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Risk-based Premium System

  • Q1. Why has Taiwan introduced a risk-based premium system?

    In recent years the government of Taiwan has been aggressively liberalizing and internationalizing the financial sector, leading to growing disparities between financial institutions in terms of their levels of risk. The original flat premium rate adopted by the deposit insurance system failed to reflect these different risk levels, thereby unfairly disadvantaging soundly run institutions. Since financial institutions engaged in high-risk operations did not pay higher rates, they were more likely to increase their portfolio investments and business risk, leading to moral hazard. Such problems can be avoided under a Risk-based Premium System. CDIC therefore studied the experience of advanced countries and conducted various studies on the pricing of premium rates. After reaching a broad consensus among the business, government, and academic communities and the insured institutions, CDIC drafted the "Proposal for a Deposit Insurance Risk-based Premium System", and submitted the proposal to the Ministry of Finance (MOF). The MOF ratified the proposal on July 1, 1999, at which time the "Implementation Scheme for the Deposit Insurance Risk-based Premium System" officially came into force. 

    Last updated 2012/01/06

  • Q2. Did CDIC consult with the related competent authorities and all insured institutions about the revised Implementation Scheme for the Deposit Insurance Risk-based Premium System prior to its implementation?

    In order to smoothly implement the premium rate adjustments, as well as to enhance communication with the related competent authorities, bankers associations, and insured institutions, CDIC has held several briefing sessions during rate adjustments or revisions to related provisions of the Implementation Scheme for the Deposit Insurance Risk-based Premium System to reach consensus. CDIC attaches great importance to the views and suggestions of insured institutions. The purpose for holding the above-mentioned meetings is to seek out the views of insured institutions and related financial supervisory agencies, build consensus through opinion exchanges, and thereby smoothly implement new deposit insurance mechanisms. 

    Last updated 2013/12/20

  • Q3. Why are a differential risk-based premium rate applied to covered deposits and a flat rate applied to eligible deposits in excess of the coverage limit?

    The amended Deposit Insurance Act promulgated by the President on January 18, 2007, changed the premium assessment base from covered deposits to total eligible deposits. This expanded premium assessment base would have greatly increased the premium burden on insured institution under the original premium levels. In order to prevent this sudden increase, CDIC proposed that the deposit insurance premium be adjusted. 
    The revised assessment basis would also result in relatively higher premium increases for foreign and domestic banks compared to increases for other types of insured institutions, since the financial institutions in the former group have a higher ratio of deposits exceeding the insurance coverage limit to total eligible deposits. In order to reduce the impact of the changes on these financial institutions, and considering that deposits in excess of the coverage limit are not covered by the deposit insurance system, separate premium calculation methods were adopted for covered deposits and deposits in excess of the coverage limit. Under this approach, covered deposits continue to be subject to an original risk-based premium rate and deposits in excess of the coverage limit are subject to a flat premium rate. 

    Last updated 2013/12/20

  • Q4. Why were the premium rates of the risk-based premium grading expanded from three levels to five levels? Why was the difference between each successive premium rate category expanded from 0.01% to 0.01%, 0.02%, 0.03% and 0.04%?

    When initially formulating the risk-based premium system, CDIC referred to the experience of advanced countries, the findings of questionnaire surveys, and inputs from scholars and experts. To ensure that the premium was within the scope acceptable to the banking industry in the initial implementation period, it was preferable that the difference between the highest and lowest rates not be too large and that the premium be adjusted upward phase by phase. Therefore the premium rates for covered deposits were set at the three levels of 0.015%, 0.0175%, and 0.02%. In order to accelerate the accumulation of the deposit insurance payout special reserve, the three premium rate levels were adjusted upwards, to 0.05%, 0.055%, and 0.06%, respectively, increasing the successive rate difference from 0.0025% to 0.005% effective from January 2000. However, scholars, experts and businesses repeatedly raised questions over the ability of the three-level premium rate system and 0.005% successive rate difference to adequately reflect differences in the operational risks of individual insured institutions. Therefore, the number of premium grades was increased from three to five and the successive rate difference was increased from 0.005% to 0.01% from July 2007. 
    The 0.01% rate difference under the risk-based premium system implemented in July 2007 was still small compared to other countries such as the United States, Canada, Singapore, and Malaysia which also adopted risk-based premium system. In addition, scholars and experts frequently offered suggestions on increasing the number of premium levels and expanding the difference between successive rates. In order to more rationally reflect differences in operational risks among insured institutions, as well as guide insured institutions to reduce such risk, CDIC included the proposal to expand differential premium grade differences from 0.01% to 0.01%, 0.02%, 0.03%, and 0.04% in deliberations on the plan to adjust the deposit insurance premiums for banks and credit cooperatives in 2010.

