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“There Will be no Shortage of Funds to Reimburse Failed Banks’ Depositors” – A. Tourbanov, General Director, Deposit Insurance Agency, is confident of the above statement (interview to “Itogi” magazine)

Date: 21.11.2005

Establishment of Deposit Insurance System (DIS) – is one of the most important events in the Russian banking system history. Has depositor's life become safer in connection with this? Can we anticipate increase in reimbursement amounts? What potential caveats can banks and their clients face? Alexander Tourbanov, General Director of State Corporation “Deposit Insurance Agency” answered the above and some other questions in his interview to “Itogi” magazine.

Reporter: The DIS only started operations, but one of its participants failed – the Central Bank revoked its license. Candidates were selected, thoroughly examined …

Tourbanov: Please, note, it is almost the yearend, but we had only one delicensed DIS participant. I do not think the results are poor.

Still, may be it is necessary to change something in the selection process?

-  We have deposit insurance law explicitly describing selection criteria that were developed by the Bank of Russia. I do not see any weaknesses in the law – and it is not because I want to polish reality. I see nothing bad if financial soundness of a bank is the basic selection criteria. Among others are – absence of violations in mandatory economic normative regulations, reliability of accounting and reporting. Selected banks were assessed on the basis of these criteria.

In reality something did not work out - if a bank went bankrupt ?

-  I do not want to dispute that enforcement practice may differ from ideas laying the basis of legislation under development. But I have no reason to think that banks' selection mechanism failed. As we all know – the main DIS objective is protection of mass depositors. And what is mass depositor?

-  World practice shows that no less than 75% of the total number deposits should be guaranteed in full value. I can give you the figure causing surprise – in our practice 98% deposits are guaranteed in full. Our households have small deposits. The above figure constitutes 40% of the total banking system deposit amounts, which means the remaining 2% of the total number – are deposits of well-off people. It does not mean our Agency is not going to protect their interests.

Recently you came up with proposal to increase insurance coverage for failed banks' depositors. What is your optimism based on?

-  You are using the correct word. Our optimism is based on objective factors. When policy-makers developed deposit insurance law, what were they governed by setting coverage limit of RUR 100,000? Some humorists made jokes stating the figure was taken at random – it was too round. Actually, we were governed by vast international experience, which says that optimal insurance coverage correlates with the GDP per capita with a coefficient from 1 to 2. At the time the law was passed, coverage limit of RUR 100,000 amounted to 1,5. This figure was not a random choice – it was the result of economic calculation. Presently we found out we are lagging behind the economic development, i.e. we are at the lower side of the above range. Naturally we would never propose increasing insurance coverage, should we have insufficient funds. I would like to remind you that mandatory deposit insurance Fund was formed with the help of initial government contribution, and at later stage it was replenished by assessments from banks. The Fund's resources are invested in financial market instruments and the income earned in this way goes to the Fund as well. At first we thought we would be able come up with proposal to increase insurance coverage only after 5 years of DIS operations, but the actual situation turned out better than our projections. By early 2006 we anticipate to have 19 billion rubles. When the total Fund's resources will reach 50 billion rubles – this will be sufficient for three times insurance increase. Though deposits up to RUR 100,000 will be guaranteed 100%, while extra 200,000 should be guaranteed 90%.

What will happen if there is a crisis?

-  Under normal development of economy and the banking system – there will be no shortage of funds. If there is a systemic crisis, most likely the Fund's resources will be insufficient. International practice shows – under such circumstances government should be able appropriate the needed funds.

International practice also shows that banks themselves should be solvent. Nevertheless, capital adequacy is still under discussion. What should it be like?

-  There is Cook ratio. Cook was a scientific banker who believed it would be appropriate to set capital ratio at the level of 8% and international banking community agreed with him. I would like to remind you that in the Russian Federation the above ratio is set at 10% for banks whose capital exceeds 5 million Euro. It should be mentioned that disputes are not about capital ratio as such, but rather about normative standard to justify revoking the bank's license. Presently, the Central Bank is obligated to revoke the license when the above ratio goes down below 2%, which is reasonable as in this case the bank is not viable, it is simply a corpse. It was proposed to raise the ratio to 8% and I believe such step is justified. What does the above ratio actually mean? It is the relation of the bank's equity amount to its assets taking risks into account. If it is found that larger part of loans will not be repaid, the ratio falls to 2%, 0%, etc. And with regard to credits - banks are actively involved in the process of providing consumer loans, though since recently we have heard complaints about bad loans.

-  Naturally there are inherent risks connected with consumer loans – but so far banks have not faced serious problems. First, as to unsecured loans, banks set higher interest rates and compensate their losses or costs in this way. Second, as to loans secured by collateral, banks are entitled to place a court suit against property received as collateral. If it is a car collateral – it is easily disposable property. With regard to collateralized apartments, it is a more complicated issue. Still availability of collateral is a serious incentive for a borrower to repay obligation amount. Presently, bad loans constitute only 2% in banks' consumer-credit portfolio. I understand concerns with this regard and believe the Central Bank should pay more attention to this business area.

