2.2. Evaluation of the deposit insurance system of the Kyrgyz Republic.
The deposit insurance system in the Kyrgyz Republic has been operating since mid-2008. According to the Law of the KR "ON protection of bank deposits" it faces the following challenges: protecting depositors in the event of a guarantee claim by providing compensation and promoting stability of the financial system as a whole.
For improvement of system of deposits protection in our country, it is necessary to analyze and evaluate its activities according to standards that can act as a reference point in international practice.
Today, with the problems and negative trends in the financial sector faces a growing number of countries, which makes both international organizations and individual governments to focus efforts on finding effective solutions, but also on the formation of a new global financial infrastructure, capable in the future to address emerging threats to the stability of global and national markets. A significant role in this direction plays the Forum for financial stability, which was established in 1999 to promote international financial stability, improve the functioning of markets and reduce systemic risk. It includes central banks and banking supervisory authorities of the industrialized countries and international financial organizations such as IMF, World Bank, Bank for international settlements, the Basel Committee on banking supervision etc.
In 2008 was presented with a package of practical measures aimed at improving the stability of financial markets, which was developed in the course of the activities of the Forum for financial stability (FFS). In virtue of the important role played by the system of protection of depositors in creating and maintaining stability of the financial systems, the FFS final report included a section devoted to system of insurance of deposits prepared with the assistance of the International Association of Deposit insurers. The recommendations and conclusions of that report were endorsed by heads of state, members of the "G8".
Much attention in the report is given to the following issues:
-increasing the efficiency of prudential regulation and supervision,
-the tightening of the requirements for disclosure and valuation of assets,
-development of mechanisms for crisis management and resolution of insolvency of banks,
-increasing confidence in the banking system,
-application supervisory responses to the troubled banks,
-changing attitudes to credit ratings.
In the report notes the growing role in maintaining the stability of the deposit insurance system of national banking systems, but at the same time, the report indicates that at the moment there are no clear internationally recognized benchmarks society, which could be to assess the effectiveness of deposit insurance systems.
The forum for financial stability regarding the insurance of deposits made certain recommendations. Governments need to define international principles for efficient insurance systems, taking into account the general features of construction of systems of ensuring financial stability, including systems of regulation and supervision, procedures for resolving bank insolvency. One possible option could be the Core principles, prepared by the International Association of Deposit Insurers. After the international principles for deposit insurance will be agreed, the FFS will encourage countries to perform a national system of insurance of deposits in compliance with these principles, independently or with the assistance of international organizations. As the timetable for implementing this recommendation defines 2008-2009.
In September 2008 at the annual conference of the European forum of Deposit insurers was said that the Basel Committee on banking supervision formed the working group on deposit insurance, whose task is to develop a set of common principles for all deposit insurance systems, based on the Core principles produced by the International Association of Deposit insurers and reflected in the report of the Forum for financial stability.
Thus, in the analysis of the deposit insurance system of KR as a guide, certified by the international society we can use the Core principles of the International Association of Deposit insurers.
The Core principles of the International Association of Deposit insurers represent 21 the principle that reflects the modern vision of effective system of deposit insurance. They are grouped in 11 blocks in accordance with various aspects of functioning of the bank deposit insurance system, and based on the experiences of various countries, as well as the recommendations of international financial organizations such as IMF, World Bank, Bank for international settlements etc. The Core Principles states that the most appropriate way to ensure the protection of depositors are legally formalized the deposit insurance system with a limited indemnity limit, since it allows to clearly define the obligations of the state to depositors, contributes to the maintenance of peace in society and helps to reduce the costs of resolving bank insolvency. It is emphasized that for the effective functioning of the deposit insurance system, it must be supported by strong prudential regulation and supervision, the proper mode of information disclosure by banks, effective law enforcement practices and ensuring an adequate level of public awareness.
The purpose of the developed Core principles is to support states seeking to improve the effectiveness of their deposit insurance systems through the introduction of best international practice in this area. It is important that the Core principles can be adapted to the particularities of a given country.
The Core principles developed by the International Association of Deposit Insurers, grouped into the following blocks:
-Definition of the objectives that puts the state before the Deposit insurance system and the external environment;
So how the Core principles affect many issues, the legislature and the government of a particular country should be a coordinated effort in defining public policy objectives for Deposit insurance and implement them.
Now, on the basis of the above material, consider how Core principles are applied in the course of functioning of deposit insurance system of the Kyrgyz Republic.
It should be noted that the overall activities of the deposit insurance system in the Kyrgyz Republic consistent with the Core principles of the International Association of Deposit insurers, which is adopted as a benchmark for international practice.
Law of the Kyrgyz Republic "On protection of bank deposits" on May 7, 2008 №78 contains challenges facing the deposit insurance system and performs with Principle 1,
the functions and powers of the Agency for Deposit Protection and its administration - Principles 3-5 ,
mechanisms of financing system - principle 11.
In addition, the Law specifies the mandatory membership of banks in the Deposit insurance system – Principle 8,
the types of insurable deposits – Principle 9
the amount and procedure of payment of compensation to depositors – Principle 19 and their awareness – Principle 13.
In addition, the interaction between the Agency on protection of deposits and the National Bank of the Kyrgyz Republic, as the oversight body for the exchange of information and coordination of actions on the basis of norms of the legislation and bilateral agreements – Principle 6.
