on the characteristics of non-deposit creditors, their ability to utilise the available 

means of limiting their loss exposure and their willingness to exercise market discipline, legal 

provisions governing these matters, and the existence of strong governance and accountability 

regimes at the responsible safety-net participant. 

(b) Collateralisation 

Policymakers also should be aware of the effects of collateralisation. In some countries, 

depositors, the deposit insurer, and other unsecured claimants share only in the unencumbered 

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assets of the failed bank and their recoveries are reduced by the collateralisation of other 

parties’ claims. However, collateralisation may have some offsetting advantages from the 

standpoint of the payments system and the public-policy objectives. Extensive 

collateralisation of a bank’s liabilities may also increase the deposit insurer’s cost and impinge 

on its ability to provide financial assistance to a troubled bank, because certain assets may not 

be available. As in the case of depositor priority, collateralisation may give unsecured 

creditors greater incentives to effect early withdrawals, shorten maturities, or impose 

additional charges in order to mitigate expected losses. 

(c) Rights of set-off 

The term “set-off” refers to situations where the claim of a creditor (for example, a deposit) in 

an insolvent bank is deducted from a claim of the bank (for example, a loan) against the 

creditor. Where set-off is available or imposed, creditors who are also debtors of the failed 

bank may increase their recoveries, while other creditors’ recoveries are diminished. 

Set-off can reduce administrative costs by reducing the number of individual creditors and 

debtors. Netting of the cross-obligations of members of the payments system lessens the credit 

risk of the remaining participants in the event of the failure of one or more participants, thus 

reducing the possibility of contagion. Depending on the jurisdiction, banks that operate in the 

derivatives-market may be able to effect transactions (for example, a swap transaction) that 

might not be available (or available only on less-favourable terms) if netting were not assured. 

Some countries emphasise the importance of set-off while others believe that it can lead to 

unequal treatment. If set-off is allowed, a number of issues should be considered, including 

whether set-off should apply to all loans or only those due or in default. Set-off against a 

performing loan could result in a “call” on a loan to a viable business; as a result, many 

countries restrict set-off to cases where the loan is in default. Even where set-off is accepted, 

the extent to which it should apply may be an issue. Set-off of obligations against loans in 

good standing may reduce the value of a portfolio of loans as a realizable asset. Coordination 

of the rules of set-off and the reimbursement of insured depositors also raise issues, such as 

whether deposit insurance is to be paid on the gross amount of the deposit or the net amount 

after set-off. Finally, set-off also can be influenced by the priority of claims in a bank failure. 

These issues generally involve trade-offs among public-policy objectives and require countryspecific solutions. 

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VII. Key Points of Guidance 

The Working Group was asked to develop guidance for the benefit of countries considering 

the adoption or the reform of an explicit, limited-coverage deposit insurance system. The 

following points of guidance summarize the main conclusions and suggestions by the 

Working Group to help policymakers design, implement and continually assess a deposit 

insurance system. These points are reflective of, and adaptable to, a broad set of 

circumstances, settings and structures. 

1. Contextual issues 

(a) Policymakers have many choices regarding how they can protect depositors. Explicit, 

limited-coverage deposit insurance (“a deposit insurance system”) is preferable to 

implicit protection if it clarifies the authorities’ obligations to depositors and limits the 

scope for discretionary decisions that may result in arbitrary actions. However, such a 

system needs to be properly designed, well implemented and understood by the public 

in order to be credible. It also needs to be supported by strong prudential regulation 

and supervision, sound accounting and disclosure regimes, and the enforcement of 

effective laws. (pages 8-9) 

(b) A deposit insurance system can deal with a limited number of simultaneous bank 

failures, but cannot be expected to deal with a systemic banking crisis by itself. 

(page 9) 

2. Moral hazard 

(a) A well-designed financial safety net contributes to the stability of the financial system; 

however, if poorly designed, it may increase risks, notably, moral hazard. Good 

corporate governance and sound risk management of individual banks, effective 

market discipline, and frameworks for strong prudential regulation, supervision and 

laws, can mitigate moral hazard and these elements are most effective when used in 

concert. (page 9) 

(b) Good corporate governance and sound risk management of individual banks help to 

ensure that business strategies are consistent with safe-and-sound operations, and thus 

can act as the first line of defence against excessive risk taking. Good corporate 

governance and sound risk management includes standards, processes, and systems for 

ensuring appropriate direction and oversight by directors and senior managers; 

adequate internal controls and audits; management of risks and the evaluation of bank 

performance; the alignment of remuneration with appropriate business objectives; and 

