Content: Introduction Chapte Theoretical aspects of deposit insurance


International experience of deposit insurance



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International experience of deposit insurance

The creation and subsequent development of a deposit insurance system can’t fail without including a review of international experience. In this work we decided to study the experience of near or distant countries.

The 2015 year was marked for Kyrgyzstan with an important event – the accession to the Eurasian Customs Union. And we believe it is important to consider the experience of the deposit insurance of our neighbors, other members of the Union.



One of the first deposit protection system, both on the CIS territory and the territory of the EAEU created in Kazakhstan in 1999. Our country has created a system of insurance one of the latest, in 2008.

Graph1. Year of deposit insurance system establishment in EAEU countries

In the organization of deposit insurance systems the most important role play the cooperation agreement between the organization engaged in insurance activities, and organizations engaged in financial regulation, in our case it is the Agency for deposits protection and the National Bank of the Kyrgyz Republic accordingly. In Russia in addition, the Deposit Insurance Agency has been successfully cooperating with the Association of banks and the Ministry of Internal Affairs, Kazakhstan Deposit Insurance Fund – with the Association of Financiers of Kazakhstan, the Agency for guaranteed compensation of bank deposits (deposits) of individuals– with the Ministry of Finance of Belarus. 9

In all EAEU countries participation in the deposit insurance system is mandatory. This helps evenly distribute the financial burden between member banks and to accumulate sufficient reserves for a quick payment of the insurance coverage. Deposit insurance provides only to individuals. In any of these countries, the deposit insurance of legal entities is not performed.

The system of deposit protection can cover either full deposit amount or part of it. Limited coverage is the most popular in international practice and recommended by the International Association of Deposit Insurers. In the event of a forced liquidation of the bank, only the insurance organizations in Belarus and Kazakhstan do not cover interest on deposits, it includes the rest countries.

Table.1 Deposit insurance coverage



Respondent countries

Deposit coverage

Deposit coverage in USD10

Belarus

Blanket

Blanket

Kazakhstan (domestic)

10 000 000 KZT

30519.44

Kazakhstan (foreign)

5 000 000 KZT

15259.72

Russia

1 400 000 RUB

21485.9

Armenia (domestic)

10 000 000 AMD

20902.98

Armenia (foreign)

5 000 000 AMD

10451.49

Kyrgyzstan

100 000 KGS

1465

In general, regular mandatory premiums of banks-members are the main source of funding for reserve of insurance organization for payment of insurance coverage in all the countries of the EAEU. In addition, the deposit insurers are using the income from the investment of the assets.

Table.2 Member banks’ premiums



Respondent countries

Premium rate

Calculation basis

Belarus

0.3%

Balance of the attracted insured deposits, charged per quarter

Kazakhstan

0.04%-0.38%

Total amount of insured deposits, charged per quarter

Russia

0.1%

Total amount of insured deposits, charged per quarter

Armenia

0.05%

Daily indicator of the total amount of deposits attracted over the reporting quarter, charged per quarter

Kyrgyzstan

0.2%

Total amount of individuals’ and legal entities’ deposits

As can be seen from table 2, all considered countries except Kazakhstan use a unique flat rate for calculating the insurance premiums paid by banks-participants. Kazakhstan Deposit Insurance Fund uses a differentiated system of premiums calculation for participating banks. In this system the member bank’s premium depends on the classification group to which it was assigned on the basis of the total score calculated using financial and other indicators. In general, the BATA differential premium system uses five classification groups with the following regular premium rates: “A” – 0.04%, “B” – 0.08%, “C” – 0.11%, “D” – 0.19%, “E” – 0.38% of the member bank’s total insured deposits.

Let’s consider how the process of coverage payment of deposits in the insurance systems of the countries - participants of the Customs Union is performed. In case of any problems with the solvency of the bank, we can use 4 methods of solutions:

1) Forced liquidation and payment of insurance coverage to depositors;

2) Purchase and assumption;

3) Bridge bank;

4) Open bank assistance.

In the considered countries, the most common method is the first method. In addition, in all countries the Central Bank is the authority, determining the method of solving, with some exceptions. For example, in Belarus these functions take the court, in our country along with the National Bank, the Agency for deposits protection is responsible for the problem bank reorganization and debt restructuring. In Russia the decision on choosing the most appropriate problem bank resolution method, take either the court or the Central Bank of Russia jointly with the Deposit Insurance Agency.

