APPLYING THE CORE PRINCIPLES WITH DIFFERENT MANDATES, SETTINGS AND STRUCTURES: THE CASE OF MEXICO

OCTOBER 23, 2014Lorenzo MeadeExecutive Secretary, IPAB

THE EVOLVING ROLE OF DIS: MEXICO AND ABROAD

2004 20142006 2008 2010 2012

Financial Crisis

BCBS/IADI Core Principles Updated

Core PrinciplesMX pilot test

CP Methodology

Key Attributes

PCA Bank Resolution

Financial Reform

Insolvent Bank Liquidation

Mexico

CESF

G20 Summit

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• Role of deposit insurance system since

the recent financial crisis

• Relevance of international financial

standards

• Importance of coordination between

authorities

THE RECENT FINANCIAL CRISIS AND DEPOSIT INSURANCE

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• International responseo Key Attributes

o Crisis Management Groups

o FSB Peer Reviews on DIS and on

Resolution Regimes and recommendations

to IADI on additional guidance

o Updating the Core Principles

• 3rd stage: Mexico’s Financial Reform

package, includes: o Strengthening of the Bank Resolution

Framework

o Special regime for Insolvent Bank

Liquidation

RESPONSE TO THE CRISIS AND CHANGES IN DIS MANDATES

• IPABo Public agency o Deposit Insurer and Resolution Authorityo Ex-ante funding system o Flat rate premium fees charged to bankso Coverage Limit: 400,000 UDIs ~ USD $150,000

• Banking system: 47 commercial banks

• Powers and mandate enable IPAB to implement

any of the following resolution methods: Deposit reimbursement Transfer of assets and liabilities Bridge bank Open bank assistance (in case of systemic risk)

IPAB OVERVIEW

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1. Public policy objectives2. Mitigating moral hazard

3. Mandate4. Powers5. Governance6. Relationships with other safety-net participants7. Cross-border issues8. Compulsory membership

9. Coverage10.Transitioning from a blanket guarantee to a limited coverage deposit

insurance system

11. Funding12.Public awareness13.Legal protection14.Dealing with parties at fault in a bank failure

15. Early detection and timely intervention and resolution16. Effective resolution processes17. Reimbursing depositors18.Recoveries

THE FORMER CORE PRINCIPLES

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• Observation:o Minor differences between the IPAB’s

mission statement and law could be

clarified, mandate not entirely consistent

with stated public policy objectives (i.e.

mandate of protecting small-scale

depositors in conflict with high coverage

limit)

• Actions:o 2011: mission statement modified “…to

guarantee bank deposits, primarily of

small and medium-sized depositors”

CP 3: MANDATE

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• Observation:o The high level of coverage per depositor

appears excessive, making the mitigation of

moral hazard more challenging.

• Actions:o In the wake of the crisis, it was determined

that coverage was appropriate if the large

majority of depositors across banks are

fully protected while leaving a substantial

proportion of the value of deposits

unprotected

CP 9: COVERAGE

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• Observation:o Accumulation of a Fund is hampered by

payment of legacy debt that stems from 1994-1995 crisis

o The Fund has no target levelo Access to extraordinary funding is

conditional and may require a period of time to enact

• Actions:o 2011: IPAB’s Governing Board approved

the development of a strategic project to determine adequate fund size and the timeframe required to implement it

o Extraordinary funding arrangements: under review

• Unresolved:o Legacy debt payment: issue of public policy

CP 11: FUNDING

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• Observation:o Uncertainty exists about the ability of

shareholders to halt a resolution process

through judicial injunctions (amparos)

• Actions:o 2013: Law on Judicial Injunctions (Ley de

Amparo) was modified to establish that

resolution measures cannot be halted by

shareholders through judicial injunctions.

CP 15: EARLY DETECTION, TIMELY INTERVENTION AND RESOLUTION

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• Observation:o Bank deterioration may turn out to be

sooner than expected.

o Bank insolvency may lead to liquidation

under commercial insolvency regime

• Actions:o 2014: Insolvent bank liquidation process is

implemented

CP 16: EFFECTIVE RESOLUTION PROCESSES

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• Observation:o Ability of IPAB to conduct on-site

examinations, the introduction of

standardized data templates and

elimination of claims form should reduce

payout periods

• Actions:o 2014: IPAB is granted the power to carry

out direct inspection visits and the claim

form for depositor reimbursement is

eliminated

CP 17: REIMBURSING DEPOSITORS

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1. Public policy objectives

2. Mandate and Powers

3. Governance4. Relationships with Other Safety-Net Participants

5. Cross-border Issues6. Deposit Insurer’s Role in Contingency Planning and Crisis Management

7. Membership

8. Coverage

9. Sources and Uses of Funds10.Public Awareness

11.Legal Protection

12.Dealing with Parties at Fault in a Bank Failure

13.Early Detection and Timely Intervention

14.Failure Resolution

15.Reimbursing Depositors16.Recoveries

THE PROPOSED CORE PRINCIPLES

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POSSIBLE FUTURE CHALLENGES FOR THE IPAB• Governance

o Operational independence (composition of Governing Board and term limits)

• Cross-border issueso Cooperation agreements with deposit insurers

from home countries of all foreign banks operating in Mexico (as subsidiaries)

• Coverageo Regular revision of coverage level

• Sources and uses of Fundso Pre-arranged sources of liquidity funding

• Reimbursing Depositorso Reimbursement within 7 days (in practice, but not

in law)

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CONCLUSIONS

• It is important to note that, as a result of the aforementioned changes and reforms, Mexico maintains an updated deposit insurance system and bank resolution regime.

• In addition, the financial reform allowed us to shorten timeframes in the case of an insolvent bank liquidation.

• Evidence of this is our recent experience with a bank resolution, which demonstrated that the process works to allow for the orderly and timely exit of a bank from the system.

• As such, and notwithstanding the foreseen challenges that I have mentioned, we do not consider these as material obstacles to a prompt and orderly bank resolution process.

www.ipab.org.mx

@IPAB_mx

@LorenzoJMeade