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management of capital and liquidity positions. Effective market discipline requires 

sound accounting and disclosure regimes and the ongoing attention to a bank’s 

soundness by rating agencies, market analysts, financial commentators and other 

professionals. Regulatory discipline can be exercised through effective regulation 

covering the establishment of new banks, the imposition of minimum capital 

requirements, the qualifications of directors and managers, sound business activities, a 

fit-and-proper test for controlling shareholders, standards for risk management, strong 

internal controls and external audits. Supervisory discipline can be exercised by 

ensuring that banks are monitored for safety and soundness as well as compliance 

issues and that corrective actions are taken promptly when problems surface, including 

the closure of banks when necessary. (pages 9-10) 

(c) Ensuring that a deposit insurance system contains certain design features can also 

mitigate moral hazard. These features may include: placing limits on the amounts 

insured; excluding certain categories of depositors from coverage; using certain forms 

of coinsurance; implementing differential or risk-adjusted premium assessment 

systems; minimising the risk of loss through early closure of troubled banks; and 

demonstrating a willingness to take legal action, where warranted, against directors 

and others for improper acts. (page 10) 

3. Public-policy objectives 

(a) The first step in designing a deposit insurance system is to identify the public-policy 

objectives that it is expected to achieve and these objectives must be well understood. 

The principal objectives for deposit insurance systems are to contribute to the stability 

of the financial system and to protect less-financially-sophisticated depositors. The 

choice of how a deposit insurance system is to be operated depends on many factors 

that are unique to each country and its governmental and financial systems. (page 12) 

(b) A continuous-improvement process should exist for reviewing the extent to which a 

deposit insurance system is meeting its public-policy objectives and its mandate. (page 

12) 

4. Situational analysis 

(a) Policymakers should conduct a situational analysis when adopting or reforming a 

deposit insurance system. This analysis should examine conditions and factors such as: 

the level of economic activity; current monetary and fiscal policies; the state and 

structure of the banking system; public attitudes and expectations; the legal 

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framework; prudential regulatory, supervisory, accounting and disclosure regimes. 

(page 13) 

(b) Where existing conditions and factors are not ideal, it is important to identify gaps and 

thoroughly evaluate the options available since the establishment of a deposit 

insurance system is not a remedy to deal with major deficiencies. If actions are 

necessary, they can be taken before, or in concert with, the adoption or reform of a 

deposit insurance system. (page 13) 

(c) Deposit insurance systems cannot be effective if relevant laws do not exist or if the 

legal regime is characterised by inconsistencies. (page 14) 

(d) The strength of prudential regulation and supervision will have implications for the 

effectiveness of a deposit insurance system. Strong prudential regulation and 

supervision should allow only viable banks to operate. Banks should be well 

capitalised and follow sound-and-prudent risk management, governance and other 

business practices. (page 14) 

5. Transitioning from a blanket guarantee to a deposit insurance system 

(a) When transitioning, policymakers should pay particular attention to public attitudes 

and expectations. Countries with a high level of capital mobility, and/or a regionalintegration policy, should consider the effects of different countries’ protection levels 

and other related policies. (page 15) 

(b) If a country decides to transition from a blanket guarantee to a deposit insurance 

system, the transition should be as rapid as a country’s circumstances permit. A 

country considering such a transition should undertake the same type of situational 

analysis as a country moving from implicit protection to a deposit insurance system. In 

addition, three special issues will need to be considered. First, how to allay fears 

because protection for depositors and other creditors is being reduced. Second, 

policymakers should consider the capacity of the banking system to fund a new deposit 

insurance system. The third issue concerns how fast the transition should proceed. 

(page 15) 

6. Self-assessment methodology (SAM) 

Policymakers should consider the use of an iterative self-assessment methodology to 

assist them in the design, implementation, modification and continuous assessment of 

a deposit insurance system. (pages 16-17) 

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7. Mandate and powers 

(a) There is no single mandate or set of mandates suitable for all deposit insurers. Existing 

deposit insurers have mandates ranging from narrow, so-called “paybox” systems to 

those with broader powers and responsibilities, such as risk minimisation with a 

variety of combinations in between. Whatever the mandate selected, it is critical that 

there be consistency between the stated objectives and the powers and responsibilities 

given to the deposit insurer. (page 18) 

(b) Formally specifying the mandate of a deposit insurer (either in law, in a formal policy 

statement, an agreement or by private contract) clarifies the role of deposit insurance 

within the financial safety net. Clarity of the mandate reinforces the stability of the 

financial system and contributes to sound governance and greater accountability. (page 

18) 

(c) As a general principle, a deposit insurer should have all powers necessary to fulfil its 

mandate. All deposit insurers require the ability to enter into contracts, set appropriate 

requirements, and access timely and accurate information to ensure that they can meet 

their obligations to depositors promptly. (page 19) 

8. Structure 

Policymakers must determine whether the deposit insurance function should be 

assigned to an existing organisation or whether a separate entity should be established. 

