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Address
By Winston Carr
To Returning Residents
At A Seminar Held At The Jamaica Conference Centre
Saturday, July 24 1999
I.
Introduction
I welcome
this opportunity to speak to you here today. We are indeed
very happy that so many returning residents found it
possible to attend this seminar. Your contribution to the
country not only in terms of financial flows but also the
skills, knowledge, experience, work ethics, etc. that you
have brought, is widely known, recognised and deeply
appreciated.
My
sincere hope, as one of the chief organisers of this
seminar, is that when you leave here this afternoon, you
will be better informed about the recent developments in
the financial sector including the measures that have been
taken to prevent a recurrence of earlier problems; that
based on this better understanding, you will know where to
go to have questions about the sector answered.
II.
Background to the Scheme
Our
Deposit Insurance Scheme came into operation at the end of
August 1998, when the Deposit Insurance Act took effect.
Like many other schemes, it resulted from an attempt by
the Government to deal with problems in the financial
sector. Many of you will recall the failure of the Blaise
and Century financial entities.
When the
Scheme was introduced, Jamaica joined fifty six (56) other
countries (developed and developing) having similar
schemes which are enforceable by law. These countries
include the U.S.A., Canada, the United Kingdom. Venezuela,
India and Trinidad and Tobago which is the first Caribbean
country to introduce deposit insurance. Many of you would
know about the Federal Deposit Insurance Corporation
(FDIC) in the USA, the Canada Deposit Insurance
Corporation (CDIC) and the Deposit Protection Board in the
U.K. Here in Jamaica, we have the Jamaica Deposit
Insurance Corporation (JDIC) of which I will speak more
about shortly.
Now what
is deposit insurance in simple terms? Deposit Insurance is
a means of ensuring that depositors in banks and other
financial institutions covered under the Scheme enjoy some
measure of protection in case their institution fails. in
other words with deposit insurance you are guaranteed to
get back a certain amount of your monies (both principal
and interest) no matter what happens to the member
institution that accepted those monies.
III.
Critical Objectives of the Scheme
(1) To
protect the small depositors who are in a position to
undertake any risk assessment of the institutions in which
they placed their funds. The Scheme can therefore be
viewed as a form of basic consumer protection.
(ii) To
restore and maintain public confidence in the banking
system and by doing so reduce the possibility of runs and
their contagious effects on otherwise healthy
institutions.
(iii) To
provide the Government in conjunction with the supervisory
and regulatory authorities with a formal mechanism under
the law for dealing with problem financial institution,
with a view to protecting depositors. Before this, the
approach was ad hoc and discretionary.
With
regard to the third objective, it is necessary to pint out
that the 100% guarantee that the government had given to
depositors on a discretionary basis fell away with the
introduction of deposit insurance under law.
IV.
Main Features of the Scheme
These are
as follows:
(1) It is
set up and managed by the Jamaica Deposit Insurance
Corporation (JDIC), which is an independent statutory body
with a seven-person Board of Directors drawn from the
public and private sectors. Membership of the Board is as
follows The Financial Secretary, The Governor of the Bank
of Jamaica and the Chief Executive Officer of the
Corporation (whoever the holders of these positions happen
to be) and four other directors, one of whom is the
Chairman..
The main
functions of JDIC are:
(1) To
insure the institutions covered the Scheme and in so doing
issue them with their policies as well as Certificates
which they must display prominently in all their head
offices and branches.
(ii) To
manage and administer the Deposit Insurance Fund or any
other income of the Corporation.
(iii) To
levy premiums and fees for the fund.
(iv) To
act as receiver or liquidator of any member institution
and in so doing can arrange for this restructuring by
merger with or acquisition by another financial
institution or by the use of other measures.
(2) The
institutions currently covered by the Scheme are six (6)
commercial banks, fifteen (15) near-banks (i.e. merchant
banks, trust companies and financial houses) and six (6)
building societies, making a total of twenty seven (27)
which is the same group currently being supervised by the
Bank of Jamaica and for which information on their safety
and soundness is immediately available.
Since the
Scheme is a compulsory one, all these twenty seven
(27) deposit-taking institutions are obliged to join it
and are required to hold valid policies of deposit
insurance. There are some strong penalties for breaches of
this requirement under the Deposit Insurance Act. Making
the Scheme compulsory prevents adverse selection of having
strong uninsured banks coupled with weak insured banks.