    Last updated 2013/12/20

  • Q5. Does the risk indicators fairly evaluate the operational risk of insured institutions in determining risk-based premium rates?

    Risk-based premium rates regard the insured institution's capital adequacy ratio and composite score of the CSRPRS. The capital adequacy ratio reflects the ability of financial institutions to assume risk and is the most highly regarded financial indicator by financial supervisors worldwide. CSRPRS is derived from the Risk-based Premium Rating System. CDIC uses the financial data of March 31 or September 30 (one quarter before the standard dates for calculating deposit insurance premiums) which is submitted by the insured institutions, to generate composite score from the Risk-based Premium Rating System.

    It is an objective quantitative indicator used to assess various indicators of risk borne by financial institutions, such as capital adequacy, asset quality, management ability, earnings, liquidity, market risk sensitivity and other assessment standards. It therefore properly reflects differences between the operational risks of insured institutions. By amply assessing the level of risk creation and risk tolerance of insured institutions, these two indicators encourage insured institutions to place importance on risk management and enhance their ability to absorb losses. 

    Last updated 2013/12/20

  • Q6. Does CDIC adopt the insured institutions’ capital adequacy ratios calculated at the end of March and September respectively?

    The CAR is based on the rate of the following dates that insured institutions report to the competent authority (for local branches of foreign and mainland Chinese banks, it refers to the data reported by their parent banks to their own competent authority in their home countries) before the standard date for calculating the deposit insurance premium, which is June 30 or December 31 each year:

    1. Domestic Banks:March 31 or September 30.
    2. Local branches of foreign and mainland Chinese banks:June 30 or December 31 (or the most recent reported data).
    3. Credit Cooperatives:June 30 or December 31.
    4. Credit Departments of Farmers' and Fishermen's Associations:From January 1, 2020, the standard dates are June 30 or December 31 instead of December 31.

    Last updated 2019/4/25

  • Q7. The cut-off points of the capital adequacy ratios of the credit departments of farmers' and fishermen's associations are 8% and 10% respectively. Why are they lower than the capital adequacy ratios applied to other types of insured institutions?

    According to Article 7 of the Measures Governing the Net Worth to Risk Assets of the Credit Departments of Farmers' and Fishermen's Associations (amended in November 2005), the CAR of credit departments shall not be less than 8%. Therefore, the minimum CAR risk grading for credit departments of farmers' and fishermen's associations was set at 8%. Moreover, farmers' and fishermen's associations are required by law to use any profits not allotted for operational reserves to make up accumulated loss as well as to be allocated for legal surplus, funds for public interest, and promotion of agricultural or fishery affairs. It is therefore very difficult for such institutions to accumulate net worth. In view of the operational characteristics of these institutions, and in consultation with the related competent authorities, CDIC set the CAR basis for the credit departments of farmers' and fishermen's associations lower than the CAR for other types of insured institutions.

    Last updated 2013/12/20

  • Q8. What are the assessment indicators under the Risk-based Premium Rating System? How does CDIC calculate the composite score for the premium rate?

    The Risk-based Premium Rating System is a method for assessing the financial status and business performance of financial institutions. The system adopts the major assessment criteria including capital adequacy, asset quality, management ability, earnings, liquidity, market risk sensitivity and the others. The Composite Score of the Risk-based Premium Rating System (CSRPRS) is calculated based on relevant data from the financial data sumbitted by the insured institutions. A statistical model is then applied to assign weights to each assessment indicator and through calculation and analysis, the scores for individual indicators are produced. These individual scores are then summed up to generate a composite score. 

    Last updated 2013/12/20

  • Q9. In respect to the rule of the level of capital adequacy ratio for determinig the applicable deposit insurance premium rates (orginal cut-off points are 8.00% and 12.00%), how does CDIC respond to the annual increase of the Basel III capital adequacy requirement for banks?

    In consideration of the consistency of financial supervision and in accordance to the Article 5 of the Regulations Governing the Capital Adequacy and Capital Category of Banks,  the cut-off points have been fixed at 10.50% and 12.50% since 2019.

    Last updated 2019/4/25

  • Q10. Where are the sources of the financial data for the composite score of the risk-based premium rating system from?

    Regarding the sources of the quantitative indicators for calculating the composite score, the data of domestic commerical banks and local branches of foreign and mainland Chinese banks are from the competent authority's Bank and Bill Finance Supervisory Data Reporting Window. The data of credit cooperatives are from the data regularly reported to CDIC. The data of credit departments of the farmers' and fishermen's associations are from the Internet Transmission Surveillance System of the Bureau of Agricultural Finance. By using the insured institutions' financial data from other financial safety net members' database instead of requesting them to report data to CDIC, it can reduce the insured institutions' burden and avoid duplicate financial reporting.

