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“98% DEPOSITORS ARE GUARANTEED 100% COVERAGE” (Interview with Alexander Turbanov, General Director, State Corporation “Deposit Insurance Agency”) KOMMERSANT DAILY, DATED SEPTEMBER 22, 2005

Date: 22.09.2005

Reporter : The final stage of selecting banks to join deposit insurance system has come to end. Could you comment on preliminary results?

Turbanov : Deposit insurance system (DIS) has been in operation during one and half years. As of September 1, 2005 there are 870 DIS member institutions. About 63% of the total banking system deposits are protected by deposit insurance system. While 98% of all depositors are guaranteed 100% coverage, as currently this is the share of deposits up to 100,000 rubles. I believe the above indicators characterize the Russian deposit insurance system as potentially efficient, capable of protecting mass depositors.

It should be mentioned during the process of establishing DIS a big number of pessimistic views were expressed. For example, the most extreme projections were: (1) the Central Bank will admit any bank to DIS no matter its soundness; (2) selection will be tough and no more than 200-300 banks will be admitted as a result. However, the total number of DIS admitted banks repudiated pessimistic projections: we can assume by September 27,2005 when the final stage of selection is over, about 80% of the total DIS applicants will be admitted.

- Please, describe the first triggering event. What experience should be taken into account for DIA future activities and which practices should be rejected all together?

- The first triggering event was delicensing International Bank for Economic Development (IBED). It was a good chance for our agency to develop and refine interaction technology both with the failed bank under triggering and agent-banks. We can conclude the first triggering event demonstrated that the DIS is capable of operating efficiently. For the first time in the Russian banking history depositors were quickly compensated for their savings. Payouts to IBED clients started even ahead of set schedule in a very efficient manner. It took DIA only 10 days to get ready for settlements with IBED depositors and during the first two weeks 72% of the total obligations were repaid. This case justified it was critical for banks to be able prepare obligations register at any time upon request. Moreover, the system of prior agent-banks accreditation with the purpose to start insured deposit payouts was justified as well. Presently the network of accredited with DIA institutions encompass over 80 regions throughout the Russian Federation. To encourage banks conclude agent agreements with DIA, our agency intends effect payments through them during liquidation process as well. With respect to our first triggering event – selection of agent bank and refining payout technology were resolved during three days. And the last, but not least, the issue of providing timely information to depositors. In the month of August DIA launched federal hot line – calls will be received from any region free of any charge.

- Do you have plans to raise insurance coverage?

- There is a fundamental principle – as economy and GDP grow and the banking system is strengthened – coverage level goes up. Though some banking experts consider existing coverage insufficient, in our opinion, guaranteed insurance protects mass depositors' interests.

As regards specific decision to increase insurance coverage, it should be determined based on three factors: (1) We are governed by the fact that total insured deposit compensation should be within 1 to 2 GDP shares per capita. The level established in the Russian Federation is currently at the lower side and we are lagging behind here. (2) Deposit structure, i.e. the number of accounts fully covered by insurance is of critical importance. According to international experience, 100% insurance coverage should be provided for no less than 75% total deposits. While this principle is valid – deposit insurance system is able to accomplish its goals and objectives. As I mentioned at the beginning of this intereview – in the Russian Federation 98% of all deposits are guaranteed 100% coverage. With this respect, we are within established standards (3) The third factor is sufficiency of deposit insurance Fund's resources. Currently, the total DI Fund is 11,5 billion rubles- half was contribution of the Russian Government, while the balance funds – assessments from banks. The above is sufficient to be able effect payouts during “typical” bankruptcies. According to our estimation, by early 2006 the total DI Fund's resources will reach 19 billion rubles and as of mid-2006 deposit insurance system will be able handle bankruptcy of any member bank, except, of course, the Sberbank.

- How will budget borrowings mechanism operate ?

Deposit insurance law has a special article – “Ensuring Financial Stability of Deposit Insurance System” where this mechanism is prescribed in detail. I don't think it makes any sense to repeat the contents of this article now. Moreover, I believe the mechanism will work properly. In addition to the above, we developed mathematical model to estimate default probabilities in forthcoming periods. In accordance with our estimation, we will not refer to federal budget for assistance during the next year.

