House of Assembly

Statement on the establishment of the Virgin Islands Deposit Insurance Corporation

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Statement

Madam Speaker,  In 2016, the House of Assembly passed the Virgin Islands Deposit Insurance Act, which sought to establish the Virgin Islands Deposit Insurance Corporation (VIDIC) and a Deposit Insurance Fund to provide, inter alia, limited compensation to insured depositors under certain circumstances.  It is envisaged that a deposit insurance scheme would assist in the restoration and maintenance of confidence in the stability of deposit-taking institutions, and in achieving this objective, reduce the probability of contagious deposit runs on these institutions, which could jeopardise the health of the financial system as a whole if such an instance were to occur. It is also anticipated that the establishment of this last component of the financial safety net would likely be encourage an increase in deposit-taking business in the territory, as the BVI would now have a viable protection mechanism, that takes the sole implicit guarantee responsibility from the Government of the Virgin Islands. At this juncture, the Government of the Virgin Islands has made an initial guarantee of USD $4,000,000.00 to the establishment this initiative. The initiative will be funded by the annual premiums of member institutions at a proposed basis points level of their total deposits.

Madam Speaker The establishment of the Virgin Islands Deposit Insurance Corporation with a robust resolution and co-monitoring function with the Supervisory and Regulatory authorities, provides the GoVI with a more formal mechanism for dealing with problem financial institutions, to protect depositors. The scheme will, therefore, replace discretion with an established legal regime, thus allowing for a faster, and more consistent administrative and resolution process. Since the passage of the Act, the Ministry of Finance has completed the development of subsidiary legislation and resolution powers to support the Act, and amendments were also made to the VIDIC Act 2016. We anticipate the launch of this initiative in 2023 third quarter, with a targeted premium payment start date of 1st January 2024, for member institutions. This would give the financial institutions sufficient time to make the necessary preparation and for full compliance with the referenced legislations.

The objectives of the Corporation are the following: 

  • To establish and administer the deposit insurance system (DIS) in Virgin Islands for protecting deposits against the risk of loss; 
  • To promote and contribute to the stability of the financial system in the Virgin Islands; and, 
  • To assess and mitigate against financial institutions risk exposure to loss to the Corporation and minimize claims against the deposit insurance fund (DIF). 

In order to accomplish its mandate, the VIDIC will build and ensure continued capabilities to fulfill its duties to: 

  • Provide insurance against the loss of deposits;
  • Manage and administer the Fund and all other income streams of the Corporation; 
  • Levy premiums and fees to its member institutions (MI), which are its Policyholders;
  • Provide financial assistance to Policyholders in financial distress; and
  • Sensitize consumers on what to expect when their bank fails. 

 

Madam Speaker The full establishment of the Corporation and Fund would meet international requirements and address the recommendations found in the Michael Foot Report of 2009 and the International Monetary Fund, Financial Sector Assessment Program (FSAP) in 2010. Its establishment will follow, to the extent that is applicable to the existing legal framework, the guidance contained in the best practices for deposit insurance contained in the “Core Principles of Effective Deposit Insurance Systems,” issued by the International Association of Deposit Insurers (IADI) and the best practices for resolution contained in the “Key Attributes of Effective Resolution Regimes for Financial Institutions,” issued by the Financial Stability Board (FSB).  

Madam Speaker, while the Territory may boast a relatively stable banking sector, not too long ago in 2007-08 the world was shaken by the global financial crisis.  Currently there are 7 of the banks operating in the BVI as a subsidiary or a branch.  This leaves the Territory banking institution more susceptible to external forces in such a crisis. 

Madam Speaker Since the passage of the Act, the Ministry of Finance has been working towards the development of subsidiary legislation and resolution powers to support the Act.  

This would give the financial institutions sufficient time to make the necessary preparation and for full compliance with the referenced legislations.

Madam Speaker, historically the financial institutions in the BVI have not offered deposit protection to its customers.  We are operating in a global environment and if the BVI is to remain competitive our banking institutions must adopt this practice and keep pace.  We have been operating by faith and through the rigorous oversight by Financial Services Commission to secure our deposits.  May I say that such ideology and practice are no longer sufficient in the 21st Century.   Madam Speaker, Deposit Insurance is not a new concept to many of the Banks operating in the BVI, for they are required to offer such protection in other jurisdictions, some even as close as a few minutes away across waters. The possibility of increased deposit-taking business as a result of this protection, may prove beneficial to these same financial institutions and this wider economy.  It is imperative that such protection be offered to the people of the BVI. 

Madam Speaker, The Bill entitled Virgin Islands Deposit Insurance (Amendment) Act, 2023  is aimed at addressing these issues and ensuring the attainment of the resolution objectives of an effective resolution regime, which are the following:

  • To ensure the continuity of critical functions.
  • To avoid significant adverse effects on financial stability, in particular by preventing contagion.
  • To protect public funds by minimising reliance on extraordinary public financial support.
  • To protect depositors covered by the Corporation.
  • To protect client funds and client assets.

Madam Speaker, the deposit insurance system established by the VIDIC Act of 2016 is largely in compliance with the International Association of Deposit Insurers (IADI) Core Principles of Effective Deposit Insurance Systems (CPs). Even though the Corporation has yet to be established and its capabilities are soon to be in place, the following compliance approximation is made under the assumption that its authorities will be able to implement its mandate, scope, and powers as prescribed in the VIDIC Act. 

Madam Speaker, the Amendment bill prescribes that the Corporation is to “establish and manage a system for the insurance of deposits,” and therefore, in managing the DIS the Corporation must determine the terms and conditions of membership. There should be clarity on the authority of the Board to determine and issue rules and regulations, in accordance with the Act, as to the entry, maintaining membership, and exit of the DIS.

When membership of member institutions is terminated by the Corporation, arrangements need to be in place to coordinate the immediate withdrawal of the bank’s license by the FSC. Additionally, as deposit insurance is compulsory for all deposit taking institutions, payment of premiums for deposit insurance is mandatory and there should be no undue leniency for premium payment defaults. To resolve these gaps, amendments are proposed in this amendment Act, and corresponding amendments to the FSC Act and the Business Companies Act (BCA).

 

Madam Speaker, I therefore ask for this Honorable House’s support for this amendment bill.

 

VIDIC