Regardless of how the deposit insurance system is structured, it is vitally important to 

set clearly the responsibility and accountability of each safety-net function. (page 19) 

9. Governance 

(a) The form of governance utilised in a deposit insurance system should reflect the 

mandate and the degree to which the deposit insurer is legally separated from the other 

financial safety-net participants. The governing body of the deposit insurance system 

should include individuals with requisite knowledge to understand the organisation’s 

activities and the environment in which it operates, and they should have the authority 

to make decisions. The deposit insurer should have access to the input and views of the 

other safety-net participants and relevant interested parties. Members of the governing 

body and management of the deposit insurer should be subject to a fit-and-proper test, 

and they should be free from conflicts of interest. (page 19) 

(b) Governance systems and practices should be developed on the basis of sound strategic 

planning, risk-management processes, and good internal-control and audit systems. 

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The governance structure should be transparent and subject to clear oversight and 

accountability. Rules specifying corporate governance practices should be developed. 

(page 19) 

10: Human resources and statutory indemnification 

(a) The ability to attract and retain qualified employees is a key challenge for most deposit 

insurers. Deposit insurers may meet this challenge by: the use of dedicated resources, 

access to the resources of other financial safety-net participants and/or reliance on 

outside service providers. (page 20) 

(b) The importance of statutory indemnification should be recognised and employees of 

the deposit insurance system should receive legal protection against lawsuits for their 

actions taken in good faith. The lack of legal protection for employees can reduce 

incentives to be vigilant in carrying out their responsibilities, particularly in cases 

where mandates emphasise early detection, intervention and closure of troubled banks. 

(page 20) 

11. Interrelationships among safety-net participants 

(a) When a single organisation performs all of the safety-net functions the smooth 

resolution of potential tensions is dependent on clarity of mandates and an adequate 

accountability regime among the relevant departments. However, when the functions 

are assigned to different organisations, issues related to information sharing, allocation 

of powers and responsibilities, and coordination of actions among the different 

functions is more complex and need to be addressed clearly and explicitly. (page 20) 

(b) A deposit insurer’s information needs vary significantly according to its mandate and 

powers, but the need for close coordination and information sharing among safety-net 

participants is essential in all cases. Rules regarding confidentiality of information 

should apply to all safety-net participants. (pages 20-21) 

(c) It is highly desirable to formalise information-sharing arrangements either through 

legislation, memoranda of understanding, legal agreements, or a combination of these 

techniques. These arrangements also may be useful in providing a general framework 

for safety-net participants to coordinate their related activities. (page 21) 

12. Membership 

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(a) Banks that are to be included in a deposit insurance system should be subject to strong 

prudential regulation and supervision. (page 21) 

(b) In general, membership should be compulsory to avoid adverse selection. (page 21) 

(c) Policymakers should determine whether eligible banks will be given membership 

automatically or whether they should be required to apply for entry. The latter option 

provides a degree of flexibility for the deposit insurer to control the risks it assumes by 

establishing entry criteria. It can also serve to enhance compliance with prudential 

requirements and standards. In such cases, an appropriate transition plan should be in 

place that details the criteria, process and time frame for attaining membership and the 

criteria should be transparent.(page 22) 

(d) Appropriate mechanisms are necessary to ensure that membership requests are handled 

expeditiously and effectively, and that eligible banks are required to meet minimum 

prudential standards and entry requirements. (page 22) 

(e) Policymakers take different approaches in deciding which financial institutions should 

be covered by deposit insurance. Domestic banks are the principal members of most 

deposit insurance systems; in some countries, foreign banks and branches, non-bank 

financial institutions, and state-owned banks also are members. Such entities might be 

included to enhance the stability of the financial system, to ensure competitive equity, 

to diversify the deposit insurer’s risks, and to apply prudential regulatory and 

supervisory rules to non-bank financial institutions that accept deposits and depositlike products. (pages 21-23) 

13. Coverage 

(a) Policymakers should define clearly in law or by private contract what is an insurable 

deposit. In doing so, they should consider the relative importance of different deposit 

instruments, including foreign-currency deposits and the deposits of non-residents, in 

relation to the public-policy objectives of the system. (page 24) 

(b) The level of coverage can be set through an examination of relevant data, such as 

statistical information describing the size distribution of deposits held in banks. 

