Malaysia: Government Deposit Guarantee

Because of global financial uncertainty and a regional expansion of deposit guarantees, on October 16, 2008, Malaysia announced the Government Deposit Guarantee (GDG) (BNM 2008; Marks and Yao 2008). The Malaysian government said that such actions were solely “pre-emptive and precautionary,” given Malaysian institutions’ liquidity and Malaysia’s strong regulatory framework (BNM 2008; PIDM 2009b).

The GDG was announced alongside an additional liquidity measure, which allowed insurance companies and certain takaful operators to access the Bank Negara Malaysia’s (BNM) liquidity facility (BNM 2008).^FA takaful operator is an institution, established according to Sharia law, that insures products through a communal fund. As with the GDG, the government said that this measure was solely precautionary and likely would not need to be used (BNM 2008).

On October 14, 2008, Hong Kong announced an unlimited deposit guarantee (Tsang 2008). This prompted Malaysia and Singapore to coordinate their own unlimited guarantees two days later, on October 16 (Marks and Yao 2008; MOF and MAS 2008; Lim 2011; IADI 2012a). In July 2009, Singapore, Hong Kong, and Malaysia formed the Tripartite Working Group, which aimed at coordinating an exit strategy from the unlimited guarantees (IADI 2012a; Tripartite Working Group 2009; FSB 2010). This regional cooperation, it has been argued, helped ensure a smooth crisis response (IADI 2012b).

Part two, chapter one, of the Malaysia Deposit Insurance Corporation Act of 2005 established the PIDM as Malaysia’s deposit-insurance authority (Parliament of Malaysia 2005). Article 25(2[a(iv)]) of the act allowed the PIDM to extend guarantees to the deposits of member institutions with the goal of “reducing or averting a risk to the financial system” (Parliament of Malaysia 2005). Article 25(2[e]) empowered the PIDM to guarantee the payment of monies or the performance of any obligations. As such, the PIDM had the authority to administer the GDG (PIDM 2010).

However, in announcing the establishment of the GDG in October 2008, the ministry of finance and the BNM did not describe the legal basis for the program.

In 2010, Malaysia’s parliament explicitly provided that legal basis in the Malaysia Deposit Insurance Corporation (Amendment) Act of 2010 (Parliament of Malaysia 2010). Section 4 of the act retroactively validated the ministry’s and the PIDM’s actions in creating and implementing the GDG: “All acts or things done or purported to be done by the Minister or the Corporation in anticipation of the enactment of this Act shall be deemed to have been validly and lawfully done” (Parliament of Malaysia 2010).

This amendment gave the PIDM the authority to provide temporary “stabilisation insurance” for “the purpose of protecting and promoting or maintaining the stability of the financial system and promoting or maintaining public confidence” (Parliament of Malaysia 2010). The act as amended included an order retroactively giving the PIDM the authority to create stabilization insurance between 2008 and 2010, which supplied a legal basis for the GDG. It also gave the ministry the authority, in a future crisis, to create “any other stabilisation insurance” for those purposes upon consultation with the BNM and the PIDM.

The 2010 act defined “stabilization insurance” as any extension of deposit insurance to financial instruments not previously guaranteed, beyond the limit of existing guarantees, or to previously uninsured institutions (Parliament of Malaysia 2010; Lim 2011).

The PIDM, which ran Malaysia’s existing deposit-guarantee scheme, administered the GDG (PIDM 2009a). The PIDM worked with the BNM to ensure that guaranteed institutions did not take excessive risks or relax capital requirements (PIDM 2009b). Moreover, owing to the nature of the GDG, the PIDM had to oversee “a larger number of financial institutions, to complement BNM’s supervisory oversight” (PIDM 2009b).

Additionally, the auditor general audited the PIDM, pursuant to Malaysian law (Parliament of Malaysia 2005).

Pursuant to Malaysian law, the auditor general audited the PIDM (Parliament of Malaysia 2005).

On October 16, 2008, the GDG was announced as part of an effort to “maintain the stability of the Malaysian financial system” (BNM 2008; Marks and Yao 2008). The Malaysian government said that such actions were solely “pre-emptive and precautionary,” given Malaysian institutions’ liquidity and Malaysia’s strong regulatory framework (BNM 2008; PIDM 2009b).

