Deposit insurance agencies in the US and many other countries were thrust into the limelight at the height of the global financial crisis. They formed a crucial part of government efforts to instil confidence in the financial system and maintain financial stability as well as to address people’s concerns about their deposits in financial institutions.

Some countries increased the coverage limit, provided a blanket guarantee or extended the coverage period. Countries providing blanket cover over a certain period included Hong Kong, Singapore, Denmark, Germany and Malaysia. Australia and New Zealand also started to guarantee deposits, which they had not done prior to the financial crisis.

In the US, the Federal Deposit Insurance Corp (FDIC) raised its cover to US$250,000 per depositor from US$100,000 and extended the guarantee period twice — until Dec 31, 2013, at the latest. As at end-September last year, the number of banks reported to be on the FDIC’s “problem list” was 552 — the highest since the early 1990s. A contingent loss reserve of US$38.9 billion has been set aside to cover estimated losses this year.

Back home, the setting up of the Malaysia Deposit Insurance Corporation (PIDM) in 2005 was seen as timely. When it was set up, the deposit insurance agency was to provide coverage of RM60,000 per depositor per member bank, but the scope of coverage was extended during the global financial meltdown.

Despite our sound financial system which includes strong internal risk management measures put in place after the regional credit crunch in 1997, the government has decided to provide full guarantee for all deposits in commercial banks and certain financial institutions until Dec 31, 2010. PIDM is to administer this temporary full coverage.

With this temporary cover expiring in less than a year, the question now is what’s next and what are the options? Will the blanket guarantee be extended? Will it revert to the previous limit or will the authorities revise it upwards?

Although our financial institutions have emerged from the global financial crisis relatively unscathed, any extension of the full guarantee will have to take into account external factors and developments on the international scene.

Such a scenario is likely, given that the three central banks in Hong Kong, Singapore and Malaysia have agreed to work together on this matter. Bank Negara Malaysia, together with the Hong Kong Monetary Authority and the Monetary Authority of Singapore, had announced last July the setting up of a tripartite working group to come up with a coordinated strategy for a scheduled exit of the full deposit guarantee to ensure regional financial stability. Hong Kong and Singapore are international financial hubs and are vulnerable to major developments in the international markets.

Any decision taken by the government will have to consider developments in these two international financial hubs. This is despite financial institutions in Malaysia enjoying good profits, are well capitalised and have strong internal risk management measures. Domestic banks also have less exposure to risky international financial derivatives or products.

Making a decision on extending the full guarantee without considering the actions by other countries in the region won’t be beneficial to our financial institutions.

We could see an outflow of funds if we cease to provide full guarantee and our neigbours decide to extend it, or vice versa.
Perhaps Bank Negara could be more open about the tripartite agreement and the progress so that depositors and financial institutions will be more prepared at year-end, when full coverage of deposits expire.

Any extension will be an additional cost to the financial institutions even though the amount may be small compared with their earnings. Any extension could also give rise to moral hazard as full coverage could tempt financial institutions and large depositors like corporations and high-network individuals into taking unnecessary risks.

If deposit insurance coverage is reverted to a maximum RM60,000 per depositor per member bank after Dec 31 this year, the government should consider providing full coverage for certain type of accounts like those of senior citizens. In the US, the FDIC for individual retirement arrangements and certain retirement accounts remain at US$250,000 after Dec 31, 2013, when the maximum amount of cover is reverted to US$100,000 per depositor.

The authorities should also consider an upward revision of the RM60,000 limit after the expiry of the blanket guarantee even though it could result in higher premiums. The increase in premiums, however, would not be substantial enough to affect the banks’ profitability. The RM60,000 limit covers some 80% to 90% of the total depositors in the country.

Given that the Malaysia Deposit Insurance Corporation (Amendment) 2009 Bill was only passed by Parliament last December, it is unlikely that the fees have already been collected from the additional financial institutions coming under the deposit insurance cover.

This amendment allows the Minister of Finance, under extraordinary circumstances, to specify the coverage of a special insurance in addition to the regular deposit insurance coverage so as to maintain public confidence and stability in the financial system. The implementation of the blanket guarantee is one such measure.

Given that the PIDM has put in place a sound deposit insurance mechanism, the authorities will be able to act fast in the event of a financial crisis.

Toh Lye Huat is associate editor at The Edge



This article appeared in Forum page of The Edge Malaysia, Issue 792, Feb 8-14, 2010.