The Formation of the Deposit Insurance System

The formation of the deposit insurance system in 2004 included four main areas of activity:
• the development of regulatory documents to support activities;
• preparation for managing the bank register and managing that register;
• the allocation of ‘start-up’ capital for the mandatory deposit insurance fund and the development of investment techniques for placing those assets in financial instruments; and
• the preparation of activities for organizing insurance compensation payments on deposits.

In so doing, the Agency was guided by the following basic principles:
• the transparency and informational openness of the activities of the deposit insurance system;
• coordination between the Agency and the banking community;
• minimal administrative burden on banks participating in the deposit insurance system.

In 2004, the Agency put in place the basic regulatory documents to underpin the functioning of the deposit insurance system, including documents to help banks make informed decisions in the period leading up to their incorporation in the system.

First and foremost, the Board of Directors of the Agency determined the key financial indicator: the rate of insurance premium payments (Protocol No. 3, from 3 February 2004). As the deposit insurance fund is still in its formative stage, the rate was set at the maximum allowed by law; 0.15% of the average volume of household deposits per quarter. The Agency bases its calculation on the assumption that the premium rate paid by banks will remain unchanged over the next five years, to support the capitalization of the fund and the necessary financial stability of the system.

Alongside determining the insurance premium rate, a number of documents were approved, concerning the procedure for calculating and making payments. For banks’ convenience, the calculation of premiums follows the same rules as the calculation of mandatory reserve payments made to the Bank of Russia.

In accordance with the principle of coordinated activity, the Bank of Russia and the Agency prepared on 1 April 2004 Decree No. 1416-U, On the Procedure for Compiling and Presenting by Banks of Reports on Deposited Funds Subject to Insurance, and Decree No. 1416, On the Form of the Register of Banks’ Obligations to Depositors.

The Agency has approved the procedures for maintaining the register of banks participating in the mandatory deposit insurance system, as well as the form and template for the certificate of enrolment in that register. In order to automate functions associated with the formation of the mandatory deposit insurance fund, the Agency has developed and launched an analytical tool – Prognoz (‘Forecast’) – which will support the maintenance of the register of banks, management accounting, and oversight operations connected to the allocation and payment of insurance premiums.

The Agency prepared a series of recommendations, in order to provide organizational and technical assistance to banks in informing their depositors about issues surrounding deposit insurance. They include a standardized set of informational materials for introducing depositors to the main aspects of the deposit insurance system, answering the most frequently asked questions. In the Agency’s view, the resulting document will support the development of a positive relationship to the system on the part of depositors, as well as to banks as a locus for deposits. Toward this end, the Agency also issues a special decal, reading “Deposits are insured. Deposit Insurance System”, the rules for the usage of which are also codified in the recommendations.

By September 2004 – when the Agency received the first applications for membership approved by the Bank of Russia as meeting the requirements for participation in the mandatory deposit insurance system – the organizational and methodological groundwork for including banks in the system and establishing coordination between the Agency, banks, and the Bank of Russia, had been largely completed.

In accordance with the Deposit Insurance Law, the Agency in 2004 enrolled banks in the mandatory deposit insurance system by including them in the register as and when approval was issued by the Bank of Russia.

As of 27 July 2004 – when the Bank of Russia stopped accepting applications for entry into the mandatory deposit insurance system – 1,140 banks had filed an application, out of the 1,179 banks with the right to accept household deposits. After that date, the Bank of Russia began evaluating applicants’ financial condition.

The first participant in the deposit insurance system, as approved by the Bank of Russia, were registered on 21 September 2004. In the period from that date and up to the end of the calendar year, the Agency registered an average of 30 banks per week. The growth of enrolment in the register, as well as the volume of liabilities to depositors, is depicted in Figure 1.

Figure 1. Banks joining the deposit insurance system in 2004

As of 1 January 2005, the register included 381 banks from 75 regions of the country (see Figure 2), representing 33.4% of the organizations that applied for participation in the system. Of those, 375 banks already held a license from the Bank of Russia, while six were receiving permission from the Bank of Russia to work with retail clients.