(3) There
is a basic coverage limit of J$600,000 per
depositor in each institution covered under the Scheme.
The reasons for currently operating with this limit are as
follows:
(I) It
covers over 90% of the number of depositors (97
percent of the accounts) in the protected institutions,
bearing in mind that one of the fundamental objectives of
the Scheme is to protect the small depositors. In terms of
empirical evidence, it is interesting to note that when
the first J$40,000 was paid back to the 43,000 depositors
at the Century Financial entities, some 30,000 or 70
percent of them were fully covered!
(ii) It
satisfies an IMF "rule of thumb" that says the
coverage limit should be about twice times a country’s
per capita Gross Domestic Product (GDP).
(iii) A
higher level coverage would cost more in terms of the
premiums payable by the member institutions (or
policyholders) which therefore raises questions of
affordability in the present economic environment.
(iv) The
JDIC, will apply ‘going concern’ solutions whenever,
there are problems with the institutions - e.g. sale/merge
before coming to liquidation, small and large, would be
fully protected and would therefore lose nothing.
(v) It
should be borne in mind that although the Scheme is
designed to mainly protect small depositors, amounts in
excess of J$600,000 (in the vent of an outright failure
involving liquidation) would not be totally lost,
especially if there is early action by the authorities.
The JDIC will issue certificates for the excess amount
which can then be used to make claims on the liquidator.
(vi)
Depositors with large sums over the J$600,000 limit should
consider placing them in safe investment instruments and
where possible utilise the services of professional
investment advisers.
(vii) In
fixing the coverage limit, the authorities had to take
into account, the need for a certain level of market
discipline. That is, they did not want too much
complacency to set in on the part of depositors and the
institutions, inducing them to take more risks with the
advent "moral hazard" problem. The likelihood of
this happening is greater, the higher the level of
coverage and especially in the absence of counter measures
such as co-insurance a and risk-based premiums. It has
been established that any deposit insurance scheme - in
fact any form of insurance - faces the problem of moral
hazard.
(viii)
Larger depositors can expand coverage by placing funds in
different institutions and in different ownership
categories of accounts within an institutions. The
various ownership categories of accounts and for which
each is covered up to J$600,000 are:
- Individual
Account
- Joint
Account
- Business
Account
- Trust
Account
The
details on these accounts are provided in the
Corporation’s main brochure entitled "Deposit
Insurance and You".
(ix) The
observation must also be made that the majority of schemes
have restricted or limited coverage and therefore it is no
accident that in the following countries the situation is
as follows:
USA
- US$100,000
Canada - CDN$60,000
UK - PDS.20,000
TT - TT$50,000
(x) The
coverage limit of J$600,000 will be reviewed in the future
in light of factors such as inflation, charges in the
deposit structure, the financial position of the banks,
etc. It is interesting to note that when the Federal
Deposit Insurance Corporation (FDIC) started in the USA in
1934 deposits were insured up to only US$20,000 in 1969,
US$40,000 in 1974 and has remained at US$100,000 since
1980.
In the
event of a failure, the corporation will make every effort
to pay back depositors as soon as possible in any event no
later than three months afterwards. If this three month
period is exceeded, the Corporation is obliged to pay
interest on the amount owing at the average savings rate
of the commercial banks until the payment is made.
Payments will be made either by way of cheques directly to
depositors or by the transfer of funds to another member
institution which will do the payment on behalf of the
Corporation.
5. The
Scheme is being funded by the premiums (initial and
annual) paid by member institutions and not the
depositors. In carrying out its function, the JDIC has
established the Deposit Insurance Fund into which these
premiums are placed. The resources of the Fund are then
invested in low risk and liquid instruments, that is
mainly Government securities such as Treasury Bills and
Local Registered Stocks. In the event of a failure,
depositors will be paid back their monies from the
resources of the Fund and if there is a shortfall, the
Corporation can borrow from both the public and private
sectors.
The
majority of funds received by a deposit-taking institution
covered by the Scheme in its usual course of business will
be insured. These include:
- Savings
and Chequing Accounts
- Time
Deposits
- Certificate
of Deposits
- Manager’s
Cheques issued by the financial institution
- Pre-paid
Letters of Credit
- Traveller’s
Cheques issued by the financial institution
- A
Share in a Building Society other than capital
share, a deferred share or a preference share.