Whatever coverage level is selected, it must be credible and internally consistent with 

other design features, and meet the public-policy objectives of the system. (page 24) 

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(c) Given the importance of effectively limiting coverage and contributing to financial 

system stability, as well as keeping the requirement for information reasonable, it is 

preferable to apply deposit insurance on a per depositor per bank basis. (page 25) 

(d) One approach to foster market discipline and to reduce somewhat the costs of deposit 

insurance is the use of coinsurance. If coinsurance is adopted, it should be applied 

above a certain amount. This will provide individuals holding small account balances 

full protection against the risk of loss, while maintaining the incentive for depositors 

holding larger account balances to monitor banks. In order for coinsurance to be 

effective, extensive information needs to be provided to the public regarding the 

financial condition of banks. (page 25) 

(e) Coverage limits may need to be adjusted periodically because of inflation, the growth 

of real income, the development of new financial instruments, and the way in which 

these factors influence the composition and size of deposits. (page 25) 

(f) The decision whether to cover deposits denominated in foreign currencies depends 

heavily on a country’s usage of foreign currency. When usage is high, it would be of 

little value to institute a deposit insurance system without covering these deposits. An 

important decision is whether to reimburse insured deposits in local or in foreign 

currency when a bank fails. Policymakers should ensure that banks have sound 

foreign-exchange risk-management systems and controls in place. Furthermore, the 

deposit insurer should develop sound policies and procedures to manage prudently any 

foreign-exchange risk it faces. In designing such policies and procedures, the deposit 

insurer may wish to draw on the expertise residing in banks. (page 26) 

14. Funding 

(a) Sound funding arrangements are critical to the effectiveness of a deposit insurance 

system and the maintenance of public confidence. A deposit insurance system should 

have available all funding mechanisms necessary to ensure the prompt reimbursement 

of depositors’ claims. Inadequate funding can lead to delays in resolving failed banks, 

to significant increases in costs and to a loss of credibility of a deposit insurance 

system. (page 26) 

(b) Member banks should pay the cost of deposit insurance since they and their clients 

directly benefit from having an effective deposit insurance system. However, 

policymakers should consider the effect of premium levels on the financial health of 

the banking industry. (page 27) 

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(c) Policymakers should choose an assessment base against which a given premium rate 

will be applied. (page 27) 

(d) The deposit insurer should ensure that funds are well managed and readily available to 

cover losses as they arise. This can be accomplished by implementing appropriate 

investment policies and procedures, and by instituting sound internal controls, 

disclosure and reporting systems. (page 27) 

(e) In practice, deposit insurance systems often are funded on a combined ex-ante and expost basis. The advantages and disadvantages with ex-ante and ex-post funding are 

generally applicable to hybrid funding arrangements. (page 27) 

(f) In principle, there are two approaches available to establishing a deposit insurance 

fund. One approach is to assess a steady premium rate over a long period, while the 

other involves developing a premium system designed to maintain a target fund ratio 

or range. If the target fund ratio method is chosen it should be sufficient to reduce the 

probability of the fund’s insolvency to an acceptable minimum, although estimating 

probabilities of loss is very complicated in practice. (page 28) 

(g) A case can be made either for establishing and maintaining one fund or for establishing 

and maintaining separate funds for different types of financial institutions that accept 

deposits from the public. If separate funds are established, policymakers should ensure 

that distinctions among the institutions and their funds do not contribute to competitive 

distortions. (page 28) 

(h) Policymakers have a choice between a flat-rate premium system or a premium system 

that is differentiated on the basis of individual-bank risk profiles. The bases and 

criteria used in a risk-adjusted differential premium system should be transparent to all 

participants. As well, policymakers who adopt risk-adjusted differential premium 

systems should ensure that necessary resources are in place to administer the system 

appropriately. If policymakers choose to adopt risk-adjusted differential premiums, 

consideration should be given to the advantages and disadvantages of keeping the risk 

profiles of individual banks confidential. (pages 28-29) 

15. Public awareness 

In order for a deposit insurance system to be effective, it is essential that the public be 

informed about its benefits and limitations. Experience has shown that the 

characteristics of a deposit insurance system need to be publicised regularly so that its 

credibility can be maintained and strengthened. (page 30) 

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16. Cross-border issues 

(a) If the host-country system provides supplementary coverage, multiple reimbursements 

of insured depositors should be avoided. The deposit insurance already provided by the 

home-country system should be recognised in the determination of levies and 

premiums. (page 31) 

(b) Provided confidentiality is ensured, all relevant information should be exchanged 

between deposit insurers in different jurisdictions and possibly between deposit 

insurers and other foreign safety-net participants when appropriate. In any case, deposit 

insurers should receive all information necessary to enable a prompt reimbursement of 

depositors’ claims and to enable them to meet their mandate. (page 31) 

17. Failure resolution 

(a) Cooperation among the various financial safety-net participants, both before and after 

a failure, is essential if troubled banks are to be handled in a timely and effective 

manner. (page 32) 

(b) The determination and recognition of when a bank is in serious financial difficulty 

should be made on the basis of well-defined and transparent criteria by a safety-net 

participant with authority to act. Prompt and decisive actions are crucial to reduce the 

cost of a bank failure, but care needs to be taken to address confidentiality issues to 

protect the exchange of information among financial safety-net participants. (page 32) 

(c) An effective failure-resolution process should: meet the deposit insurer’s obligations, 

ensure that depositors are reimbursed promptly and accurately, minimise resolution 

costs and disruption of markets, maximise recoveries on assets, settle bona-fide claims 

on a timely and equitable basis, and reinforce discipline through legal actions in cases 

of negligence or other wrongdoings. (page 32) 

(d) Three basic failure resolution options exist: liquidation and reimbursement of 

depositors’ claims; purchase-and-assumption transactions (sales); and open-bank 

financial assistance. Bankruptcy/insolvency and other laws may heavily influence the 

choice of resolution methods since such laws vary considerably among countries and, 

in some cases, may make a particular resolution method difficult to implement. 