Approved banks were added to the register no later than one working day after the receipt of the relevant documents from the Bank of Russia. On the next working day after enrolment, the Agency informed in writing both the Bank of Russia and the newly enrolled bank, in addition to sending the relevant information for publication in the Bulletin of the Bank of Russia and Rossiiskaya Gazeta; additionally, this information was published on the Agency’s Internet site. Further, along with this information the Agency sent each bank the relevant certificate and regulatory documents on deposit insurance.

Figure 2. Location of banks participating in the deposit insurance system

  Regions where participating banks are located

The volume of enrolled banks’ liabilities to depositors as of the end of the reporting period exceeded 433 billion rubles, representing 55.2% of household deposits held in the Russian banking system, excluding Sberbank (see Figure 3).

Of all banks enrolled in the mandatory deposit insurance system, 23.6% were registered in Moscow. Their depositor liabilities represent 52.3% of all deposits insured by the system.
Over the course of the reporting period, the majority (66) of the 100 largest banks joined the system. Their total depositor liabilities represent 77.8% of aggregate insured deposits.

Figure 3. Proportion of total banks enrolling in the deposit insurance system

In 48 subjects of the Russian Federation, between 50% and 100% of banks joined the deposit insurance system. In 53 regions, the volume of insured deposits was between 50% and 100% of all household deposits.

On 29 December 2004, the Bank of Russia approved the applications of Sberbank and Vneshtorgbank to join the mandatory deposit insurance system (they were enrolled in the register of participants on 11 January 2005). With their inclusion, the total volume of insured depositor liabilities nationwide exceeded 90% of all Russian household deposits.

Thus, by the end of 2004 the Russian deposit insurance system was for all intents and purposes fully formed, with the vast majority of household bank deposits protected .

In accordance with the law, each depositor is guaranteed the full return of his or her deposits in each insured bank up to a maximum of 100,000 rubles per account, inclusive. That figure represents 1.1 times 2003 per-capita Russian GDP. The International Monetary Fund defines the sufficiency of deposit compensation at 1-2 times per capita GDP. Accordingly, a compensation level of 100,000 rubles is in line with international practice and is optimal in relation to the volume of reserves of the deposit insurance system and banks’ premium rate.

The aggregate number of accounts held by depositors in participating banks as of 1 January 2005 exceeded 32 million. Of those, 98% had balances lower than 100,000 rubles.

The balance of insured funds in household deposits is 435.3 billion rubles. The total volume of liabilities on deposits not exceeding 100,000 rubles is 106.9 billion rubles, or 24.6% of insured deposits.

The average deposit size among banks participating in the deposit insurance system is 13,600 rubles.

Figure 4. Proportion of total household deposits in the banks participating in the deposit insurance system

The organization of the process of compensating depositors in the case of an insurance event at a participating bank is a crucial aspect of the Agency’s work. To this end, the Agency has developed a package of relevant regulative and organizational/methodological documents.

A system for organizing the payout of compensation on deposits has been developed, determining the order of payments and the resolution of disputes about the amount of compensation, as well as determining the procedure for reinstating claims for compensation that are received from depositors after the deadline. Moreover, the relevant document includes the basic principles relating to the participation of agent banks in organizing payments to depositors.

According to the law, the Agency has the right either to make payments on its own, or to contract with agent banks, who would act on behalf and on account of the Agency.

The payment of compensation for deposits through agent banks is seen by the Agency as the primary and most effective and rapid method of settling with depositors. Such an approach would maintain the deposit base of the banking system and simultaneously encourage trust among the population in banking services.

In doing so, the Agency will rely on federal-level banks with branch networks and on large regional credit organizations, in order to create a flexible mechanism for payments.

In order to select agent banks for the payment of insurance compensation on deposits, the Agency has developed a tender procedure, which has been discussed with banking associations as part of negotiations on cooperation agreements, and has been agreed with the Federal Anti-Monopoly Service and approved by the Agency’s Board of Directors.