What is your attitude regarding the idea of introducing bankruptcy process for individuals?

-  My attitude is positive. Individual bankruptcy process has been defined, but lawmakers have not gone farther. Probably, they decided that mechanisms set under legal entity bankruptcy could be shifted to individual's bankruptcy process. However, it is known these are different entities and specific procedure should be set for enforcement against individuals' property.

From what you say, everything seems too smooth. Some of your colleagues are much more critical. There is an opinion that nearly 60% Russian banks can be referred to problem institutions – if they are assessed using international standards.

-  First, Russian banks were transferred to International Accounting Standards (IAS) and already provided IAS statements for the year 2004. As a result, some banks look better while others deteriorated. I do not agree that 60% of banks can be referred to problem group. IAS statements as such do not ensure that banking system becomes sound at once. We hope that our system will gradually become more open and transparent, and more understandable, including for our foreign partners.

Are you sure our banks are interested to deal with foreign partners?

-  I think not all institutions are interested to join world capital markets, not all of them have matured enough to do this. However, those who strive to reach the world markets will have to follow transparency principles. Even institutions operating locally realize they are unable attract more clients without openness and transparency under conditions of enhanced competition. We have to admit our banking system was born in difficult times – during so called “bandit capitalizm” period. It was dangerous at that time to open all information. Presently the situation has changed, moreover, competition is growing, hence, banks need to be more transparent to have more clients believe them and entrust funds with their bank.

Currently there are about 1300 banks in Russia. Is it much or little? Or it is not a matter of numbers?

-  I do not exclude that the total number of banks will significantly go down. Those who survive will differ with respect to operations magnitude, developed branch network, quality and range of provided services. Today we have banks whose capital is below 50,000 Euro and they are unable ensure legal operations that can earn income. Though banks can be large, mid-size or relatively small, but they should not be the size when their equity capital can be easily pocketed in one of your suit pockets. In general, I would not focus on numbers, the formula is simple: the total number of banks should adapt economy demands.

Here we observe trends that are far from being liked by all. For example, concentration of assets in banks with large share of government capital. In your opinion, is it the right way?

-  First of all, let me point out that Banking Sector Development Strategy explicitly stated that government would gradually exit from banks' capital. Presently government involvement is still high, but this has simple explanation. During the period of intensive development – there should be healthy development basis, and this basis is government participation. Some government share can remain for a long time – but the total share will not be as large as it is now.

During this period Sberbank and Vneshtorgbank will be able strengthening their monopoly position so that nothing is left for other banks .

-  I do not agree with this approach. First of all, we have only one monopolist – it is Sberbank. It is true, Vneshtorgbank is really one of the largest banks with state capital, but its share on household deposits market constitutes only 4%. Sberbank is different. Its share in crediting legal entities is one-third, in retail credits – above 50% of the market. This is the result of historical development. It should be mentioned that after deposit insurance system was introduced, the situation began to change. During the current year, the Sberbank's share on household deposits market went down from 60% to 56%. Previously Sberbank's deposits were covered by implicit government guarantee (though there were no budget appropriations to fund the guarantee). Presently Sberbank enjoys equal position from the point of guarantee with other banks and the result is discernable.

What were the reasons for so many banks' inspections during this year? Was it in connection with some extraordinary situation?

-  Nothing extraordinary. During the last two years the Central bank conducted examinations of all banks in connection with establishment of deposit insurance system – in fact, majority examinations were conducted during 2004. The fact itself is dangerous neither for the economy nor for the public. On the contrary, it means the situation is fully under control.

The Central Bank conducted examinations jointly with law enforcement bodies. Experts believe this was caused by increase in the total volume of cashing operations. That is - banks are suspected of participating in money laundering schemes and stripping funds from taxation?

-  I cannot agree that cashing operations volume increased. Illegal cashing existed before, but nobody was actually held liable for such operations. The current year showed active involvement of supervisory and law-enforcement bodies in examination activities. This should raise no consumer concerns as the above activities are aimed at strengthening confidence in the banking system – banks that do not want operating honestly are removed from the system.

If you compare today's banking system on the whole with the one in operation 10 years ago, what would be the main difference?

-  There are two basic differences: the present banking system is more developed and sound. It is operating under different conditions of political stability and economic growth.

It is an optimistic assessment. And what do you say about today's bankers ?

-  Bankers as the banking system itself have changed. Today they are professionals with higher specialized education. Their attitude towards business has changed as well. They have become more responsible.

I did not expect a different answer. You yourself are teaching them in the Academy of National Economy. Can a banker be made of anyone?

-  Of course, it is possible. Like you can teach any woman to dance, but it is a question whether she will become another Maya Plisetzkaya. The same with bankers: highly professional banker can be made of “good material”, still we are trying to make good bankers out of worse material as well.

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