How PIDM Promotes Stability in the Malaysian Financial System - Part 3

Part 3 - Early Intervention and Resolution of Troubled Member Institutions

The Malaysia Deposit Insurance Corporation Act (“PIDM Act”) provides PIDM with a wide range of legislative powers. As a resolution authority, PIDM can intervene early in troubled member institutions and to resolve them “… in a manner that minimises costs to the financial system.”

The PIDM Act and the system design features contemplate that PIDM would work closely with Bank Negara Malaysia, and would have the powers to carry out timely interventions or resolutions of troubled member banks. Prompt action not only helps support public confidence, but reduces the costs of failure and mitigates the potential adverse effects on the rest of the financial system.

Should a member institution fail, PIDM has a wide-ranging set of powers to enable an effective resolution of the member bank. The PIDM Act allows PIDM to resolve the bank through a liquidation (winding-up) and deposit payout. This is, typically, the role of a “deposit insurer”.

However, as a resolution authority, PIDM can also effect other transactions, such as a “purchase and assumption”, whereby an acquirer may buy the insured deposits and some of or all of the troubled bank assets. Alternatively, PIDM can compulsorily transfer the shares of the troubled bank to another entity. It may also effect the transfer of assets and liabilities to a temporary bridge bank (a subsidiary of PIDM), which would run the bank’s business for a period of time before an acquirer for the bridge bank is found and buys the bridge bank. In these instances, consumers would have continued access to their deposits and other banking services. Depending on the troubled institution and the circumstances, the earlier PIDM is able to intervene, the better its range of solutions and protection for depositors.

Resolution Planning and Simulations

As a resolution authority, PIDM has always been focused in ensuring operational readiness during good times. Readiness means that we must be prepared to deal with troubled member institutions as early as possible and at all times, in a manner that minimises costs to the financial system.

More than a decade ago, the Global Financial Crisis sent many economies into a tailspin and revealed the difficulties of resolving complex or large financial institutions without risks to the rest of the financial system. Failures of such entities bring with them the risks of collapsing entire financial systems and damaging economies, and hence, bailouts for such entities by governments.

In 2011, the Financial Stability Board (FSB) endorsed the Key Attributes of Effective Resolution Regimes for Financial Institutions. A core element of the Key Attributes is the need for countries to ensure the development of an effective recovery and resolution planning regime for long-term financial and economic stability, and to reduce the costs to the public of future financial crises.

Malaysia’s resolution planning efforts are part of our operational readiness journey. Broadly speaking, these efforts are centred on reducing the risks of severe systemic disruptions posed by any of its member institutions to the financial system and the economy. Resolution planning is aimed at heightening the financial system’s resilience. It involves assessments, by the resolution authority, of the business structures, operational and financial interdependencies of a member institution. The resulting resolution plan will be specific to each individual member institution and comprise likely strategies and plans for its resolution.

In summary, the objective of developing credible and robust resolution plans or “living wills” during good times is to help provide authorities with a clearer picture of where the key risks lie. Once identified, resolution planning could involve the possible reduction or removal of elements of significant risks to the rest of financial system. At a minimum, the resolution planning exercise will provide authorities with better options to deal with such institutions. The enhanced resolvability of these member banks would, in turn, help promote the stability and resilience of our financial system.

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