Resolution Approaches and Tools
What Happens When a Member Institution Fails?
PIDM has special resolution powers under the PIDM Act to deal with financially troubled member institutions when they can no longer operate in a viable condition. These powers allow PIDM to take appropriate actions promptly and effectively:
Pre-emptive powers – Acting early
- PIDM can act early even before a member institution is declared non-viable.
- If a member institution shows signs of trouble, PIDM can carry out special examinations to understand what is going on and get ready to step in if needed.
- These early actions are intended to help reduce or avert risks to the financial system.
Resolution powers – Managing failure in a prompt and orderly manner
When Bank Negara Malaysia declares a member institution as non-viable, PIDM steps in to manage the failure in one of two main ways:
Going concern resolution ->
We keep the institution (or parts of it) open and running under separate management and/or shareholders to ensure continuity of key financial services and minimise disruptions to the financial system.
Gone concern resolution ->
We wind down the institution in an orderly manner and quickly reimburse insured deposits or protected benefits to protect depositors and policy owners to enable the failing institution to exit the business in a least costly manner.
Both approaches help us manage the failure smoothly, while preserving financial stability and public confidence.
Key Shariah Considerations in Resolution
PIDM is committed to Shariah compliance with respect to resolution of Islamic member institutions (i.e. Islamic banks and takaful operators). Compliance with Shariah requirements is critical for PIDM to ensure consistency with Islamic jurisprudence, mitigate legal and reputational risks, and promote market confidence in the Islamic financial system. Key considerations include:
i. Unique products and services
Islamic member institutions’ products and services are characterised by the application of a wide range of Shariah-compliant contracts or concepts. Therefore, it is important to assess how these products and services should be dealt with in a resolution to, amongst others, safeguard stakeholders’ rights and responsibilities.
ii. Mechanism for resolution actions
Resolution mechanisms, e.g. the sale to a third-party acquirer or transfer to a bridge institution will be subject to Shariah considerations when dealing with a non-viable Islamic member institution. Although there have been instances of asset and liability transfers in mergers and acquisitions involving Islamic banks, the unique circumstances of a resolution differ significantly from these cases. Therefore, careful planning and collaboration with relevant stakeholders are essential to develop a framework that ensures compliance with Shariah principles in resolution.
iii. Shariah governance
Reference to Shariah authority for advice on Shariah matters is important, given the potential impact of resolution on financial stability. Additionally, there is also the need for on-going monitoring to ensure Shariah compliance throughout the resolution implementation process. Therefore, establishing clear Shariah governance during good times is essential to provide certainty and credibility for the resolution of Islamic member institutions.
Our Approach for Readiness in Shariah Resolution
PIDM will continue to take a proactive and collaborative approach, engage in various forums to ensure Shariah awareness and enhance readiness for the resolution of a non-viable Islamic member institution. This includes continuing to organise the Muzakarah to provide a platform for participants to discuss and deliberate the development of Shariah-compliant resolution approaches with the view and intent to ensure an effective, prompt and orderly resolution of an Islamic member institution.
To learn more about PIDM Resolution Approaches and Tools, please refer to FAQs here.