Financial institutions, not taxpayers, should pay for the benefits of financial stability underpinned by the deposit insurance system, Jean Pierre Sabourin, chairman of the executive council and president of the International Association of Deposit Insurers (IADI), said in an interview on Thursday.
But ultimately, the growth of public awareness is key to a well-functioning financial safety net, he said.
The state-run Central Deposit Insurance Corp (CDIC, 中央存保) had invited Sabourin to address a forum on bank crisis management and international cooperation on Friday.
PHOTO: SEAN CHAO, TAIPEI TIMES
During his visit, Sabourin also met central bank governor Perng Fai-nan (
"Financial institutions are doing business mostly at the cost of depositors' funding. It is a privilege and a trust business," Sabourin said in the interview.
Banks play the role of financial stewards, and it is their obligation to protect depositors. Financial institutions should think more about stakeholders, not only shareholders, he added.
Deposit insurance is a guarantee to depositors if a bank fails. The system is designed to provide protection for small, unsophisticated depositors who are not capable of assessing the risks facing the financial institutions where they deposit money.
In Taiwan, the maximum insured amount for each depositor will be raised to NT$1.5 million (US$45,166) from NT$1 million, based on the amended Deposit Insurance Act (存款保險條例).
The system is also aimed at helping restore or maintain confidence in and the stability of deposit-taking institutions and the financial sector as a whole.
In this respect, Sabourin said, financial institutions should pay for the benefits of stability that they enjoy, and those with higher risk levels should pay more.
"If they cannot afford the premium, they should not be in the business," said Sabourin, who has more than 30 years' experience in deposit insurance and has guided more than 40 troubled financial institutions.
Sabourin is founder and current head of the IADI. Established in May 2002, the IADI is a non-profit organization constituted under Swiss Law and a separate legal entity domiciled at the Bank for International Settlements in Basel, Switzerland.
The association has 47 members consisting of deposit insurers, central banks and supervisory agencies from around the world. It has a total of 67 participants, including the IMF and Asian Development Bank.
Taiwan's CDIC is one of the founding members of the IADI. CDIC President Johnson Chen (陳戰勝) represents Taiwan as a member of the international association's executive council and governance committee, as well as chairman of the research and guidance committee.
"My trip to Taiwan is to share and transfer knowledge ... and bring the CDIC's experience in areas like a differential premium system and risk assessment ... to Malaysia," Sabourin said.
The industry veteran now also heads the Malaysia Deposit Insurance Corp, set up in 2005, after 12 years of service at the Canada Deposit Insurance Corp.
Malaysia, where the deposit insurance system is in a fledgling stage, is expected to introduce a differential premium system next year, to replace the current flat-rate premiums that ignore financial institutions' level of risk.
To build an effective financial safety net, the growth of public awareness is crucial and necessary, Sabourin said.
In Malaysia, the administrative body propagates the system through the mass media and publications in four languages, educating people about who to turn to for help, he added.
"This can help prevent a potential deposit run if banks fail. Because if bank runs start, it is hard to stop them," Sabourin said.
In an unprecedented move, the Taiwanese government has taken over four troubled lenders within four months.
The unexpected takeover of The Chinese Bank (
The people who rushed to the bank were mostly in their 40s and 50s and their savings were mostly less than the current insured amount of NT$1 million, CDIC chairman Ray Dawn (董瑞斌) said.
After the government's intensive takeover action, three more debt-ridden local lenders remain on the watch list, sparking public concern and extensive discussion about whether the financial regulator should step in at an early stage to reduce the social cost.
However, Sabourin said that there was no fixed model available to handle distressed financial institutions, and that local situations and cultures had to be taken into account.
Regulators usually hope to resolve these problems through normal commercial transactions, like investment by or mergers with other lenders before an eventual takeover or exit from the market, he added.
Taiwan performs well in terms of transparency, with the public fully aware of which banks are financially weak. Sabourin said that people would not know that in most other countries.
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