Because of the special significance of banks and bank failures, policymakers may wish 

to review whether bankruptcy/insolvency laws facilitate the orderly exit of troubled 

banks. (page 33) 

18. Reimbursing depositors 

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(a) Systems and processes should be developed in order to undertake preparatory reviews 

of deposit liabilities held by troubled banks. This requires development of 

administrative practices and procedures and the ongoing review of the quality and 

security of bank deposit records. (page 35) 

(b) The deposit insurer should know, as soon as possible, when a bank will be closed. 

Access to the necessary deposit data before the bank is closed lessens the risk of 

manipulation of records, shortens the time for completing the reimbursement process, 

and helps preserve public confidence. (page 35) 

(c) The reimbursement process should be evaluated ex-post to incorporate lessons learned. 

(page 36) 

19. Claims and recoveries 

(a) The powers provided to the entity responsible for the claims-and-recoveries function 

should be guided by applicable laws and should include control of the failed bank’s 

assets; contract rights and privileges; the ability to allow or disallow claims; the 

capability to enforce or repudiate certain contractual obligations; and the ability to 

challenge fraudulent transfers and transactions. (page 37) 

(b) Asset-management and disposition strategies should be guided by commercial 

considerations and their economic merits, given the quality of the assets, the depth and 

condition of markets, the availability of expertise in asset management and disposition, 

legal requirements relating to the disposition of assets, and public-policy objectives. 

(page 37) 

(c) Transparency and access to information are key factors in marketing failed-bank 

assets. In principle, a wide range of methods is available for disposition of the assets of 

failed banks, including: asset-by-asset sales; auctions or sealed bids; asset pools; 

securitisation; asset-management companies; and equity partnerships. (page 38) 

(d) Claims and litigation advanced by the failed bank or the receiver/liquidator against 

directors, officers, auditors and other parties related to the bank failure are potentially 

important assets. These claims may result in significant recoveries and may serve as a 

tool for fostering discipline in the banking sector. For these reasons, potential claims 

should be identified and investigated carefully to determine the appropriateness and 

potential for recovery before being pursued. (page 38) 

20. Depositor ranking, collateralisation and rights of set-off 

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(a) Policymakers should be aware of the potential effects of existing depositor priority 

laws or statutes on failure-resolution costs and the incentive for depositors or other 

creditors to exert market discipline. (page 39) 

(b) Policymakers should be aware of the effects of collateralisation. Extensive 

collateralisation of a bank’s liabilities may affect the deposit insurer’s cost and 

impinge on its ability to provide financial assistance to a troubled bank. (pages 40) 

(b) Some countries emphasise the importance of set-off while others believe that it can 

contribute to unequal treatment. If set-off is allowed, a number of issues should be 

considered, including whether set-off should apply to all loans or only those due or in 

default. Set-off also can be influenced by the priority of claims in a bank failure. These 

issues generally involve trade-offs and require country-specific solutions. (page 40) 

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Annex I: Members of the Working Group 

Chairman 

Mr. Jean Pierre Sabourin, President and Chief Executive Officer 

Canada Deposit Insurance Corporation 

Argentina - Seguro de Depósitos Sociedad Anónima Canada - Canada Deposit Insurance Corporation (CDIC) 

Dr. José Carlos Jaime, Chairman Mr. Ronald N. Robertson, Chairman 

Dr. Adolfo César Diz, Member of the Board Mr. Guy L. Saint-Pierre, Senior Vice-President, Insurance 

Lic. Martin Lagos, Adviser and Risk Assessment 

Mr. Wayne Acton, Senior Vice-President, Field Operations 

Mr. David Walker, Director, Policy and Economics 

Chile - Banco Central de Chile France - Secrétariat général de la Commission bancaire 

Mr. Rodrigo Cifuentes, Senior Economist Madame Sylvie Mathérat, Chef du service des études 

Mr. Carlos Budnevich Le-Fort, Manager of Financial Analysis bancaires 

(until February 2001) Monsieur Olivier Jaudoin, Adjoint au chef du service des 

études bancaire 

Germany – Federal Ministry of Finance 

Mr. Udo Franke, Advisor to the Ministry 

Mr. Dietrich Jahn, Advisor to the Ministry (until June 2000) 