Table.3 Problem bank resolution methods



Respondent countries

Forced liquidation

P&A

Bridge bank

OBA

Armenia

#










Belarus

#










Kazakhstan

#

#

#

#

Kyrgyzstan

#

#

#




Russia

#

#




#

In the case of bankruptcy, you need quickly and accurately determine the full amount of deposit insurer’s liabilities on paying insurance coverage. This implies that forcibly liquidated bank earlier prepared a depositors’ register. In most countries of the Customs Union, the register of depositors is prepared by the liquidated bank itself. In some countries - together with the insurer of deposits.

If we consider the period during which the insurer of deposits may gain access to the depositors’ register of the liquidated bank, the situation looks as follows: the shortest period stipulate in the insurance system of Belarus - the list of depositors is made available within 3 working days after the bank receives notice from the Central Bank about revocation of license. In our country, the period of access to the register of depositors the most long – within 15 calendar days after the bank failure. In addition, it should be noted that only in Belarus and Russia there is a completely automated process of checking the proper preparation of depositors’ register. Russia has created special software that used by the Deposit Insurance Agency during bank inspections and by the banks-participants of insurance system for self-assessment of compliance with the requirements of the Agency. In Kazakhstan the establishment of the depositors’ register is made through the Automated Banking Information System (ABIS).

After a precise definition of the deposit insurer’s liabilities it is essential in the short term to pay the insurance coverage, to maintain the level of public confidence in the deposit protection system. In Armenia maximum period for starting insurance coverage payouts – within 30 days after the bank failure, in our country, this period is 2 times longer – within 60 calendar days after the bank failure, in Kazakhstan and Russia – within 14 days, in Belarus – within 30 days after receiving the depositor’s application to receive a deposit insurance coverage payout.

There are several ways of insurance coverage payments, which are used in the respondent countries. As can be seen from table 4, the payout of the insurance coverage through the agent bank is the most common. The selection of the agent bank is performed on the basis of the following criteria: the degree of financial stability, compliance with prudential regulations and standards of regulatory authorities, past experience in deposit insurance coverage payouts, etc.

Table.4 Coverage payout methods

Respondent countries

Deposit insurer

Agent bank

Postal transfer

Liquidated bank

Armenia




#




#

Belarus




#







Kazakhstan

#

#

#




Kyrgyzstan

#

#







Russia

#

#

#




After examining the experience of countries of the Customs Union, we will also analyze the experience of the deposit insurance in other countries in the Asian region such as Japan, South Korea, Taiwan, Vietnam, Malaysia, and Indonesia. One of the first in Asia, deposit protection system was introduced in India (1962), the Philippines (1963), in Japan (1971). Countries that have recently created an insurance system are Hong Kong, Singapore – 2006 and Thailand - 2008.

The first feature that catches when comparing, is that the insurance system of the countries in the Asian region has reached the highest degree of development; their main objective is only to minimize the risk. In addition, there are differences in the power possessed by the deposit insurers in the Asian region and the countries of the EAEU. If the first have a fairly broad authority, the latter – only a limited and basic powers. More developed countries of the Asian region went through a lot more bank failures, particularly during the Asian financial crisis than countries of the EAEU. This has led them to ensure that the improvement and development of deposit insurance systems as a key factor in the stabilization of the financial sector, and significant expansion of the powers of deposit insurers to more effectively perform its functions, became a priority.

If we consider the methods used in the bank's insolvency, in contrast to the deposit insurance systems of the countries of the Customs Union, in the countries of the Asian region forced liquidation and payment of insurance coverage to depositors is the least used method, moreover legislation of some countries even do not specify the exact timing of the start of the payment process of insurance coverage of deposits. Payout to depositors is carried out in most cases in national currency.

About the establishment of a depositor’s register, banks in developed Asian countries use an automated banking information system. This allows the deposit insurers if necessary to obtain access to all necessary information and to avoid the need regularly inspect member banks.

After reviewing the experience of countries like the EAEU, and other developed Asian countries, we can conclude that the process of deposit insurance in our country requires even more improvement and development. In this case, after reviewing the system of deposit protection in foreign countries, we can learn from the most effective and suitable to our conditions of methods.



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