- Are you planning to use differentiated scale of assessments to deposit insurance Fund?

- Currently the law sets forth flat insurance premium rate – 0,15% per quarter of the total attracted deposits. As you see, all banks are in equal condition facing the objective of proportionate participation in deposit insurance Fund formation. In my opinion, differentiated rate could be fairer as it would directly depend on specific bank's condition and its policy risks. Thus, if a bank is involved in high risky operations, it would be only natural to impose higher assessment rates, while for prudent institutions premiums could be reduced. This issue could be reviewed as soon as the total deposit insurance Fund' resources reach 5% of the total banks' obligations to depositors. In order to implement this approach, the Central Bank will need reliable statements from banks. Otherwise, if a bank submits unreliable reports, it will pay lower premium while continuing risky operations. As a result it goes bankrupt, and other member institutions have to compensate for its risks.

- Andrei Kozlov, CBR First Deputy Chairman, stated at the banking conference in Nizhny Novgorod, that the Bank of Russia would change criteria for estimating banks' financial conditions based on practical experience of DIS entry selecting process. In what aspects do you think estimation methodology could be changed ?

- I would like to point out three important aspects. First – transparent ownership structure. Clients need to know who are the bank's owners managing their resources. Second, the Central Bank will be actively using capital assessment methodology allowing its formation only of appropriate assets. Third, estimation of assets quality. Some bankers are in a habit of hiding not only confidential information, but data that could be of interest to clients as well. Some bankers believe that DIS selection measures were only one-time process, and after DIS is fully established the routine would be same as in the past. In my opinion, the Bank of Russia will do its best to preserve positive trends and ensure further strengthening of the banking system. Therefore, bankers have no reason to feel relaxed.

- What instruments will be DI Fund's resources invested during the next year?

- Since the time DI Fund was established we have invested its resources only in Russian government bonds. Currently about 95% Fund's resources are invested in this instrument with maturity from 2005-2020, though the law allowed investing in other instruments as well. Some instruments, for example, corporate securities of Russian issuers, should meet certain criteria set by authorized federal executive body. Finance ministry was appointed authorized body and jointly with the Central Bank and Federal Financial Markets Service drafted Rule (order) setting out above criteria. Currently this rule is going through approval procedure. Before it comes into effect, we cannot say how our investment policy will change during the next year.

- DIA announced it would conduct management companies auctions to place DI Fund's resources. What are basic criteria for selecting management companies?

- Currently we manage these operations by ourselves. As DI Fund will grow and financial instruments expand the need for human and other resources will increase significantly. This is going to be a large and independent area of activities. Moreover, DIA is not a professional player on securities market. As companies specializing in this area have highly professional staff, it will be cheaper and more convenient for us to place partial Fund's resources under professional management. The selected companies should operate on securities markets no less than during four years and manage assets of no less than 2 billion rubles. Furthermore, NAUFOR has to confirm financial stability rating of these companies.

- What other functions does DIA perform?

- Presently DIA is acting as corporate liquidator for 32 credit organizations, i.e. we are engaged in clean up of the banking system from weak institutions and those involved in suspicious transactions. During one year 334 billion rubles were cashed only through six banks, which is above 20% of all cash resources in circulation.

- When developing deposit insurance system for the Russian Federation you studied international practice. DIS of what countries had the biggest influence on the Russian system?

- Many deposit insurance systems are using US practical experience. Americans were the first to establish deposit insurance system in 1933 and accumulated enormous experience since then. We began studying international experience long before DIA was established when running ARCO. At that time we joined International Association of Deposit Insurers (IADI) and were given official observer status. When DIA was established we became IADI full-fledged member and have been trying to use the best international practice of various deposit insurers. Therefore, it is difficult to name one country Russian DIS was replicated. I would like to mention that one of the leading international experts in deposit insurance area, Jillian Garcia, gave high appraisal of the Russian DIS and named it “corresponding to the best international practice”.

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