The report of the Financial Stability Forum on Enhancing Market and Institutional Resilience (April 2008) pointed out that events during the recent international financial turmoil illustrate the importance of effective depositor compensation arrangements. The report stresses the need for authorities to agree on an international set of principles for effective deposit insurance systems. The Basel Committee on Banking Supervision (BCBS) and the International Association of Deposit Insurers (IADI) decided to collaborate to develop an internationally agreed set of Core Principles and established a joint working group. They submitted to BCBS and IADI for respective review and approval.
The evaluation methodology based on the 16 core principles was launched in December 2010, in a collaborative effort with the IMF, the World Bank, the European Commission, the Assembly of European Deposit Insurers, and the Financial Sector Assessment Program (FSAP). This methodology uses legislation, the efficacy of the deposit insurance system, and its practical efficiency as the evaluation criteria for these principles. The global financial crisis of 2007-2009 led to significant policy changes in the deposit insurance system, underscoring the importance of bolstering depositor confidence in the financial system. Many countries responded by increasing deposit insurance levels, strengthening financial stability support instruments, and introducing new guarantee laws. Despite the different forms of depositor protection, all policymakers concur that maintaining depositor confidence is of utmost importance. Consequently, due to the crisis, many deposit insurers have broadened their mandates to encompass bailouts and other restructuring measures. As per an IMF study, the number of deposit insurance institutions that were given responsibility for restructuring surged by 65 percent from 2005 to 2011.
IADI was presented to a joint working group which include representatives from BCBS, European forum of deposit insurers, European Commission, FSB, MF and World bank. The JWG has sought to achieve the right balance between raising the bar for more effective deposit insurance systems and retaining the Core principles continue to accommodate a diverse range of deposit insurance systems.
National authorities are free to put in place supplementary measures that they deem necessary to achieve effective deposit insurance in their jurisdictions. As a result of this review, the numbers of Core principles have decreased from 18 to 16 and,The core principles for the effective deposit insurance systemis approved in November 2014.
The Core Principles are intended as a voluntary framework for effective deposit insurance practices.
The core principles for the effective deposit insurance system
- Principle 1 – public policy objectives
- Principle 2 – mandate and powers
- Principle 3 – governance
- Principle 4 – relationship with other safety net participants
- Principle 5 – cross-border issues
- Principle 6 – deposit insurer’s role in contingency planning and crisis management
- Principle 7 – membership
- Principle 8 – coverage
- Principle 9 – sources and uses of funds
- Principle 10- public relations
- Principle 11 – legal protection
- Principle 12 – dealing with parties at fault in a bank failure
- Principle 13 – early detection and timely intervention
- Principle 14 – failure resolution
- Principle 15 – reimbursing depositors
- Principle 16 – recoveries