Hungary - National Deposit Insurance Fund of Hungary 

Mr. Dániel Jánossy, Managing Director 

Mr. András Fekete-Gyor, Deputy Managing Director 

Italy - Banca d’Italia 

Mr. Giovanni Carosio, Head of the Department, Supervision of 

Credit Institutions 

Mr. Alessio De Vincenzo, Economist, Banking and Financial 

Supervision Department 

Jamaica - Jamaica Deposit Insurance Corporation 

Mr. Winston K. Carr, Chief Executive Officer 

Japan - Financial Services Agency, Deposit Insurance Mexico - Instituto para la Proteccion al Ahorro Bancario 

Corporation of Japan, Ministry of Finance Mr. Carlos Isoard, Member of the Board of Governors 

Mr. Masaru Honma, Executive Director of General Affairs Mr. Julio César Mendez, Executive Secretary and CEO 

Department, DIC Mr. Vicente Corta, Executive Secretary and CEO 

Mr. Masamichi Kono, Director, International Affairs Division, (until September 2000) 

Planning and Coordination Bureau, FSA Ms. Ingrid Cerwinka, Assistant General Director 

Mr. Yasushi Kanzaki, International Bureau, MOF (until November 2000) 

(until June 2000) 

Mr. Noriaki Oka, Senior Counsel - General Affairs Department, 

DIC 

Philippines - Philippine Deposit Insurance Corporation United States of America - Federal Deposit Insurance 

Mr. Norberto C. Nazareno, President and CEO Corporation (FDIC) 

Mr. Ricardo M. Tan, Executive Vice-President Ms. Donna A. Tanoue, Chairman (until July 2001) 

Ms. Rosalinda U. Casiguran, Senior Vice-President for Legal Mr. George Hanc, Associate Director 

Affairs and Chief Legal Counsel Mr. Christie Sciacca, Associate Director 

Ms. Virginia P. Castillo, Senior Vice President 

Ms. Rescina S. Bhagwani, Vice-President 

The World Bank International Monetary Fund 

Mr. Gerard Caprio, Director, Financial Policy Department, and Mr. David S. Hoelscher, Division Chief 

Head, Financial Sector Research Mr. Charles A. Enoch, Assistant Director (until April 2000) 

Mr. Giovanni Majnoni, Adviser, Financial Sector Strategy and Mr. Michael Taylor, Senior Economist 

Policy Department Systemic Banking Issues Division 

Members of the Secretariat Financial Stability Forum 

Canada Deposit Insurance Corporation Mr. Pierre Cailleteau 

Ms. M. Claudia Morrow, Corporate Secretary 

Secretary to the Working Group 

Mr. John Raymond LaBrosse, Director, International Affairs 

Executive Director of the Working Group 

Ms. Jacqueline (Jackie) Chartrand, Administrative and Technical Support to the Working Group 

Research Committee: 

Mr. George Hanc, Head (FDIC) Ms. Christine Blair (FDIC) 

Mr. David Walker (CDIC) Ms. Rose Kushmeider (FDIC) 

Ms. Detta Voesar (FDIC) Mr. Greg Cowper (CDIC) 

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Annex II: Approach to Developing Discussion Papers 

1. Research Plan 

The Working Group developed a research plan on topics relating to guidance on deposit 

insurance that was made available at http://www.cdic.ca/international. Subgroups were 

formed for the 16 guidance topics, with a Working Group member acting as the coordinator. 

A member of the research committee assisted each subgroup. 

2. Outreach Sessions and Conferences 

The Working Group held meetings in Switzerland, the United States of America, Mexico, 

Hungary, Malaysia, Argentina, Italy and Chile. It also provided a number of fora for people 

interested in deposit insurance issues to exchange ideas and benefit from the experience of 

others. The Group met with over 400 people from over 100 countries. In addition to the 

presentations by Working Group members, there were over 90 presentations delivered at the 

conferences and seminars from individuals who were not directly associated with the Working 

Group. 

The format consisted of a two-day Working Group meeting, followed by an outreach session 

hosted by one of the members and a two-day conference on specific guidance topics. Outreach 

sessions and conferences were supported financially and otherwise by the Working Group 

members, other organisations and, in some cases, the Financial Stability Institute (FSI). As 

well, the Working Group cooperated with a number of the regional development banks. 

The Working Group’s Web site includes copies of presentations, the text of the remarks 

provided by many of the speakers, and videos of each conference. The Web site also includes 

copies of the Working Group’s business plans and discussion papers. Messages via e-mail 

were sent regularly to over 600 individuals and there have been over 40,000 visits to the Web 

site. 