Also Agency for Deposit protection interacts with international Deposit insurers – through their participation in the International Association of Deposit insurers and in the framework of bilateral agreements on interaction and cooperation, international conferences, seminars and working meetings for experience exchange – Principle 7.
Although the activities of the Deposit insurance system in Kyrgyzstan is limited to problems of moral hazard– Principle 21, in particular, identified measures and supervisory action against banks that do not meet the requirements to participate in the system, limit the amount of insurance and not the insured deposits of legal entities, there is still room for improvement in this direction.
Before the creation of a deposit insurance system was a thorough situation analysis, based on the results of which were set forth the basic parameters and characteristics of the system. Thus, Principle 2 was performed. Such an analysis is carried out periodically, for example, in 2010 was increased the threshold amount for compensation of guaranteed deposits from 20 thousand to 100 thousand soms.
As a result, we can identify several trends in the insurance system of the Kyrgyz Republic, and requiring development of both the legislative and practical work to ensure full compliance with the Core Principles of the International Association of Deposit Insurers. These areas include:
-Strengthening mechanisms for coordination of efforts and sharing of information between agencies responsible for the maintenance of financial stability, in regard to situations related to the emergence of problems in individual banks and systemic threats - Principle 6
-Extension of the list of methods for resolving bank insolvency – Principle 17, including the financial health of banks and transfer of their assets and liabilities, including the "bridge banks" - the Principle 18
-Alert the Agency about the alleged insurance cases and providing of access to databases on deposits of troubled banks – the Principle of 19
-Create a system of legal protection of workers, engaged in settlement of bank insolvency – Principle 14
-Development and implementation of a system of differentiated contributions of banks taking into account the risks imposed on the system by each bank– the Principle of 12
-Definition of measures to prevent bank insolvency – Principle 16, as well as the prosecution of those responsible for their ruin – the Principle of 15
-Legislative settlement of the question of the priority of claims of the Agency for protection of deposits in the liquidation of insolvent banks – the Principle 20.
Based on these trends we can identify areas of possible improvement of the deposit insurance system of the Kyrgyz Republic.
Despite the establishment of a deposit insurance system and its activity, public confidence in the banking system is still at a low level. It is therefore necessary to develop common approaches for the adoption of measures preventing the occurrence of banking crises and preventing them from spreading. The necessity of these measures arises in the conditions of occurrence of threat of destruction of major important for the system and the whole banking sector banks and a sharp increase in the volume of withdrawals of deposits from banks.
It is also very important to expand the number of tools used by the government to prevent bankruptcies. In this case, the improvement measures can be based on the Principle 17, which says that for the effective functioning of a deposit insurance system it is advisable to have three basic method of resolving insolvency of banks. In our country there is only one – the elimination (bankruptcy) of the bank and payment of compensation for deposits. Of the three, this method is the most painful for customers and the least allows preserving banking functions.
The other two methods we have not used. This method of organizing transactions for the transfer of assets (sale and purchase) and liabilities of the "sick" bank to "healthy" (or "bridge bank") and the method of providing financial assistance to the Bank (or investors) without closing it. In addition, while not even considered the question of legislative consolidation. These methods have long been successfully used to resolve banking crises in the US, Canada, Japan, Germany, South Korea and many other countries.
Another area for possible development is the early informing of the Agency for protection of deposits on potential claims. When the Agency for protection of deposits in advance knows about the alleged revocation of the bank, it can fully and efficiently implement insurance payments to depositors. It also contributes to early beginning of the development and adoption of measures to restructure the troubled bank.
Another direction of improving the efficiency of the insurance system in our country - the establishment of a mechanism of legal protection of workers in settlement of bank insolvency. This applies not only to employees of the Agency for protection of deposits, but also of the National Bank of the Kyrgyz Republic and other state agencies whose employees are charged with responsibilities in crisis management of enterprises and organizations whose activities in the national interest.
One of the most important areas of development of deposit insurance system in Kyrgyzstan is the introduction of a differentiated system of contributions paid by banks to the Deposit insurance Fund. Today in our country has a unified scale of contributions. As a result, the most reliable banks, do not expose the deposit insurance system at great risk of incurring losses, and weak banks, leading unnecessarily risky policy, pays the same.
For the introduction of a differentiated contribution system in our country must first achieve the submission by banks of reliable information, allowing to assess the real risks of their activities, and to develop criteria by which will be the assessment of risk to the deposit insurance system associated with each specific bank, and harmonize them with the National Bank of the Kyrgyz Republic as the competent supervisory authority with the banking community, which should confirm the reasonableness of its methodology of ranking of banks in terms of risk. This innovation will require considerable effort and time, but in the process of practical work we can base on international experience of specific countries, such as Kazakhstan and Malaysia which have implemented the system of differentiated contributions in 2007 and 2008, and the United States and Turkey, recently radically changed the force they informed risk assessment methods for the purpose of levying contributions from the banks.
The evaluation of a deposit insurance system in the Kyrgyz Republic in terms of the Core principles, developed by the International Association of Deposit insurers, we have identified that in general the insurance of bank deposits in our country conforms to the standards accepted in international practice. However, it is necessary to spend huge work on development and improvement of the effectiveness of our deposit insurance system.
We have also identified the prospects of development of the system in KR. As a result, the development of specific measures to implement these principles becomes a necessary action. A significant part of the measures will require adoption of new legal documents; others can be implemented under existing legal mechanisms. It is important that they contribute to the strengthening of the banking system of the Kyrgyz Republic, increasing its international authority and provide adequate protection to customers of banks, primarily investors.