Deposit Guarantee System

Accquiring Institutions: A healthy bank or financial institution that purchases some or all of the assets and assumes some or all of the liabilities of a failed institution in a purchase and assumption transaction.

Advance Payment: A payment made to uninsured depositors or creditors after a bank failure to meet their liquidity
needs.

Adverse selection: The tendency for higher-risk banks to opt for deposit insurance and lower-risk banks to opt-out of deposit insurance  when membership in a deposit insurance system is voluntary.

Aggregation: To collect compiling information from depositors’ different several accounts into one for managing needs (usually for the purpose of reimbursement).

Amalgamation: A combination under a single entity of   all or part of the assets and liabilities of two or more business units by  either merger (where one company absorbs another) or consolidation (where the original companies form a new one).

Assessment Base: The base on which the deposit insurer to  charge premium or to calculate the levy needed to compensate the insured depositors.

Asset Purchases: A buyout strategy in which certain specific assets of a target institution are purchased.

Bank Insolvency: When a bank can no longer pay any inancial obligation  when due.

Bank run: A rapid loss of deposits precipitated by fear on the part of the public that a bank may fail and depositors may suffer  losses.

Blanket Guarantee: A declaration by the government that all deposits and perhaps other financial instruments will be protected. 

Benchmark: A standard or guideline to which other items or processes can be compared.

Bridge bank: A temporary bank established and operated to acquire the assets and assume the liabilities of a failed institution until final resolution can be accomplished.

Claim: An assertion of the indebtedness of a failed institution to a depositor, general creditor, subordinated debt holder, or shareholder.  

Coinsurance: An arrangement whereby depositors are insured for a pre-specified portion, less than 100 percent of their deposits.

Collateralisation: The taking of a mortgage, pledge, charge or other form of security by a creditor over one or more
assets of a debtor.

Compulsory System: A deposit insurance system that all targeted institutions must participate in to be member institutions according to law or agreement.

Conservator: A entity is given the authority to act the legal procedure provided by statute for the interim management of   financial institutions.

Conservatorship: The legal procedure provided by statute for the interim management of financial institutions.

Contagion: The spread of an individual bank run to several other financial institutions.

Corporate governance: The system by which an organization is  directed, administered or controlled, and includes the relationships among   stakeholders and the goals for which the organisation is governed.

Coverage Ratio (by account): A measure of all depositors that would be fully protected in case of an insured institution failure.

Coverage Ratio (by value): Ratio of insured deposits divided by total insurable deposits.

Covered Item: Accounts and financial products which are at insured institutions and covered by the deposit insurer.

Debt Management: The control of maturities, timing, quantum and composition of debt by a business.  

Deposit Insurance: Deposit insurance is a system established to protect depositors against the loss of their deposits in the event a insured institution of the deposit insurer is unable to meet its obligations to depositors. Similar terms such as deposit guarantee or deposit protection   are used in some countries.

Deposit Payout: A resolution method for failed institutions that involves the reimbursement of deposits and the transfer of   the bank’s assets to a receiver for liquidation.

Depositor priority: The granting of preferential treatment to depositors such that their claims must be paid in full before remaining creditors can collect on their claims (same as depositor preference).

Differential Premium: A levy on a bank assessed on the basis of that bank’s risk profile (also called Risk-Adjusted Differential Premium).

Disclosure: A fact, condition, or description that is revealed clearly and publicly.

Due Diligence: A potential purchaser’s on-site inspection of books and records of a failing institution.

Enterprise Risk Management: The framework applied on an organization-wide basis to ensure and demonstrate that an entity?significant risks are being consistently and continuously identified, assessed, managed, monitored and reported on.

Ex-ante funding: The accumulation of a fund to cover deposit insurance claims in anticipation of the failure of a insured bank.

Ex-post funding: An assessment levied after the failure of a insured bank to provide funds to cover deposit insurance claims.

Financial Assistance: Economic assistance provided by unrelated   third parties, typically government agencies or deposit insurers. They may   take the form of loans, guarantees, subsidies, tax allowance, contribution, or cost-sharing arrangements. 

Financial safety net: A financial stability mechanism that usually comprises the deposit insurance function, prudential regulation and supervision, and the lender-of-last-resort function.

Flat – Rate Premium: A premium assessed at a uniform rate across all insured institutions.  

Forbearance: To grant an extension of time to certain distressed banks from minimum regulatory requirements.  

Foreign bank: A foreign-bank subsidiary is incorporated as a separate entity in the host country. A foreign-bank
branch, on the other   hand, is an extension of the foreign bank itself into a host country. Foreign-bank branches and subsidiaries may be subject to different rules and supervised differently by a host country.

Hybrid Funding: A funding method used by the deposit  insurers by combining both the ex-ante and ex-post funding mechanisms.

Indemnification: In general, a collateral contract or assurance under which one person agrees to secure another person against   either anticipated financial losses or potential adverse legal consequences.

Indexed Coverage: The limited coverage level determined by the inflation rate of a country.

Insured Deposits: Types of deposits that are covered by a deposit insurance system.

Internal-Control System: A system of objectives and controls designed to provide for the safeguarding of assets
and the reliability of   financial records.

Interrelationship: Relationships among deposit insurers and other financial safety players and their collaboration through allocation of powers and responsibilities, information sharing, and the co-ordination of actions to promote financial stability.  

Islamic Banking Business: Banking business in line with the principles of the Shariah, the law of Islam based upon the Quran, Sunnah (sayings and deeds of the Prophet Muhammad), s.a.w. Ijma’ (consensus of Muslim scholars) and Qiyas (analogy).