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Outreach Sessions, Conferences and Seminars 

Location Host Date 

Basel, Switzerland Financial Stability Institute (FSI) and Federal 

Deposit Insurance Corporation 

May 2000 

Washington D.C., United States The World Bank 

Inter-American Development Bank (IADB) 

June and October 2000 

June 2000 

Cancun, Mexico Instituto para la Proteccion al Ahorro Bancario 

(IPAB) 

October 2000 

Budapest, Hungary National Deposit Insurance Fund of Hungary 

(NDIF), European Bank for Reconstruction and 

Development and FSI 

November 2000 

Chicago, IL United States Federal Reserve Bank of Chicago December 2000 

Kuala Lumpur, Malaysia Philippine Deposit Insurance Corporation, FSI 

and South East Asian Central Banks (SEACEN) 

January 2001 

Berlin, Germany Federal Ministry of Finance, Germany March 2001 

Paris, France Organization for Economic Cooperation and 

Development (OECD) 

March 2001 

Buenos Aires, Argentina Seguro de Depósitos Sociedad Anónima 

(SEDESA) 

March 2001 

Rome, Italy Banca d’Italia April 2001 

Lusaka, Zambia Common Market for Eastern and Southern 

Africa (COMESA) 

April 2001 

3. Business Plans 

The focus for each subgroup was articulated in a business plan, which outlined objectives, 

methodology, and methods for generating feedback. The Web site, outreach sessions and the 

conferences were the main vehicles that were used to implement the approach. 

4. Discussion Papers 

The Working Group took a non-prescriptive approach to developing the discussion papers on 

the guidance topics. The discussion papers drew on existing academic research, examined the 

pertinent elements of effective deposit insurance systems and explored the trade-offs and 

implications associated with particular approaches to deposit insurance. 

Copies of the discussion papers, a sample business plan and information related to the 

outreach activities are included in Volume II to this Report and can be downloaded from the 

following hyperlink http://www.cdic.ca/international/ 

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5. Final Report – Guidance on Deposit Insurance 

The Working Group’s activities culminated in this Final Report to the Financial Stability 

Forum. It draws together the issues presented in the discussion papers, and the views provided 

during the outreach sessions and via the Web site. 

The process used is shown below: 

Business Plans and Discussion Papers 

Consultations 

Web site Outreach Sessions Conferences/Seminars 

Guidance on Deposit Insurance 

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Annex III: Organisations that Assisted the Working Group 

Outreach Sessions, Seminars and Conferences 

Asian Development Bank Federal Reserve Bank of Chicago 

Banca d’Italia Financial Stability Institute 

Bank for International Settlements Instituto para la Proteccion al Ahorro Bancario, 

Mexico 

Canada Deposit Insurance Corporation Inter-American Development Bank 

Canadian Bureau for International Education National Deposit Insurance Fund of Hungary 

The Canadian High Commission, Malaysia Organization for Economic Cooperation and 

Development 

Common Market for Eastern and Southern Africa Philippine Deposit Insurance Corporation 

Embassy of Canada, Rome, Italy Seguro de Depósitos Sociedad Anónima, 

Argentina 

European Bank for Reconstruction and South East Asian Central Banks 

Development 

Federal Deposit Insurance Corporation The World Bank 

Federal Ministry of Finance, Germany 

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Participation at Outreach Session and Conferences/Seminars 

From Basel, Switzerland (May 2000) to Lusaka, Zambia (April 2001) 

Albania Hong Kong, SAR Panama 

Algeria Hungary Paraguay 

Argentina Iceland Peru 

Armenia India Philippines 

Austria Indonesia Poland 

Azerbaijan Iran Portugal 

Bahamas Ireland Romania 

Bahrain Isle of Man Russian Federation 

Barbados Israel Rwanda 

Belgium Italy Saudi Arabia 

Bolivia Jamaica Singapore 

Bosnia and Herzegovina Japan Slovak Republic 

Botswana Jersey Slovenia 

Brazil Jordan South Africa 

Bulgaria Kazakhstan Spain 

Burundi Kenya Sri Lanka 

Cambodia Korea Sudan 

Canada Kuwait Swaziland 

Chile Kyrgyz Republic Sweden 

China Latvia Switzerland 

Colombia Lebanon Taiwan 

Congo Lithuania Tajikistan 

Côte d’Ivoire Luxembourg Tanzania 

Croatia Macau, SAR Thailand 

Cyprus Macedonia, Republic of Trinidad & Tobago 

Czech Republic Madagascar Tunisia 

Denmark Malawi Turkey 

Egypt Malaysia Turkmenistan 

El Salvador Malta Uganda 

Eritrea Mauritius Ukraine 

Estonia Mexico United Kingdom 

Ethiopia Moldova, Republic of United States of America 

European Commission Mongolia Uruguay 

Finland Morocco Uzbekistan 

France Mozambique Venezuela 

Germany Namibia Vietnam 

Gibraltar Netherlands Antilles Yugoslavia 

Greece New Zealand Zambia 

Guernsey Norway Zimbabwe 

Haiti Oman, Sultanate of 

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Glossary of Terms 

adverse selection - The tendency for higher-risk banks to opt for deposit insurance and lowerrisk banks to opt-out of deposit insurance when membership in a deposit insurance system is 

voluntary. 

