General Guidance for Developing Differential Premium Systems
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This paper updates a previous guidance paper on differential premiums systems published in February 2005. The paper sets out a number of guidance points for establishing and maintaining a differential premiums system. The objectives of a differential premiums system should be to provide incentives for banks to avoid excessive risk taking and introduce more fairness into the system. Before establishing a differential premiums system, it is important to undertake a situational analysis in order to self-assess the state of the economy, current monetary and fiscal policies and the state and structure of the banking system, among other things. Approaches used to differentiate bank risk should: 1) be effective at differentiating banks into appropriate risk categories; 2) utilize a variety of relevant information; 3) be forward-looking; and 4) be well accepted by the banking industry and safety-net participants. The deposit insurer must have the appropriate authority, information and resources in place to administer the system appropriately. There should be meaningful distribution among differential premium categories. Premium rates should meet the overall funding requirements of the deposit insurer and provide incentives for prudent risk management of banks. A well-managed transition process can help contribute to the success and acceptance of the differential premiums system. And, the basis and criteria used in differential premiums systems should be transparent to banks. A formal review process should be in place that allows banks to contest their scores.
International Endorsement : After extensive public consultation, the Executive Council of IADI approved and endorsed this paper as official guidance.
International Application : A number of IADI members are using this guidance in order to develop or enhance their differential premiums systems.