General Guidance on Early Detection and Timely Intervention for Deposit Insurance Systems
This paper provides guidance on the role deposit insurers can play in frameworks for the early detection of troubled banks and timely intervention into banks operations:
- Regardless of the specific responsibilities of the deposit insurer in any particular jurisdiction, the manner in which banks are supervised and regulated, and troubled banks resolved, has a major impact on the costs and other aspects of the deposit insurance system.
- Timely detection of weak or problem banks is very important for the effective and stable functioning of the financial and deposit insurance systems, as it affords the insurer due preparation for expected insured events (bank failures).
- Regardless of who has responsibilities in this regard, it is important to recognize that the determination and recognition of when a bank is or is expected to be in serious financial difficulty should be made early, and that the intervention and resolution process should be initiated promptly and on the basis of well-defined criteria.
- When dealing with troubled banks, neither a purely rules-based nor a purely discretionary prompt corrective action approach is recommended. Instead, a balance needs to be struck between the two.
- Institutional arrangements for ongoing bank surveillance and intervention action need to ensure that the financial safety-net participants involved have clearly defined mandates, roles and responsibilities, as well as the operational independence and powers to perform their respective roles in the early intervention/corrective action framework.
- Best results can be achieved if intervention is initiated at an early stage of deterioration of a bank's condition, when identified problems can still be rectified.
- It is important for the bank supervisor, the resolution authority and the deposit insurer to have well-developed action/contingency plans for ensuring timely and effective implementation of intervention measures that are adequate and proportionate to the seriousness of a bank's weaknesses.
- Special attention should be paid to systemically important financial institutions (SIFIs) as the stability of many other banks, and ultimately of the deposit insurance system, can often depend substantially on their safety and soundness.
- Introduction of recovery and resolution plans requires close coordination of relevant safety-net participants' actions at all stages of development, review, approval and implementation of such plans.
- 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 formalize these arrangements either through legislation, memoranda of understanding, legal agreements, or a combination of these instruments.
- For information to be useful to the deposit insurer, it should be timely, accurate and relevant in order to facilitate an effective system for the ongoing evaluation of individual insured institutions as well as the banking industry as a whole.
- The deposit insurer's need for relevant information can vary significantly depending on its institutional mandate and powers but this does not obviate the need for close coordination and information sharing among safety-net participants in all cases.
- A deposit insurer with a broader mandate, such as loss or risk minimization, has a greater need for information to enable it to assess the financial condition not only of individual insured institutions, but also of the entire banking industry.
- Since the supervisory authority is usually the primary and most important source of banking information given its specific powers and responsibilities, there should be clear guidelines for this entity to share relevant information with other safety-net participants, including the deposit insurer. It is important to ensure that the supervisory authority is obliged to supply the required information within a specified period of time.
- For all deposit insurers it is important to be informed about the results/prospects for implementation of corrective/intervention measures and/or recovery and resolution plans, and to participate in their analysis so as to be better prepared for possible negative developments, when the deposit insurer's involvement will be required.