implementation of deposit insurance in transition economy: the case of bulgaria

International Conference

MEASURES FOR IMPROVING CONFIDENCEIN THE BANKING SYSTEM

Bishkek City, 1-2 July 2004

Implementation of Deposit Insurance in Transition Economy: the Case of Bulgaria

Roumyana Markova, Chief Expert, International Cooperation and PRBulgarian Deposit Insurance Fund

Presentation Outline

The main challenges encountered:

Proper timing to launch DIS

Criteria for membership and funding

Scope and level of coverage

Efficient repayment procedures

Public awareness

International Conference Bishkek City, 1- July 2004

Proper Timing to Launch DIS

Implicit government guarantee till Jan 1996

First explicit limited coverage DIS - introduced Jan 1996 (Regulation of the Central Bank - BNB)

– only deposits of physical persons were insured– level of coverage - appr. EUR 2,500



Outbreak of the financial crisis - mid 1996 (within ten months 17 banks comprising 25% of total banking system assets failed)

Extraordinary legislation - Law on State Protection of Deposits; Repayment of deposits from the budget:

– 100% to physical persons

– 50% to legal entities



Introduction of Currency Board - mid 1997– curbing the crisis

Explicit DIS with limited coverage on deposits - Law onBank Deposit Guaranty - Apr 1998

Bulgarian Deposit Insurance Fund (BDIF) - Jan 1999– independent legal entity– accountable to Council of Ministers, BNB, National Audit Office– financial activities audited by the National Audit Office


Mandates and Powers of BDIF

1998 Law on Bank Deposit Guaranty (LBDG)– determines and collects premiums from banks– invests its assets under LBDG provisions– repays insured amount of deposits with failed banks

1999 Amendments to Law on Banks: Art.89a (repealed by LBB)– very limited control over trustees

2002 Law on Bank Bankruptcy (LBB)– administers bank bankruptcy proceedings by

controlling trustees and preparing draft regulations – control over 4 failed banks


Criteria for Membership

Mandatory membership for all banks licensed to take deposits

Under certain circumstances only foreign banks’ branches may be allowed not to participate in the system

32 members institutions (incl. 3 foreign banks’ branches)

Branches of Bulgarian banks operating abroad – ?


Funding

DIS of ex-ante type funding by banks– entry and annual premiums paid by banks

No initial capital contribution from the budget

Other sources of funding– interest on BDIF investments– proceeds from BDIF subrogated claims– loans, etc.


Banks Premiums

Flat rate system

Entry premiums - 1% of registered capital

Annual premiums - 0.5% of total amount of previous year’s deposit base; due by 31 March in current year– deposit base determined on average daily basis (end 2001)

BDIF is considering the introduction of a risk-adjusted premium system


Target Size of Funds

Under LBDG - 5% of total amount of insured deposits in the banking system

– Management Board may decide to reduce annual premiums if funds exceed 5% target ratio

Ratio of BDIF funds / deposits - 2.23%– Current funds of BDIF - BGN 249 Mio / € 127 Mio


Scope of Coverage

Insured are:– deposits of physical persons and legal entities– deposits in national and foreign currency

Exclusions:– banks and non bank financial institutions, insurers, pension and

social securities funds, investment intermediaries, privatization funds, government and government institutions, municipalities, BDIF

– bank’s senior officers and auditors, shareholders of more than 5% of bank’s equity, and their close relatives, preferential rate deposits

– deposits associated with ‘money laundering’ (end 2001)


Coverage

Level of coverage– currently 100% up to BGN 15,000 / € 7,670

Application of coverage limits– per depositor per bank


Increase of Coverage

1998 BGN 6,900 / € 3,528 – to BGN 2,000 - 95%– over BGN 2,000 - 80% (max 5,000)

2002 BGN 10,000 / € 5,113 – 100% (abolishment of coinsurance)

2003 BGN 15,000 / € 7,670 – 100%

2005 BGN 22,000 / € 11,248 – EU Timetable

2007 BGN 39,200 / € 20,043 – EU Timetable


The Case of DSK Bank (former State Savings Bank)

State Savings Bank – the ‘bank of the people’– regulated by SSB Law of 1967– accepting only household deposits in BGN

Till May 2000 - full government guarantee on deposits in SSB

Smooth transition to limited guarantee– small average size of deposits– two-year transitional period for SSB transformation into

commercial bank (DSK Bank);


Repayment of Insured Amounts of Deposits

Deposits are repaid only in national currency

Repayment of insured amounts of deposits is done via a servicing bank determined by BDIF Management Board

Repayment begins not later than 45 days from date of revocation of bank’s license by BNB

Deadline for repayment of insured deposits


Efficient Repayment Procedures

BDIF has successfully performed its insurance function in the two bank failures since its establishment

– Credit Bank - 1999– Balkan Universal Bank - 2000

Subrogation - in both failures BDIF recovered the repaid amounts of insured deposits in full


The Case of Credit Bank

12 Jan 1999 Revocation of license 1 Mar 1999 Start of repayment 1 Mar 2004 Expiration of prescriptive period

Insured deposits in total BGN 9.5 MioRepaid deposits BGN 8.9 Mio - 94%

Nov 2002 Termination of bankruptcy proceedingsDec 2002 BDIF starts issuing certificates to depositors –

smooth processInternational Conference Bishkek City, 1- July 2004

Public Awareness

Strong emphasis on public awareness

BDIF public relations policy– objectives and principles

BDIF Public Relations Rules– specify terms and procedures for relationships with media

and general public, and other communication activities– chief spokesperson is BDIF Chairman

Organization of PR activities: in-house resources


Public Awareness

Objectives– popularization of DIS features & BDIF functions– maintaining confidence in banking system– enhancing BDIF image

Target audiences– general public (present and potential depositors, uninsured

depositors and creditors of failed banks)– media– banks and their front line staff, banking association– lawmakers and public officials


Public Awareness

Communication techniques

– press releases and conferences, interviews for media– Q & A Brochure on deposit insurance - 2000– hot telephone line - 2000– provision of information to general public in BDIF office– written responses to requests and complaints– web site - 2001 (both in Bulgarian and English)– discussions and seminars– paid advertisement in printed media


Survey on Public Awareness of DI

National representative study - 2002 (quantitative & qualitative)

Findings– 24% of respondents know in general about BDIF– 43% of bank depositors are familiar with DIS in place– level of awareness of population and depositors is low

Recommendations: enhance effectiveness in provision of public information, higher involvement of banks’ employees, diversifying communication channels

Findings and recommendations - presented also to BNB Banking Supervision Dept. and Association of Commercial Banks


New Communication Techniques

Use of additional communication techniques and tools– educational radio-series on deposit insurance– TV ads– seminars for banks’ branch directors– front-door and counter stickers– product registers– revamp of BDIF web site– Q & A leaflet on bank bankruptcy

Cost issues and evaluation of results


How to Contact BDIF

Bulgarian Deposit Insurance Fund2, Graf Ignatiev Str. 3rd Floor, 1000 Sofia, BulgariaTel. +359 2 980 1438; Fax +359 2 988 8207E-mail [email protected] http://www.dif.bg

orInternational Cooperation and Public Relations Dept.Ms. Roumyana MarkovaTel. +359 2 981 3809; E-mail [email protected]


mailto:[email protected]

http://www.dif.bg/

Thank you for your attention


implementation of deposit insurance in transition economy: the case of bulgaria

Economy & Finance