Taipei Times: What lessons can Taiwan learn from your experience of bailing out problem banks?
Jean Pierre Sabourin: One of the big changes that have occurred around the world is that there's a recognition that, in any country at any time, banks will fail. What we've seen around the world is the push towards preventives ? how to make sure this doesn't happen -- and what to do when it does happen because supervisors and deposit insurers don't make loans. They don't manage the bank. That's up to the board of directors. Therefore, if an institution gets into trouble, they should be taken out of the system. They should be forced to close down.
I've seen annual reports from the Central Deposit Insurance Corp, Taiwan. They are certainly pro-active in failure resolution and there's no question that they are doing their job well. Still, there are always lessons to be learned. If you don't liberalize your system, you have to have a strong supervisory system and a strong deposit insurer.
In case a bank does get in trouble, the primary responsibility for the deposit insurer is to protect depositors. There are different ways of doing it, depending on the mandate of the deposit insurer. The mandate in Canada is not just dealing with troubled institutions, but to find a way to minimize exposures to our corporation, so we have a lot of interventionist powers to ensure we are minimizing exposures.
We're very interventionist. If institutions are not following rules, we will take steps either to rectify the situation immediately, working with the supervisors, or we'll close them down.
TT: In other words, Canada is very pro-active in taking prompt corrective actions against failing banks. But when do you decide to step in?
Sabourin: There are a number of criteria for an early-warning system in use around the world. You can use capital adequacy ratios and differential premiums.
In Canada, we've gone a step forward, which we call standards of sound business and financial practices.
Standards have been put in place, because we realized from our 43 failures that banks usually failed because of mismanagement. It's not because they don't have a strong governance system to identify, assess and manage risks. So, what we are really saying is that if you manage your risks, you should have a well-rounded institution which has strong governance that set the rules for whatever responsibilities the board and management have.
We require that banks have sound risk management systems so that if a bank understands its risks, it can assess whether to accept the risks or not. In that regard, that's an early warning system. If they are not following our standards, then we're concerned. These are not solvency tests, they are issues of "do you have sound risk management systems?" And we coupled that with [the concept that] if you can't follow our standards, you cannot get the best score in our differential premiums system. It's not a risk-based system, but basically we've set both quantitative and qualitative criteria to assess the risk portfolio of various institutions so that we can differentiate one institution from another for differential premiums.
The institutions that have a higher risk factor pay higher premiums, just like in Taiwan. We all recognize today that if you wait until banks are insolvent, it's too late. So you have to move forward to an early-warning system. We cannot stop failures, but we can manage them and help banks not to get into trouble at the beginning. And we can put strong compliance requirements on them that reduce the risk of failure.
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