PIDM shares experience on Differential Premium Systems with Asia Pacific Deposit Insurers

On 6 November 2020, deposit insurers attended a webinar, hosted by the Korea Deposit Insurance Corporation, entitled ‘A Deep-Dive into the Differential Premium System (DPS)’. More than 100 attendees from 12 deposit insurers in the Asia Pacific met to discuss how DPS works as an effective policy incentive for banks to adopt improved risk management practices. This, in turn, promotes a more stable financial system.
 
Rafiz Azuan Abdullah, Chief Executive Officer of Perbadanan Insurans Deposit Malaysia (PIDM), presented on Malaysia’s 15-year experience with the DPS, discussing its design, phases of maturation, practical issues and future prospects. Speakers from Korea and Taiwan also discussed in depth, its technical aspects - principles, indicators, scoring and implementation challenges.
 
In closing, Rafiz urged participants to advance the DPS frameworks through “Change, Creativity, and Collaboration”. The prolonged COVID-19 crisis, he said, offers an exceptional impetus for deposit insurers to rethink, revalidate and reset the DPS, so that such systems can remain fit for purpose moving forward. In volatile environments, the DPS needs to stay relevant.
 
In such times, DPSs may need to be reviewed with a view to tackling emerging financial system risks, the inherent issue of pro-cyclicality, potential integration of resolution-centric considerations (loss given default), and other areas.
 
In PIDM’s experience, COVID-19 has provided the creative tension for some valuable - though pragmatic - thinking and possible solutions. At the same time, deposit insurers needed to engage closely with bank supervisors and other authorities, as well as engage with the financial industry. This is so that key stakeholders accept and understand that, working together, we can achieve innovatively designed DPSs that can continue to support the robustness of the financial system through thick and thin.