The International Association of Deposit Insurers (IADI) has praised Malaysia’s publicity around the GDG (IADI 2012b). Malaysia’s publicity campaign included brochures in various languages, a call center, and government trainings on the GDG (IADI 2012b). The World Bank and the IADI also praised Malaysia’s exit from the GDG. The World Bank argued that Malaysia’s communication helped ensure a smooth transition out of the program (World Bank 2013).

The PIDM, through the GDG, covered eligible accounts with an unlimited guarantee (BNM 2008).

The PIDM insured deposits held at member institutions, as required by the Malaysian Deposit Insurance Corporation Act of 2005. The government insured deposits above the PIDM’s guarantee limit or held at institutions outside the PIDM’s coverage. As such, the PIDM had no exposure to the GDG (PIDM 2009b).

To fund the GDG, the PIDM and the government entered into a Loss Coverage Agreement, which laid out the GDG’s terms and conditions. The agreement set the PIDM as the GDG’s administrator, allowing the PIDM to levy fees on participating institutions on the government’s behalf (PIDM 2009a; World Bank 2013). These fees were ultimately remitted to the government, pursuant to the agreement. The government did not publicly disclose the specific guarantee fee rate charged. Under the GDG, institutions paid a total of MYR 180 million in fees (World Bank 2013).

Under its precrisis deposit scheme, commercial and Islamic banks paid fees to the PIDM, which were separated into two distinct funds, one for conventional, interest-bearing deposits and one for Islamic deposits (Parliament of Malaysia 2005). The Malaysian government could lend money to the PIDM, and the PIDM also built up funding through investments, primarily in government securities (Parliament of Malaysia 2005). The total size of the two funds rose from MYR 275 million at the end of 2008 to MYR 370 million at the end of 2009 (PIDM 2010). Total insured deposits were MYR 202 billion at the end of 2008. Since the PIDM was only founded in 2005, its deposit-insurance funds were low relative to the insured deposit base at 0.2%. Its target was a range of 0.6% to 0.9% (World Bank 2013). It is not clear if the PIDM defines the insured-deposit base to include all deposits or just those deposits under the insured limit.

All domestic and locally incorporated foreign banks were eligible, including commercial, Islamic, and investment banks and deposit-taking development financial institutions regulated by the BNM (BNM 2008). The GDG covered 22 conventional commercial banks and 17 Islamic banks that were covered by the precrisis PIDM insurance schemes. It also automatically covered 15 investment banks, five deposit-taking development financial institutions, and two international Islamic banks that were not previously covered (PIDM 2009b; Lim 2011; BNM 2008).^FThe PIDM’s 2008 annual report notes that only two international Islamic banks were covered (PIDM 2009b). However, another PIDM document suggests that three international Islamic banks were covered (Lim 2011). It is possible that a license may have been granted to other international Islamic banks after 2008 while the GDG was still in operation.

The GDG did not cover foreign branches and subsidiaries of domestic banks (PIDM 2009b).

All commercial and Islamic banks were required to be members of the PIDM. Some deposit-taking institutions are not part of the PIDM (World Bank 2013). Some of these institutions are covered by explicit or implicit government guarantees, though some are not covered by such guarantees, including credit cooperatives (World Bank 2013). Credit cooperatives were not covered by the GDG (World Bank 2013). The Malaysian Co-operative Societies Commission supervised these cooperatives (World Bank 2013).

When announced, the Malaysian government said that the GDG would cover all ringgit and foreign-currency deposits (BNM 2008). In 2009, the PIDM clarified which deposit accounts were covered by the GDG (PIDM 2009a). Among those covered were fixed deposits, current accounts, savings accounts, joint and trust accounts, all Islamic deposits, principal-guaranteed conventional structured deposits, foreign-currency deposits and negotiable instruments of deposits held by nonbanks (PIDM 2009a). Those not covered included conventional structured products that were not principal-guaranteed, deposits payable outside Malaysia, interbank money-market placements, nonnegotiable instruments of deposit held by banks, and repurchase agreements (PIDM 2009a).^FFor the purposes of the GDG, the PIDM defined “structured products” as “a structured product with embedded derivatives (e.g. options) that are normally linked to the performance of an underlying asset such as interest rates, equities, foreign currency rates, etc.,” which “may be principal protected or non-principal protected” (PIDM 2009a).

