THE Bill seeking to establish a Deposit Insurance Scheme to lay out a regime governing its core elements–the Deposit Insurance Corporation and the Deposit Insurance Fund–was last Thursday laid in the National Assembly by Finance Minister, Winston Jordan.
The legislation which is yet to be debated in the National Assembly is aimed at establishing a scheme to protect insured depositors comprising a Deposit Insurance Fund and a Deposit Insurance Corporation responsible for managing the Fund and for connected purposes.
The Bill which will be read for the second time and debated in the future, notes that deposit insurance is one of the components of the financial sector safety net, alongside supervision, resolution, and emergency liquidity assistance.

According to the explanatory memorandum, the Bill seeks to address the inherent instability of maturity transformation in the banking sector, that is, the financing of long-term assets through the issuance of demand or short-dated deposits, which makes banks vulnerable to depositor runs and to contagion from less sound institutions.
The advent of deposit insurance has proven to prevent major banking crises the world over and plays a central role in maintaining financial stability.

DEPOSIT INSURANCE SCHEME
Clause 3 of the Bill seeks to establish the Deposit Insurance Scheme which is aimed at fostering financial stability by protecting depositors and by contributing funds to the resolution of member institutions. “These objectives inform the design of all elements of the Scheme and provide a yardstick for holding the Corporation accountable in the performance of its functions,” the explanatory memorandum says.

DEPOSIT INSURANCE CORPORATION
Meanwhile, Clause 8 seeks to establish the Deposit Insurance Corporation as the deposit insurer and seeks to give it a pay-box plus mandate, with functions and powers instrumental to the objective of fostering financial stability through depositor protector and resolution financing.

It sets out the core functions of the Corporation which are to reimburse the funds held by insured depositors at a failed member institution and to finance the resolution of a member institution. Incidental to these functions, it is also tasked to collect premiums, manage the assets of the Fund, and promote public awareness.

To effectively do the aforementioned, Clause 9 seeks to give the Corporation an open-ended assignment of powers, enabling it to take any action deemed necessary.
Clauses 9 and 10 outline the governance framework of the Corporation which is designed to ensure its ability to exercise its functions without undue pressure from the Government or the industry. Notwithstanding being independent, the Corporation relies on the Bank for material support to carry out its operations.

Clauses 12 to 21 set out the decision-making structure of the Corporation which is made up of the Board of Directors and the Chief Executive Officer (CEO). The rules governing the composition of the Board, the division of responsibilities between the Board and the CEO and appointments aim to put in place a system of checks and balances that support the independence of the Corporation and prevent its powers from being abused. The Board is responsible for the approval of policies and regulations and for the supervision of management, while the CEO is symmetrically tasked with proposing the formulation of policies and regulations and with the performance of daily management.

These clauses also set out the requirements on integrity, qualification, and conflicts of interest which apply to the CEO and to the independent directors, further supporting the independence of the Corporation. To avoid undue influence from political or private interests, certain individuals are also ineligible to serve as CEO or independent director, namely members of Parliament, Government or the Supreme Court, public officers, political party officers, and directors, officers or qualified owners of a financial institution.
Clauses 22 to 25 speak to the accountability and transparency of the Corporation while Clauses 48 and 49 seek to provide that, in support of the independence of the Corporation, its current and former CEOs, Directors, and employees, as well as other individuals in its service enjoy legal immunity.

DEPOSIT INSURANCE FUND
Meanwhile, Clauses 26 to 36 states that funding for the Scheme is provided on an ex-ante basis (which is based on the forecasted need for funding as opposed to the actual need for funding) thus giving the Corporation immediate access to the necessary resources to reimburse depositors promptly.

The minimum target size of the Fund and the timeframe to achieve it will be determined following a quantitative assessment of the risks to which the member financial institutions are exposed. Start-up funds are provided by the Bank, with a government guarantee, and by the member financial institutions through initial contributions. In addition, regular premiums are assessed bi-annually on the member financial institutions at a rate of 0.2 – 1.5 per cent of covered deposits, as determined by the Board.

Further, the Bill states that the fund must be managed so as to ensure immediate availability should an insured event come about. It means therefore that the funds must be invested in safe assets, following a strategy that prioritizes liquidity over return, and subject to adequate risk management and internal control mechanisms.

Clauses 37 to 43 seek to provide that insurance coverage needs to be set at a level that is low enough to be credible and mitigate moral hazard, but high enough to afford protection to small depositors. Based on these considerations, the Act sets the coverage limit at $2M. Certain classes of deposits are excluded from coverage. Those include deposits of financial institutions, deposits of government authorities, deposits held at overseas branches of financial institutions, deposits of persons affiliated with a failed financial institution, and deposits of individuals engaged in money laundering or financing of terrorism.
Additionally, the clauses also aims at avoiding bank runs and panics, thereby ensuring that the Corporation must be able to complete the payout process shortly after a financial institution is placed in liquidation.

The Corporation is empowered to extend funds for resolution, provided the amounts involved are less than what would be necessary should the financial institution be liquidated. Financing can be provided to fill a balance-sheet gap in the event of a transfer of assets and liabilities to a willing purchaser or to a bridge bank, up to 50 per cent of the minimum target size of the Fund. Here, too, the Corporation is entitled to recover from the liquidation, estate with the same rights and rank as insured depositors.
Because advance planning is essential for the Corporation to be able to react promptly to an insured event, clause 38 states that the Corporation is entitled to receive supervisory data from the Bank with a view to monitoring the likelihood and magnitude of an insured event.

Clause 45 also empowers the Corporation to obtain, by regulations, other relevant information directly from the member financial institutions, in particular, their depositor records, through on-site or off-site examinations and the liquidator.
Clause 44 seeks to provide that the Corporation has the authority to share information and cooperate with other domestic and foreign safety-net participants apart from the Bank. Such participants may include authorities with responsibilities over the financial sector in and outside Guyana, such as the Ministry of Finance, deposit insurance agencies, financial supervisors, and resolution authorities.

All private information obtained by the Corporation in the discharge of its duties must be kept confidential. However, there are exceptions where information is released to law enforcement authorities, to a court of law, to the external auditors, to domestic or foreign safety-net participants, or is used in the interest of the Corporation in legal proceedings.
Meanwhile, Clause 54 speaks to transitional provisions to establish a timetable for the implementation of the Act. Actions that are expected to be implemented in one to 12 months include the appointment of the independent Directors, the appointment of the CEO, the approval of the employment and the salary schedule, the appointment of the external auditor, the approval of policies and regulations on a number of matters, the approval of the initial disbursement plan and the disbursement procedures, and the determination of the regular insurance premiums.