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IADI Observes Trends in DSPs, Deposit Insurance, and Financial Inclusion

The International Association of Deposit Insurance (IADI) published a draft research paper entitled, Deposit Insurance and Financial Inclusion: Current Trends in Insuring Digital Stored-Value Products, to “document the challenges emerging for jurisdictions which have decided on a deposit insurance treatment of DSPs”, as well as review the approach taken by deposit insurers to provide coverage for DSPs. Digital stored-value products (DSPs), which are financial products that allow consumers to store value in a digital format (i.e. digital instrument that carries a credit balance such as digital gift cards), are becoming increasingly available and have served as a means of financial inclusion. According to the paper, however, “Survey data show that deposit insurers are not actively involved in national arrangements to promote financial inclusion, and the decision to participate in these arrangements does not rely on them.”

The survey further reveals that deposit insurers are aware that member institutions are offering DSPs as products, but they are not considered deposits in more than three-quarters of 51 jurisdictions. A summary of DSP product observations include the following: Little over half of surveyed jurisdictions have at least one approach to DSPs (“In 2016, the Consultative Group to Assist the Poor (CGAP) published the document Deposit Insurance and Financial Inclusion, which identifies three approaches for covering DSPs that have emerged regarding digital financial inclusion and deposit insurance.”); 10 jurisdictions have opted out of DSP coverage; 12 jurisdictions cover DSPs; DSP institutions do not have a liquidation process in place in most jurisdictions; although not required, the none of the jurisdictions have created a separate fund to cover DSPs; and only six of the jurisdictions surveyed had specific requirements regarding “public awareness activities” related to insured or non-insured DSPs.

The paper concluded that as observed in 2013, the majority of jurisdictions do not have a formal acknowledgement of the role that deposit insurance plays in promoting financial inclusion, and while deposit insurers put in place rules that protect small depositors, they “do not incorporate specific obligations in terms of fostering financial inclusion”.

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IADI

WOCCU Supported Measures Included in IADI Guidance Paper on Deposit Insurance Systems

The International Association of Deposit Insurers (IADI) released a Guidance Paper entitled, "Public Policy Objectives for Deposit Insurance Systems". The Guidance Paper gives an update on deposit insurance system public policy objectives in various jurisdictions as well as guidance for effective implementation of Principle 1 found in the IADI’s Core Principles for Effective Deposit Insurance Systems, which lays out essential public policy directives aimed to “protect depositors and contribute to financial stability”. The paper includes “results of a survey conducted by IADI of members’ experiences in selecting, implementing and evaluating their PPOs”.

In October, WOCCU responded to the IADIs consultation on public policy objectives for deposit insurance systems and emphasized its support for IADI’s PPOs to protect depositors and support financial stability; however, we encouraged IADI to include proportionality guidance so that national level regulators have the clearance to properly tailor regulations for cooperative institutions that are often less complex and less risky than their for-profit bank counterparts. With success, IADI addressed the importance of proportionality and stated, “By setting only the minimum requirement, these guidance points are supportive of the principle of proportionality. In any case, their application is voluntary and deposit insurers are free to put in place their own PPO development process and review framework based on jurisdiction, circumstance and legal framework.”

Additionally, WOCCU urged IADI to create effective regulation that provides supervision and monitoring of depository institutions for credit unions, as well as the provision of technical and financial assistance programs that will contribute to the protection of deposits for cooperative depositories and smaller, less capitalized institutions. WOCCU noted an absence of data for deposit insurance systems designed for credit unions. In the survey, IADI listed the countries that had PPOs in place as of March 31, 2016, and of those countries, Poland was the only country found to ensure financial assistance for credit unions, however, many countries address small, less sophisticated depositors.

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IADI

IADI Urged to Consider Credit Union Deposit Insurance Schemes in Setting Ratios

World Council of Credit Unions (World Council) filed its comment letter on the International Association of Deposit Insurers on the Association’s draft research paper Deposit Insurance Fund Target Ratios.  WOCCU included information on the National Credit Union Share Insurance Fund (NCUSIF) in the United States, the United Kingdoms’ Financial Services Compensation Scheme (FSCS), and Canadian provincial deposit insurance funds noting that including these successful approaches taken by the respective schemes, albeit different in their approaches, can help inform the IADI’s future work on deposit insurance fund target ratios.  

The letter notes that these funding structures strike an appropriate balance vis-à-vis the costs of levies versus pro- and counter-cyclality versus maintaining readily available funds to pay for insurance losses.

A copy of the letter can be viewed here.

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IADI, Comment Letter

WOCCU Urges Changes to IADI Research on Resolution Tools

The World Council of Credit Unions (WOCCU) filed its comment letter with the International Association of Deposit Insurers on the Association’s draft research paper on Resolution Issues for Financial Cooperative: Overview of Distinctive Features and Current Resolution Tools urging numerous changes to the hierarchy of tools available for resolution of a troubled credit union.  

Michael Edwards, VP and General Counsel of WOCCU states that, "[m]aintaining the availability of cooperative financial services to ordinary physical persons and small and medium enterprises (SMEs) is important for promoting financial inclusion in all types of communities, especially rural districts and poor urban areas that are underserved by commercial banks because of a perceived lack of profitability".

As such, WOCCU urged the following changes to the draft research paper: 

  1. Demutualization should be a last resort for resolving financial cooperatives, i.e. used only when a business combination with another financial coop is not possible;
  2. Mergers or Purchase and Assumption transactions with another financial coop should be the preferred resolution method;
  3. The Association’s paper should be updated to include recent Basel Committee, Canadian OSFI, and EU capital rules for financial coops which have increased financial coops ability to recapitalize; and
  4. Supervisory tools available before the point of non-viability, such as Net Worth Restoration Plans, should be emphasized.
A copy of the letter can be viewed here.
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IADI, Comment Letter