    Last updated 2013/12/20

  • Q11. How will CDIC react if the insured institutions dishonestly report their financial data or intentionally hide the critical information?
    • According to the Paragraph 4 of Article 3 of the Revised Implementation Scheme for the Deposit Insurance Risk-based Premium System, CDIC can conduct special inspection on the above-mentioned insured institutions.
    • After the inspection, if CDIC finds the insured institutions really cheat on reporting their financial data, CDIC can legally charge additional premium rate on the insured institutions by 0.01%~0.04% depending on the level of severity. The insured institutions have to pay the differences of the revised premium calculated by the adjusted premium rates between the original premium. Moreover, CDIC should report the case to the competent authority according to the Article 46 of the Deposit Insurance Act.

    Last updated 2013/12/20

  • Q12. Why are the premium rates for the credit departments of farmers' and fishermen's associations lower than those for other types of insured institutions under the Implementation Scheme for the Deposit Insurance Risk-based Premium System?

    After the Agricultural Finance Act was enacted in January 2004, the competent authority for agricultural financial institutions (referring to the credit departments of farmers' and fishermen's associations and Agricultural Bank of Taiwan) was changed to the Council of Agriculture of the Executive Yuan, while FSC supervises general financial institutions (financial institutions other than agricultural financial institutions). Since the two types of financial institutions differ in terms of their competent authorities, supervision rules, and risk assumption, the January 2007 revision of the Deposit Insurance Act divided the deposit insurance fund into two funds: one for general financial institutions and the other for agricultural financial institutions, to undertake and handle deposit insurance for each of these types of institutions.

    According to paragraph 2 of Article 4 of the revised Statute for the Establishment and Management of the Executive Yuan's Financial Restructuring Fund enacted in June 2005, a special fund in the amount of NT$22 billion was established for reimbursement of the credit departments of farmers' and fishermen's associations. As of June 30, 2010, over NT$20 billion remained in this fund, and about NT$2.5 billion remained in the special fund for agricultural financial institutions. Since the funds are sufficient for handling the market removal of problem credit departments of farmers' and fishermen's associations, and since the balance of this fund remained positive, the competent authority on November 24, 2010, granted approval to provisionally exempt the credit departments of farmers' and fishermen's associations from the deposit insurance premium adjustment for general financial institutions in 2011. The differential premium rates for credit cooperatives was set 0.01% lower than that for banks for each premium level in consideration of their simpler operations and lower risk, as indicated, for instance, in the fact that credit cooperatives have a lower non-performing loan ratio than banks; and their CAR and coverage ratio of allowance for uncollectable accounts is higher than that of banks. 

    Last updated 2012/01/06

  • Q13. If an insured institution has questions about its premium rate, can it ask for a review by CDIC?

    Yes. Insured institutions that have questions about their premium rate can apply to CDIC for a review. Such applications should be submitted in writing after receiving from CDIC a notice of premium dues and before the end of the premium payment deadline. Applications submitted after that time will not be considered, and each institution can only request one review in a given premium period. 

    Last updated 2012/01/06

  • Q14. Is an insured institution required to pay its premium on time even when a review is ongoing?

    Yes. CDIC makes every effort to handle applications for premium rate reviews as quickly as possible. However, the time taken to complete a review can vary according to the time that insured institutions apply for the review and the complexity of individual cases. Therefore insured institutions that are notified by CDIC of a rate change before the deadline for premium payment in the current period should submit payment based on the post-review adjusted rate. Those that have not received such notification by the deadline should pay the premium as originally assessed. In such cases, the insured institution will pay a supplement or receive a refund equal to the difference between the original and review adjusted premium amounts. Interest will not be applied to such adjusted amounts. 

    Last updated 2012/01/06

  • Q15. Who handles the premium rate review applications by insured institutions? What is the emphasis of CDIC's reviews of premium rates?

    CDIC is naturally very conscientious and careful in determining the premium rates for insured institutions. However, in order to ensure that the system is entirely fair and reasonable, while at the same time establishing a two-way communication channel with insured institutions, CDIC set up a "Deposit Insurance Premium Rate Review Committee" in charge of handling rate reviews requested by insured institutions. 

    CDIC places particular weight on insured institutions' composite score of the Risk-based Premium Rating System, and on the major items influencing the applicable premium rate.  

    Last updated 2013/12/20