Least-cost resolution: A procedure that requires the deposit insurer or other designated entity to implement the resolution alternative that is determined to be less costly to the system than all other resolution alternatives, including the liquidation of the failed bank.

Lender-of-last-resort function: The provision of liquidity to the financial system by a central bank. Limited- coverage deposit insurance – A guarantee that the principal and the interest accrued on protected deposit accounts will be paid up to a specified limit.  

Limited-Coverage Deposit Insurance: A guarantee that the principal and/or the interest accrued on protected deposit accounts will be paid up to a specified limit.

Liquidation: The winding down of the business affairs and operations of a failed insured depository institutions through the orderly disposition of its assets after it has been placed in receivership.

Loss Sharing: A method in a purchase and assumption transaction in which the receiver agrees to share with the acquirer losses on certain types of loans. Loss sharing may be offered by the receiver in connection with the sale of classified or no performing loans that otherwise might not be sold to an acquirer at the time of resolution.

Mandate: A mandate is a set of official instructions or statement of purpose of a firm or an organization.

Market discipline: A situation where depositors or creditors assess the risk characteristics of a bank and act upon such assessments to deposit or withdraw funds from a bank.

Maximum Coverage: The amount a depositor can claim from the deposit insurer in the event of bank failures. See  also “Limited-Coverage Deposit Insurance”.

Moral hazard: The incentive for additional risk taking that is often present in insurance contracts and arises from the fact thatparties to the contract are protected against loss.

Netting/netting arrangements: This term refers to the reduction of an  accountholder’s insured deposits by the amount of outstanding loans in a   failed institution or the reduction of an accountholder’s outstanding loans by the amount of deposits above the coverage limit.

On-Site Appraisal: An essential part of the banking supervisory process undertaken by authorities. The appraisals include   examinations of books, records and internal controls to financial institutions.  

Open-bank assistance: A resolution method in which an insured bank in danger of failing receives assistance in the form of a direct loan, an assisted merger, a purchase of assets, or other means.

Pay box: A deposit insurer with powers limited to paying out the claims of depositors.

Prompt Corrective Action: A supervisory action to provide a timely and non-discretionary triggering mechanism for early intervention of problem financial institutions.

Purchase-and-assumption transaction (sales): A resolution method in which a healthy bank or group of investors assume some or all of the obligations, and purchase some or all of the assets of the failed bank.

Rebate: The return of part of a payment, representing some deduction from the full amount previously paid.  

Receiver: The legal entity that undertakes the winding down of the affairs of an insolvent bank.

Receivership: The legal procedure for winding down the affairs of an insolvent institution.  

Recover Rate: The ratio of net collections to the book-value of an institution’s assets.

Recovery: The amount of net collections of a bank?s assets.

Regulatory Discipline: It governs the establishment of new banks, qualifications of directors and managers,
business activities. change of control, and standards for risk-management, internal controls, and external audits.

Reinsurance: The assumption by another party of part or all of the risk held by the deposit insurer.  

Resolution: The disposition plan for a failed institution.

Resolution Costs: For a given resolution method, the sum of   the expenditures and obligations incurred, including any immediate or long- term obligations and any direct or contingent liabilities for future payment, net of recoveries
on assets of the failed bank.

Risk Minimizer/Risk Manager: A deposit insurer with the powers to  reduce the risks it faces. These powers may include the ability to control entry and exit from the deposit insurance system, assess and manage its own risks and may conduct examinations of banks, or request such examinations.

Set-off: Refers to situations where the claim of a  creditor in an insolvent bank (for example, a deposit) is deducted from a   claim of the bank against the creditor (for example, a loan).  

Situational analysis: An examination that policymakers undertake to assess factors such as: the state of the economy; current monetary and fiscal policies; the state and structure of the banking system; public attitudes and expectations; the state of the legal, prudential regulatory and supervisory; accounting and disclosure regimes.  

Start-up Funding: The fund received by a newly established deposit insurance system by initial contributions from banks, government, and/or the central bank.  

Strategic Planning: The process of developing and setting the strategic direction and actions to accomplish the vision and goals of an organisation.  

Subordinated Debt: A debt instrument that ranks lower than another instrument in the priority of its claim on the issuer’s assets.  

Subrogation: The process where a deposit insurer is substituted as the claimant for the insured deposits paid by a
deposit insurer.  

Supervisory discipline: It requires that banks are monitored for safety and soundness as well as compliance issues and that corrective actions are taken promptly, including the closure of a bank when necessary.

Suspense account: A suspense account is used when not enough information is available to post a transaction with the right offset. For example, dividends and interest are paid to a trust account on their payable date even if all of the money from depositors and paying agents is  not received on time.

Systemic risk: A risk that has implications for the  general health of the financial system and can have serious adverse   implications for financial stability and overall economic conditions.

Target Ratio: The level for the deposit insurance fund expressed as a percentage of total or insured deposits.  

Termination of Deposit Insurance: The right of a deposit insurer to terminate the status as an insured institution if it doesn’t meet some specific qualifications set by the insurer.  

Too Big to Fail: The practice of protecting uninsured depositors, creditors, and others from loss when large banks fail in order to prevent from the occurrence of a systemic risk.

Uninsured Deposit: Types of deposits that are not covered by a deposit insurance system.

Voluntary System: A deposit insurance system that a targeted institution has the right to decide to participate in as a member.

Withheld Deposits: Deposits that are temporarily suspended to be paid by the deposit insurer due to lack of enough information. See also “Suspense Account”.

Working Capital: the current funds available to administer the deposit insurance function.

Workout: The making of special repayment arrangements in light of likely or actual default on a loan