Foreign
currency deposit
Foreign currency deposit are also insurable but payments
will be made in Jamaica and in the equivalent Jamaican
currency amount calculated at the ruling exchange rate on
the date the policyholder is closed.
It can be
deduced therefore that not all funds placed with
financial institutions covered by the Scheme will be
insured. In fact, the Act explicitly excludes
interbank and Government deposits. The main rationale for
excluding interbank deposits from coverage is that banks
are likely to be particularly well informed regarding the
financial condition and operations of other banks.
Consequently, these banks constitute the best potential
source of market discipline and by excluding interbank
deposits from coverage, this market discipline is
retained. Other major category of funds to be excluded
from coverage would be Commercial Paper, Brokered or
Managed Funds and Debentures.
7. The
Deposit Insurance Act addresses the very important issue
of the relationship between the Corporation and the Bank
of Jamaica. Essentially, there will be no attempt by the
Corporation to engage in the on-going supervision of
policyholders as is the model for example, at the federal
Deposit Insurance Corporation (FDIC) in the USA. The Bank
of Jamaica in its supervisory capacity will continue to
perform this function through on-site visits and off-site
surveillance. Instead, the Corporation will rely on copies
of the Bank’s examination reports on policyholders
together with any other material information relating to
the safety and financial soundness of policyholders. In
return, the Corporation must take available to enhance the
development of sound financial practice in Jamaica.
In
carrying out its function, the Act stipulates that the
Corporation must take all the necessary measures to ensure
that there is the least possible exposure of the
Corporation to loss, again reflecting a broader concept
of its role and function. This implies that it must
have the relevant information to adequately evaluate the
riskiness of policyholders and recommend where required
prompt corrective action regarding resolution strategies.
It is also intended that a close and cooperative working
relationship will be developed between the Corporation and
the Bank in its capacity as lender of last resort, that
is, in providing short term liquidity support to the
banks.
V.
Role of Various Stakeholders
Deposit
Insurance should never be viewed as a panacea for all the
ills of the banking system
Deposit
Insurance should never be viewed as a panacea for all the
ills of the banking system. Nor is it a substitute for
effective regulation and supervising coupled with a strong
legal; framework bearing in mind that only some 33 percent
of total deposits in value terms will be insured in the
institutions to be covered. In addition, it will take some
time for the Deposit Insurance Fund to be built up to a
comfortable level. Notwithstanding, the Jamaica Deposit
Insurance Corporation in collaboration with the securities
Commission, the Bank of Jamaica and the Superintendent of
Insurance intends, like we are doing today, to play a
critical role through a co-ordinated public education
programme to keep the public at large informed of how
best to protect their funds in terms of the institutional
framework and the array of products available. However, in
the final analysis, depositors will be ultimately
responsible as to where they place their funds. The need
to seek information, ask questions and be aware of
developments such as unexplained high rates on their
deposits compared with peer institutions.
Shareholders
have the responsibility to see that their institutions are
adequately capitalised at all times. Depositor should at
no time have to provide the cushion required to operate an
institution. Shareholders must understand that it is their
funds which must be put at risk and not those of the
depositors. They should also be the first to lose out in a
failure.
The Board
of Directors and senior management must be constantly
aware of their fiduciary responsibilities regarding the
safety and soundness of the institution.
The
external Auditors also have a key role to play and Mr.
Dandy has already alluded to their increased
responsibility, consequent on the 1997 amendments. In the
final analysis, External Auditors must operate as true
professionals and not bend the rules when it suits the
institutions they are auditing.
Finally,
the supervisory authorities will have to ensure at the
licensing stage or birth of an institution that "fit
and proper" persons with the requisite capital are
selected to run it. This concept of "fit and
proper" as you heard from Mr. Dandy was expanded to
incorporate a person’s ability to exercise the level of
competence, diligence, soundness of judgment and probity
required by director, major shareholders and officers of
an institution. The Minister of Finance now have power to
exclude from the ownership or management of a bank persons
who by virtue of their positions or relationships with the
bank may be likely to pose a threat to the interest of
depositors. Mechanisms are also in place for the on-going
supervision of the health of an institution during its
life and finally steps are being taken under the Deposit
Insurance Scheme to protect depositors at the close or
death of an institution.
Thank you
ladies and gentlemen.
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