Prior to the GDG, the PIDM covered conventional and Islamic deposits (PIDM 2007). The PIDM did not insure foreign-currency deposits (PIDM 2007). The GDG covered this previously excluded instrument (PIDM 2009a). Moreover, prior to the GDG, the PIDM covered principal-guaranteed conventional structured deposits but not conventional structured products that were not principal guaranteed.

An amendment to the Malaysia Deposit Insurance Corporation Act of 2005 retroactively allowed the PIDM to extend deposit insurance to financial instruments not previously guaranteed (Parliament of Malaysia 2010; Lim 2011).

PIDM-insured institutions paid annual premium fees for coverage up to MYR 60,000 (Parliament of Malaysia 2005). These fees were charged on an institution’s total insured deposits as of December 31 of the preceding assessment year and were credited to the PIDM. The maximum premium that could be charged to Islamic and conventional banks was 0.5% (Parliament of Malaysia 2005).^FThis limit has been removed by subsequent amendments to the Malaysian Deposit Insurance Corporation Act. The PIDM implemented risk-based premiums in 2008, which it had planned before the crisis. The rates were 0.03%, 0.06%, 0.12%, and 0.24% for four categories, based on institutions’ risk profiles. Prior to the change, banks paid a flat rate of 0.06% of total insured deposits (PIDM 2008). Premium revenues declined 18% in 2008, owing to the lower premiums paid by banks with lower-risk profiles under the new system and to provisions the PIDM made to ease the transition for banks with higher-risk profiles. Revenues rose almost 50% to MYR 132 million in 2009 as the risk-based system came into full effect (PIDM 2010; PIDM 2009b).

Pursuant to the Loss Coverage Agreement between the PIDM and the Malaysian government, the PIDM collected fees on behalf of the government to fund the GDG. The PIDM remitted these fees to the government. The PIDM did not publicly disclose the specific guarantee fee rate. For PIDM-insured institutions, the fee rate was charged on the total deposits and instruments guaranteed under the GDG minus the total insured by the PIDM. For non-PIDM-insured institutions, the fee rate was charged on all GDG-insured deposits. The PIDM separately charged premiums on conventional and Islamic deposits, though the calculation formulas remained the same for both types of deposits (PIDM 2009a).^FFor more on the differing deposits for Islamic and conventional institutions, see PIDM 2009a. During its two years of operation, the PIDM collected MYR 180 million in fees (World Bank 2013).

For the assessment year 2009, the cutoff date for the calculation of total guaranteed deposits and PIDM-insured deposits was December 31, 2008. Institutions captured two additional months in computing the guarantee fee to encompass the guarantee period in 2008. For the assessment year 2010, the cutoff date was December 31, 2009, adding up to a 12-month period.

The PIDM Act of 2005 sets out the guarantee’s exercise procedure (Parliament of Malaysia 2005). In the event of an institution’s failure, the PIDM would cover the first MYR 60,000 under the precrisis guarantee’s terms (Lim 2011). For insured deposits exceeding the PIDM’s guarantee limit or for deposits held at non-PIDM-insured institutions, the government would compensate depositors, likely through its remitted fee revenue or further government outlays (World Bank 2013). According to the PIDM Act of 2005, payouts would occur “as soon as possible and in any case not later than three months” after the date of an institution’s winding-down order (Parliament of Malaysia 2005, Article 55[2]).

In addition to fees, the GDG had other conditions to mitigate moral-hazard concerns (PIDM 2009b). Among these, Malaysia prohibited institutions from using the GDG in marketing campaigns and increased risk assessments (PIDM 2009b; IADI 2012b).

When the GDG was announced on October 16, 2008, the government announced that it would end on December 31, 2010 (BNM 2008). The program ended as scheduled (BNM 2011). To promote a smooth exit from the full deposit guarantee, Malaysia took various measures, including expanding the scope and increasing the cap of its precrisis deposit program (Lim 2011).

Following the program’s expiry, Malaysia’s precrisis deposit-insurance program was expanded (BNM 2011). Under the scheme, the PIDM guaranteed up to MYR 250,000 per depositor per insured institution, an increase from the precrisis maximum of MYR 60,000 (BNM 2011). These protections covered about 99% of all depositors (BNM 2011).