Funds Management Context, Set-up and Funds Flow Tracking · 2017. 4. 7. · Lays down the policy...

Funds Management – Context, Set-up and Funds Flow

Tracking

Kumudini Hajra Director, DICGC (India)

Investment Management for Deposit Insurance Agencies

February 20-22, 2013MUMBAI, INDIA

Safety net framework

Fund management◦ Conceptual framework

◦ Indian context

Investment management◦ Conceptual framework

◦ Indian context

Investment Management for Deposit Insurance AgenciesFebruary 20-22, 2013, Mumbai, India

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Ministry of Finance

Resolution Authority

Deposit Insurance

Supervisor

Central Bank

Overall financial sector policy making

Orderly resolution of problem banks

Protection of depositors of failed banks

Bank regulation and lender of last resort

Supervision of banks aimed at early detection

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Review of deposit insurance systems and resolution frameworks

Role of DIA in systemic crisis management (not

only protecting depositors of failed individual banks but also stabilising the overall financial system)

Increased role of DIS as resolution authority

Crisis arrangements – enhanced interaction among Central Bank, Supervisor, Ministry of Finance and DIA


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Roles of DIAs differ:

◦ Paybox

◦ Paybox plus

◦ Loss minimizer

◦ Risk Minimizer

For the deposit insurer agency to perform its role, it has to be backed by adequate fund.


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A deposit insurance system should have available all funding mechanisms necessary to ensure the prompt reimbursement of depositors’ claims including a means of obtaining supplementary back-up funding for liquidity purposes when required. Primary responsibility for paying the cost of deposit insurance should be borne by banks since they and their clients directly benefit from having an effective deposit insurance system.


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Type of Funds – Ex-ante, Ex-post and Hybrid

Sources of Funds –

◦ Capital (initial contribution)

◦ Premium from member institutions

◦ Investment income

◦ Share in recoveries

◦ Lines of credit (from CB/MoF)

◦ Borrowings

Use of Funds –

◦ Payouts

◦ Resolution Funding

◦ Operational Expenditure

◦ Other (Taxes?)


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Founded in 1962

Paybox mandate (credit guarantee mandate added in 1978 but has remained non-operational since 2003)

Provides funding for mergers of banks

Maintains three distinct funds

Insurance limit of INR 0.1 mn fully protects 93% of accounts and covers 35% of deposit value

Insures 2174 banks, including 2011 co-operative banks

Claims largely originate from co-operative banks


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Deposit

Insurance

Fund

General

Fund

Credit

Guarantee

Fund

• DICGC maintains three balance sheets

• DIF – Largest Fund

• CGF – Small fund; no schemes at present

• GF – Used for operational expenses

• Transfer between funds is permitted

• Limited explicit back-up funding


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SOURCE

OF FUNDS

APPLICATION

OF FUNDS

o Premium from insured banks

o Recoveries

o Coupon (Interest) received from existing investments

o Income from Reverse Repo transactions

o Any capital gains from rebalancing activity

o Settlement of Claims

o Tax Payments:

Income Tax

Service Tax

o Operational expenses

o Any capital losses from rebalancing activity


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INR

bill

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DIF - Contribution to Gross Revenue

Premium Investment Returns Recovery Others


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INR

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Payouts and Number of Failed Banks

Payout No. of banks failed (right axis)


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37.0642.5055.1459.0878.1891.03

109.79133.62

161.55

201.52

247.04

300.93

0.6 0.6 0.7 0.70.8

0.9 0.8 0.70.8

1.2

1.41.6

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INR

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Fund Balance and Reserve Ratio

Deposit Insurance Fund Balance Reserve Ratio (per cent) (right axis)

Normal situations

◦ Establish how large a reserve is appropriate

◦ Target level should be adequate to at least cover the potential losses of the insurer under normal circumstances

◦ Should factor in:

Composition of member banks (number, size, complexity of banks)

Liabilities of members and exposure of insurer to them

Probabilities of failures

Crisis situation

◦ Over-reliance on back-up funding from government (essential for maintaining depositor confidence) – budgetary limits?

◦ Issue of bonds (backed by government guarantee?)


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To invest the Corporation’s Funds in manner whichwill provide for:

Maximum security; while meeting

Cash flow demands of the institution; with

High returns on investment

In accordance with

provisions of the DICGC Act/Regulations

Sound and acceptable business practices


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Market:

Overnight Funds

Instruments:

Reverse Repo

◦ Done on an anonymous,electronic dealing systemprovided by CCIL

◦ Telephonic deals, reported viaPDO-NDS, an RBI package

Rationale:

Temporary surplus funds areinvested for overnight tenor, sincethe G-Sec market follows a T+1settlement cycle, while in theovernight market, settlement is onT+0 basis

Market:G-Sec

Instruments:◦ Dated securities from GoI◦ Treasury Bills from GoI◦ Special securities from GoI

such as Oil Bonds, FertiliserBonds

◦ Cash Management Bills fromGoI

◦ Done on electronic platform Rationale:In accordance with Sec. 25 of the

DICGC Act

Approved by the Board every year

Provide overall guidance to treasury operations and clarify concepts

Lays down the policy for investing corporation’s funds

Identification and measurement of risk, risk mitigation strategy, continuous tracking


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FRONT

OFFICE

MID OFFICE

Investment & Risk

Management Committee

BACK OFFICE


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• Tracks CCIL CASBI IndexDuration of long-term

portfolio

• Measure of interest rate sensitivityModified duration

• Concentration in top 4 securities not to exceed 20% of entire portfolio

Concentration risk

• Quantification of market risk is set at higher of that arrived by 2 methods

Market risk (VaR/Standardisedduration method

• IFR cushion maintained against market risk

Investment fluctuation reserve


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Pe

r C

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tTotal Returns on Portfolio

CASBI Return T-Bills Index Return

Liquid Bond Index Return DICGC Portfolio Return


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INR

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INR

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Fund Governance - Investment Value Buffer

DI Fund (Actuarial + Surplus) Portfolio Book Value

Portfolio Market Value IR + IFR (right axis)

IR: Investment ReserveIFR: Investment Fluctuation Reserve

Precluded from taking speculative position

Day-to-day audit of treasury transactions

Checks and balances at various levels

◦ Head of treasury

◦ CEO level – Treasury dashboard (part of MIS)

◦ Investment Committee –Monthly review

◦ Board and Audit Committee – Quarterly review

◦ Statutory audit - Annual


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Conservative stance – limits earnings potential

Narrow pool of instruments

Illiquidity in G-sec market

Low maneuverability (directive to work on fully-invested basis)


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SHORT-TERM

Implementation of risk-based premiums

Faster settlement of claims – IT solutions (unique customer view?)

Information sharing with central bank – MoU

Estimation of actuarial liabilities / target fund size

Enhanced public awareness

MEDIUM TERM

Broader reforms in deposit insurance (Working Group, Financial sector legislative reforms commission)

Focus on 3 things – (i) Efficiency in payouts, (ii) Financial strength of DICGC, (iiii) Broader mandate (incl. resolution)


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Develop and sustain fund raising capabilities

◦ Especially in the case of systemic crises

◦ Quick access to large amount of money

Fund management in normal times

◦ Appropriate target size of reserve fund

◦ Feasible differential premium scheme

Investment management framework

◦ Balance between liquidity and profitability

◦ Portfolio management within tolerable risk parameters

◦ Accountability for performance


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Funds Management Context, Set-up and Funds Flow Tracking · 2017. 4. 7. · Lays down the policy...

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