The Organization of the System of Mandatory Deposit Insurance in Russia

Deposit insurance systems currently function in more than 80 countries around the world and are an important pillar of stability for banking sectors, protecting depositors from unfavourable economic conditions.

The financial and banking crisis in Russia in 1998 clearly demonstrated that an effectively functioning system to protect savings would have made the impact of the crisis much less painful for millions of citizens.

In programmatic documents, the President of the Russian Federation, the Government of the Russian Federation and the Bank of Russia all elaborated the necessity of creating a nationwide system of deposit insurance. This resolution was actively supported by the representative and legislative bodies of the state and by the banking community. Simultaneously, the successful development of the economy in recent years has allowed the formation of a strong basis for a deposit insurance system.

On 27 December 2003, the Deposit Insurance Law came into effect, laying the organizational, legal and economic foundation for the functioning of the deposit insurance system in Russia. Thus, deposit insurance came into being for the first time in the entire 250-year history of banking in Russia.

The deposit insurance system is based on the following principles:
- Mandatory participation by banks in the deposit insurance system;
- Reduction of the risk to depositors of unfavourable outcomes in the event that a bank does not fulfil its obligations;
- Transparency of the deposit insurance system’s operations;
- The accumulative nature of the mandatory deposit insurance fund, based on regular insurance premium payments by participating banks.

In order to manage the deposit insurance system, the Russian state created the Deposit Insurance Agency as a State Corporation.

The Agency began its operations in January 2004, creating management bodies and setting out the Agency’s organization structure.

The highest management body is the Agency’s Board of Directors, which is responsible for determining the Agency’s strategy and for taking fundamental decisions regarding the functioning of the deposit insurance system. The Board includes seven representatives from the Russian Federal Government, five from the Bank of Russia, and the General Director of the Agency.

In 2004, the Agency’s Board of Directors approved the basic documents laying out the key principles for the functioning of the deposit insurance system.

To lay the financial foundation for the deposit insurance system, the state made an initial investment, transferring to the mandatory deposit insurance fund the assets of the State Agency for Restructuring Credit Organizations Corp. (further, ‘ARCO’), worth 2 billion rubles, as well as allocating 1 billion rubles to cover initial organizational costs. Other assets belonging to ARCO will also be allocated to the system, as and when they are released over the course of the liquidation of that organization.

A crucial task in creating the deposit insurance system – the selection of financially stable banks as participants – was conducted by the Bank of Russia.

In accordance with the Deposit Insurance Law, the Bank of Russia reviewed the financial condition of all banks that applied to join the deposit insurance system.

Beginning in September of 2004, credit organizations began entering the deposit insurance system based on decisions issued by the Bank of Russia.

In accordance with the conclusion of the Banking Sector Development Strategy that the deposit insurance and the liquidation of failed banks are two parts of a unified mechanism for defending creditors’ interests, the requisite amendments were made in August 2004 to the Federal Law On the Insolvency (Bankruptcy) of Credit Organizations. Thus, the function of bankruptcy trustee for insolvent banks was delegated to the Agency.

On 9 December 2004, the Board of Directors approved the Agency’s Activity Concept for the implementation of the requirements of the Federal Law on the Insolvency (Bankruptcy) of Credit Organizations.

The Concept sets out the aims, tasks and principles of the Agency in its role as corporate bankruptcy trustee, determines the basic, organizing procedural principles for the bankruptcy of credit organizations, describes management methods for the assets of credit organizations in receivership, for working with creditors, and for enforcing the liability of individuals guilty of bringing a credit organization to insolvency.

The necessary regulatory framework and changes to the Agency’s organization structure in connection with the delegation of the role of bank liquidator to the Agency have been put in place.

Both of the Agency’s activity areas – deposit insurance and corporate liquidation – are carried out by the Agency’s highly qualified specialists, who have gained the required experience through their work in ARCO and other organizations.

As an integral part of the Russian banking community, the Agency gives particular weight to developing a close working relationship with bank associations, Russian scientific and research centres studying banking issues, and leading international and trans-national financial institutions.

In order to provide expert informational and analytical support to the operations of the deposit insurance system, the Agency has created a Permanent Expert Analytical Council, the main functions of which are to support the development of increased trust in the banking system of the Russian Federation, the attraction of savings to that system, improvement to the culture of cooperation between depositors and banks, and the study of the impact of the deposit insurance system on the development of the Russian economy and banking sector. The Council includes representatives of the research community, organizations of depositors and banks, and other organizations whose activities are connected with the deposit insurance system, the defence of consumer rights, and the analysis of macroeconomic processes.

Thus, 2004 saw the organizational formation of the mandatory deposit insurance system. A special delegation from the World Bank, which visited the Agency in 2004, noted with satisfaction that the organization of the deposit insurance system in Russia meets international best practices.