PIDM plays a crucial role in ensuring financial stability by protecting depositors and ensuring that it is ready to manage bank crises effectively.
WHEN the Silicon Valley Bank failed in 2023, news headlines called it the ‘first Twitter-fuelled bank run’, highlighting how the digital era can accelerate financial panic.
In the past, bank runs were gradual. Today, the spread of information (and misinformation) is almost instant and adds another dimension to a financial institution failure, which could happen anywhere, anytime and unexpectedly.
This is why a just-in-case mindset is required for authorities to act swiftly to protect depositors and maintain financial stability when such a situation arises.
At Perbadanan Insurans Deposit Malaysia (PIDM), crisis preparedness is a foundational element of its operations.
Managing financial institution failures
As a resolution authority, PIDM is responsible for resolving member institutions in a prompt and orderly manner should they fail. In this context, failure means when they go bankrupt.
The agency is equipped with comprehensive powers to manage and resolve troubled member institutions while minimising the impact and disruptions to the financial system in the event of their failure.
Generally, there are two resolution approaches:
> Closed bank strategy: PIDM can close the bank and reimburse depositors (gone concern), or
> Open bank strategy: it can continue the bank’s operations through implementing a seamless sale or transfer of business. This ensures the continuity of important financial services to consumers and the economy (going concern).
PIDM's strategies for resolving failed member banks include both open bank strategies, like restructuring or selling the bank, and closed bank strategies, such as closing the bank and reimbursing depositors. Image: PIDM
Business as usual preparations
Fortunately, failures are rare—so what happens during business as usual (BAU)? History has shown that a bank’s failure can negatively impact the financial system, economy and members of the public.
Banks are financial intermediaries and are highly interconnected within the financial system. The failure of a bank could come with major consequences, extending beyond disruptions to the banking system.
This is why in BAU, it engages in advanced planning through a process termed ‘resolution planning’.
This just-in-case approach involves working with member institutions to develop customised resolution plans that set out the strategy on how member institutions will be managed in a failure event, as well as identifying and addressing issues during BAU that could impede an effective resolution.
Resolution planning provides PIDM with information and options for swift decision-making and actions, ensuring that essential banking services continue uninterrupted and at the same time preserve public trust and prevent panic.
Importance of crisis preparedness
For PIDM, taking a proactive approach to crisis preparedness ensures that it can effectively deliver its mandate when needed. It ensures that disruption to depositors is minimised and they can have continued access to their deposits.
Financial consumers can also play a role in being prepared for such unexpected events. Keeping informed and up-to-date with information on how they are protected as financial consumers can support them in making decisions that suit their needs.
While financial crises are rare, understanding the crisis preparedness measures that PIDM can take in the event of a financial institution failure can ease concerns and provide financial consumers with greater peace of mind.
In the face of unexpected events, PIDM is prepared to take quick, decisive actions to protect financial consumers and maintain the stability of the financial system.
How does PIDM’s resolution authority role contribute to financial system stability? Visit https://www.pidm.gov.my/PIDMrole for more information.
This article was brought to you by PIDM.
