Parliamentary Replies
Published Date: 27 August 2002

Reply to PQ on Deposit Insurance Scheme


Date : For Parliamentary Sitting on 27 August 2002

To ask the Deputy Prime Minister and Minister of Finance, with regard to the Monetary Authority of Singapore's proposed deposit insurance scheme, (a) who will be appointed to manage the scheme; and (b) how have other countries operated similar schemes, especially with regard to best practices needed to avoid possible conflict of interest among bankers and banking supervisors who may be represented on the boards of such appointed agencies.

1 MAS has not decided who will manage the deposit insurance scheme. The first phase of the deposit insurance study by MAS has focused on issues related to the membership, coverage limit, the size of the fund and how participating institutions will be assessed for premium contributions. The issue of who will manage the scheme will be considered in the second phase of the study.

2 There are two broad options for managing deposit insurance. One option is to have the responsibility reside within MAS. There is substantial overlap in the interests and responsibilities of a bank supervisor and a deposit insurer. MAS supervises banks to assess their safety and soundness and to minimise incidences of failure.  A major part of this supervision involves evaluating the risk profile of institutions - both the health of their balance sheets as well as the strength of their risk management systems and processes. The deposit insurer similarly needs to assess the risk profile of institutions so that it can price the insurance premiums appropriately and take supervisory action to minimise the risk posed by a weak institution to the deposit insurance fund. If MAS administers the deposit insurance scheme, it can leverage on its existing supervisory resources, avoid the duplication of supervisory functions and minimise the burden on institutions.

3 Another option is to set up a separate organisation with its own governance structure. In part, this approach emphasises the concern that the interests of a deposit insurer and a bank supervisor may not always coincide.  A deposit insurer may want to close a weak bank early instead of risking further deterioration in the bank and a larger loss to the deposit insurance fund.  The bank supervisor may disagree if there is a good chance that the bank can be returned to health after cleaning up its balance sheet and improving its management. But even under this option where the deposit insurer is separate from the bank supervisor, the two will still need to consult closely and share information with each other.

4 In the second phase of the study, the MAS will assess the relative merits of the two arguments, and study the practices in other countries, before making a firm proposal on an organisational structure most suitable for the Singapore deposit insurance scheme. The MAS will consult with the industry and other interested parties when the study is completed.

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