Revised Differential Premium Systems framework introduces “matrix approach”
Kuala Lumpur, 9 March 2015: Perbadanan Insurans Deposit Malaysia (PIDM) recently issued the revised Guidelines on the Differential Premium Systems (DPS) framework for the Deposit Insurance System. The revised DPS framework, effective from assessment year 2015, will supersede the last enhancement in 2011.
The DPS framework is a risk-based system to provide financial incentives for member banks to achieve sound risk management as well as to ensure fairness among member banks. Implemented in 2008, the DPS provides a framework for imposing premiums on member banks at differential rates. In brief, the better the risk profile of the member bank, the lower the premium rate will be.
“PIDM is committed to ensuring that the DPS framework remains current and relevant” said Rafiz Azuan Abdullah, Executive General Manager of PIDM.
“2015 marks another significant milestone in the enhancement of the DPS framework with the introduction of the two-dimensional matrix approach, which is designed to incentivise member banks to have strong capital buffers levels, as well as strong financial performance and condition,” he added.
PIDM member banks will now be assessed in a matrix comprising “capital buffer” and “financial performance and condition”. The latter will be based on three major criteria, namely Profitability, Asset Profile and Funding Profile, whereby Funding Profile is a newly introduced criterion. This new criterion is intended to assess a member bank’s ability to fund the business from stable funding sources and the stability of the bank’s customer deposits.
"The global financial crisis has demonstrated the importance of funding and liquidity management and the repercussions for financial institutions when funding and liquidity are not properly managed. The introduction of a funding criterion is timely as this will ensure that the DPS framework remains robust and relevant to the operating and regulatory environment,” he added.
The matrix approach will better reflect the inter-linkages between strong capital buffer levels and sustainable financial performance and allows for more granular differentiation of the member banks’ risk profiles.
The DPS is a culmination of extensive research, discussions and feedback from our stakeholders. PIDM is confident that the DPS will continue to encourage member banks to adopt sound risk management practices and minimise excessive risk-taking. The revised DPS framework can be downloaded from PIDM’s corporate website at www.pidm.gov.my.
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