bank run - A rapid loss of deposits precipitated by fear on the part of the public that a bank 

may fail and depositors may suffer losses. 

benchmark - A standard or guideline to which other items or processes can be compared. 

blanket guarantee - A declaration by the government that all deposits and perhaps other 

financial instruments will be protected. 

bridge bank - A temporary bank established and operated to acquire the assets and assume 

the liabilities of a failed institution until final resolution can be accomplished. 

coinsurance - An arrangement whereby depositors are insured for a pre-specified portion, less 

than 100 percent of their deposits. 

collateralisation - The taking of a mortgage, pledge, charge or other form of security by a 

creditor over one or more assets of a debtor. 

contagion - The spread of an individual bank run to several other financial institutions. 

corporate governance - The processes, structures, and information used for directing and 

overseeing the management of an organisation. 

depositor priority - The granting of preferential treatment to depositors such that their claims 

must be paid in full before remaining creditors can collect on their claims. 

differential premium/risk-adjusted differential premium - A levy on a bank assessed on 

the basis of that bank’s risk profile. 

disclosure - A fact, condition, or description that is revealed clearly and publicly. 

ex-ante funding - The accumulation of a fund to cover deposit insurance claims in 

anticipation of the failure of a member bank. 

ex-post funding - An assessment levied after the failure of a member bank to provide funds to 

cover deposit insurance claims. 

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financial safety net - Usually comprises the deposit insurance function, prudential regulation 

and supervision, and the lender-of-last-resort function. 

forbearance - To grant an extension of time to certain distressed banks from minimum 

regulatory requirements. 

foreign bank – A foreign-bank subsidiary is incorporated as a separate entity in the host 

country. A foreign-bank branch, on the other hand, is an extension of the foreign bank itself 

into a host country. Foreign-bank branches and subsidiaries may be subject to different rules 

and supervised differently by a host country. 

least-cost resolution - A procedure that requires the deposit insurer or other designated entity 

to implement the resolution alternative that is determined to be less costly to the system than 

all other resolution alternatives, including the liquidation of the failed bank. 

lender-of-last-resort function - The provision of liquidity to the financial system by a central 

bank. 

limited-coverage deposit insurance - A guarantee that the principal and the interest accrued 

on protected deposit accounts will be paid up to a specified limit. 

mandate - A mandate is a set of official instructions or statement of purpose of a firm. 

market discipline - A situation where depositors or creditors assess the risk characteristics of 

a bank and act upon such assessments to deposit or withdraw funds from a bank. 

moral hazard - The incentive for additional risk taking that is often present in insurance 

contracts and arises from the fact that parties to the contract are protected against loss. 

netting/netting arrangements – This refers to the reduction of an accountholder's insured 

deposits by the amount of outstanding loans in a failed institution or the reduction of an 

accountholder's outstanding loans by the amount of deposits above the coverage limit. 

open-bank assistance - A resolution method in which an insured bank in danger of failing 

receives assistance in the form of a direct loan, an assisted merger, or a purchase of assets. 

paybox - A deposit insurer with powers limited to paying off the claims of depositors. 

purchase-and-assumption transaction (sales) - A resolution method in which a healthy 

bank or group of investors assume some or all of the obligations, and purchase some or all of 

the assets of the failed bank. 

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receiver - The legal entity that undertakes the winding down of the affairs of an insolvent 

bank. 

recovery - The amount of net collections of a bank’s assets. 

regulatory discipline - Governs the establishment of new banks; qualifications of directors 

and managers; business activities; change of control; and standards for risk-management, 

internal controls, and external audits. 

risk minimiser – A deposit insurer with the powers to reduce the risks it faces. These powers 

may include the ability to control entry and exit from the deposit insurance system, assess and 

manage its own risks and may conduct examinations of banks, or request such examinations. 

set-off - Rrefers to situations where the claim of a creditor in an insolvent bank (for example, 

a deposit) is deducted from a claim of the bank against the creditor (for example, a loan). 

situational analysis – An examination that policymakers undertake to assess factors such as: 

the state of the economy; current monetary and fiscal policies; the state and structure of the 

banking system; public attitudes and expectations; the state of the legal, prudential regulatory 

and supervisory; accounting and disclosure regimes. 

supervisory discipline - Requires that banks are monitored for safety and soundness as well 

as compliance issues and that corrective actions are taken promptly, including the closure of a 

bank when necessary. 

suspense account – A suspense account is used when not enough information is available to 

post a transaction with the right offset. For example, dividends and interest are “paid” to a 

trust account on their payable date even if all of the money from depositors and paying agents 

is not received on time. 

systemic risk – A risk that has implications for the general health of the financial system and 

can have serious adverse implications for financial stability and overall economic conditions. 

60