It has been decided that federal-level agent banks must have a minimum capital of 1 billion rubles and no fewer than 10 stand-alone structural subdivisions. Regional agent banks must have capital equivalent to no less than 10% of the total banking sector capital in their subject of the Russian Federation. In all, approximately 150 credit organizations currently meet these requirements.

To select agent banks, the Agency has created a permanent tender commission, comprising 11 people, including staff from the Agency and representatives of the Association of Russian Banks and the Rossia Association of Regional Banks.

The procedures for working with agent banks in compensating insured deposits has also been approved. In accordance with the relevant document, the agent bank will make compensation payments without charging any service fees to depositors. The amount to be paid by the Agency for services rendered by the agent banks is to be determined in accordance with the bid offers submitted during the relevant tender, within the limits set by the Board of Directors (no more than 1.5% of the insurance payout).

The Deposit Insurance Law envisions collaboration between the Agency and the Bank of Russia within their respective jurisdictions relating to the functioning of the mandatory deposit insurance system. Thus, in a 17 October 2003 decree the Bank of Russia created a joint working group for the preparation of the normative basis for regulating the insurance of household deposits in Russian banks, comprising representatives from the Agency and the Bank of Russia. This group, among other things, drafted the Agreement on the Coordination of Activity and the Exchange of Information, which was concluded by the Agency and the Bank of Russia on 29 September 2004.

The Agreement sets out the main trajectories of collaboration regarding banks’ participation in the deposit insurance system, banks’ payment of insurance premiums, the conduct of bank assessments regarding deposit insurance, the enforcement of their liability, the liquidation of banks, as well as the resolution of a number of other tasks that arise in the operations of the insurance system.

Moreover, on 1 November 2004 the Bank of Russia and the Agency signed the Agreement on the Exchange of Information in Electronic Form, speeding the movement of documents between the organizations and, in the case of an insurance event, the receipt from banks of the register of depositor liabilities via the Bank of Russia’s channels.

Together with the Agency, the Bank of Russia prepared a draft Decree No. 1542-U, from 13 January 2005, On the Particulars of Conducting Checks of Credit Organizations (Their Branches), in accordance with the Federal Law On the Insurance of Household Deposits in the Banks of the Russian Federation. The document regulates the procedure by which the Bank of Russia may employ the staff of the Agency in conducting checks of banks, as well as those staff members’ rights and responsibilities. Such checks are conducted in order to ensure that banks are observing the requirements set out in the Deposit Insurance Law and the Bank of Russia’s related normative acts.

The Agency also participated in the drafting of the Russian Federal Government Decree No. 540, from 14 October 2004, On the Powers of Federal Executive Bodies in the Area of the Insurance of Household Deposits in the Banks of the Russian Federation, which states that the Federal Tax Service is empowered to represent the demands of the Agency to bankrupted banks related to the payment of compensation on insured deposits.

In accordance with the above-mentioned decree, the Federal Tax Service and the Agency jointly prepared a draft decree on the procedure by which the Federal Tax Service will represent the demands of the Deposit Insurance Agency in cases involving the bankruptcy of participants in the mandatory deposit insurance system; it is planned that this decree will come into force in 2005.

A crucial factor for the effective functioning of the deposit insurance system is cooperation between the Agency and banking associations. In 2004, the Agency concluded cooperation agreements on deposit insurance with the Association of Russian Banks, the Rossia Association of Regional Banks, and the Association of Banks of the North-West. The main trajectories of cooperation are the development of a joint approach to the enforcement of deposit insurance legislation, the enforcement of depositors’ rights while observing the interests of banks, increasing the transparency of banks dealing in household deposits, and providing banks with organizational, methodological and consultative assistance in issues related to deposit insurance.

The Agency has taken on the responsibility of presenting to the banking associations drafts of its regulatory documents regarding the participation of banks in the deposit insurance system, the calculation and payment of premiums, and other documents that affect the interests of participating banks.

In May 2004, the Agency also organized a seminar for the developers of bank software and for the users of proprietary automated banking systems. The aim of the seminar was the improve the preparation of these systems for the creation of the mandatory register of depositor liabilities and for the calculation of insurance premiums.