Premium Assessment Approach and Target Fund Level

Transcription

1 Premium Assessment Approach and Target Fund Level Presented to the 6 th DICJ Round Table March 8, 2012 Presented by: Mark Maltais Controller Canada Deposit Insurance Corporation

2 Objectives To provide a summary of the current and future state of funding for CDIC 2

3 Outline of Presentation Current state of funding for CDIC Description of Consultation process related to funding Description of future of CDIC s funding arrangements 3

4 Core Principle 11: Core Principles Basel Committee on Banking Supervision and International Association of Deposit Insurers A deposit insurance system should have available all funding mechanisms necessary to ensure the prompt reimbursement of depositors claims including a means of obtaining supplementary back-up funding for liquidity purposes when required. Primary responsibility for paying the cost of deposit insurance should be borne by banks since they and their clients directly benefit from having an effective deposit insurance system 4

5 Current Situation in Canada Member funded d system with losses borne by membership. CDIC has no statutory requirement for maintaining ex ante funding it has been established by the board of directors as a measure of prudence. Incurred loss in excess of ex ante funding will be funded on an ex post basis. 5

6 CDIC s Funding Mechanisms Ex Ante Funding The extent of ex ante funding is currently $2.4 billion or 38 bps of total insured deposits of $622 billion. Ex Post Funding CDIC has a statutory borrowing limit of $18 billion adjusted each year based on the growth of insured deposits. Additional Funding Parliament can increase CDIC s statutory borrowing limit by authorizing an Appropriation Act. 6

7 Review of Funding Range At CDIC a funding review was recently undertaken in consideration of the following: 1. CDIC s Board of Directors resolution required that a review of ex ante funding be undertaken when the fund reaches 40 basis points of insured deposits (projected in 2013/14). 2. Recent events highlighted that all members need to be considered in developing a funding strategy. 3. Deposit Insurers should consider the pro-cyclicality of funding arrangements. 7

8 Consultative Approach CDIC developed a consultation paper that was circulated to its membership and other interested parties in mid The purpose was to solicit feedback on a number of issues related to CDIC s funding strategy and premium assessment approach. Risk based premiums were not addressed in the consultation paper and will be the subject of a separate consultation process in the future. 8

9 Questions asked in the Consultation Paper 1. Would you agree that t the goal of stable premium rates is desirable? 2. Should ex ante funding and premium rates be calibrated to reduce the likelihood that CDIC will experience a deficit for a prolonged period of time? 3. Would a minimum target for ex ante funding of between 100 and 150 basis points provide acceptable protection to significant ex post increases in premium rates? 4. Is ten years an appropriate time frame over which CDIC should reach the minimum target funding? 5. Is 5 to 7 years an appropriate p period of time to review funding strategies? 9

10 Q1. Stable Premium Rates A review of CDIC s historical data indicates that premium rates have tended to move pro-cyclically. Pro-cyclical premiums have created challenges for member institutions and required increasing premiums in a poor economic environment. Stable but higher premium rates can reduce (but not eliminate) procyclical rate increases. 10

11 Q1. Stable Premium Rates CDIC s Surplus/Deficit Premium History $ $2 $1 Surplus/Deficit(leftscale) scale) Premiums in bps (right scale) llions Surplus/(Deficit) - $Bil $0 -$ Basis Points -$2 2 -$3 0 11

12 Q2. Historical Stable Premium The consultation paper provided an analysis of CDIC s financial history to develop two approaches to mitigate prolonged deficits. In the first approach, CDIC determined a constant premium rate since its inception in 1967 that would have achieved a retained earnings level of approximately $1 billion (current situation). At a constant 6.4 basis points, CDIC would have been in a deficit position (i.e. retained earnings would have been negative) for as many as 13 years. 12

13 Q2. Historical Stable Premium status quo ($1 Billion Surplus) Surplus/Deficit Position Constant tpremium Rate of 6.4 Basis Points $6,000,000 $5,000,000 $4,000,000 rplus/(deficit) - $000 0's Su $3,000,000 $2,000,000 $1,000,000 $0 -$1,000,000 -$2,000,000 -$3,000,000 13

14 Q2. Historical Stable Premium Stable rates at 8.8 basis points In the second approach, CDIC estimated the premium assessment rate that would have kept retained earnings above zero. If historic premium rates had been set at 8.8 basis points, CDIC s ex ante funding in 2010 would have been approximately 100 basis points of insured deposits. 14

15 Q2. Historical Stable Premium no deficit Surplus/Deficit Position Constant Premium Rate of 8.84 Basis Points $6,000,000 $5,000,000 $4,000,000 Surplus/(Deficit) - $0 000's $3,000,000 $2,000,000 $1,000,000 S$ $0 -$1,000,000 -$2,000,000 -$3,000,000 15

16 Q2. Historical Stable Premium Comparison with 2011 results Average Premiums (basis points of insured deposits) Actual 2010/11 Stable Prem. Stable Prem. (Status Quo) (No deficit) Based on CDIC s history, the analyses suggest that CDIC s current premium m rates are lower than warranted. 16

17 Q3. Target Fund Size Determining the appropriate extent of resources necessary to deal with failure situations including determining the extent of ex ante funding, is a matter of judgement. CDIC utilized a statistical model (Monte Carlo simulations) to inform the discussion. The analysis considered various randomly generated scenarios (including failure scenarios) based upon assumptions in regard to probability of default, loss given default and exposure at default. 17

18 Q3. Target Fund Size (continued) In Canada CDIC s borrowing authority increases in line with insured deposit growth. By setting both ex-ante and ex-post funding targets as a function of insured deposits a consistent relative funding target is established. The Consultation Paper proposed a minimum target ex-ante fund size of between 100 and 150 basis points of insured deposits. 18

19 Q3. Target Fund Size (continued) Ex-Ante/Ex-Post Funding Current Situation Ex-Ante Target Ex-Post Borrowing 40 bps 290 bps $ 2.5 Billion $ 18.0 Billion 12% of total Funding 88% of total Funding 0 $20.5 Billion 12% 19

20 Q3. Target Fund Size (continued) Scenario: 100bp Fund Target Ex-Ante Target Ex-Post Borrowing 100 bps 290 bps $6.2 Billion $ 18.0 Billion 25% of total Funding 75% of total Funding 0 $24.25 Billion 25% 20

21 Q3. Target Fund Size (continued) Scenario 150bp Fund Target Ex-Ante Target Ex-Post Borrowing 150 bps 290 bps $9.4 Billion $ 18.0 Billion 35% of total Funding 65% of total Funding 0 $ Billion 35% 21

22 Q4. Time Horizon Needs to be credible. At current rates (average 3.6 bps of insured deposits), a 100 basis point target would take more than 30 years to attain. 22

23 Q4. Time Horizon (continued) Estimated average premium rates Time horizonon (basis points) Funding target Funding target basis points basis points 15 years years years

24 Q5. Review Period The environment in which CDIC operates is not static. Decisions made today regarding funding a premium rates may not reflect the future environmental/economic situation. The Consultation Paper proposed a 5 to 7 year review period after which CDIC s membership would be consulted. 24

25 Responses from Consultation Paper Overall the message received from the consultation process is that there is a desire to reduce pro-cyclical increases in premium rates. Concern was expressed that in a very low interest rate environment, deposit insurance premiums can represent a larger proportion of funding costs at member institutions. The key to achieving CDIC s ex ante funding target will be to build a larger fund over an extended period to minimize impact on member institutions. 25

26 26 Questions

27 27 Comments or questions can be directed to Mark Maltais at