FUNDINGFUNDINGsources, mechanisms sources, mechanisms

and critical issuesand critical issues. . Experience of the KDIFExperience of the KDIF

Presented byMrs. Bakhyt MazhenovaChair, KDIF

«A deposit insurance system should have

available all funding mechanisms necessary

to ensure the prompt reimbursement of

depositors’ claims including a means of

obtaining supplementary back-up funding

for liquidity purposes when required»

(11th Principle “Funding”, Core principles for effective

deposit insurance system, BCBS and IADI)

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Sources of the KDIF’ reserveSources of the KDIF’ reserve

Member banks’ regular premiums The KDIF’ authorized capital (up to 50%) Recoveries from the assets of forcibly

liquidated banks Investment profit Other (penalties, etc)

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Structure of the special Structure of the special reservereserve

as of the 3 quarter 2009as of the 3 quarter 2009

Member-banks premiums

RecoveriesAccumulatednet income

50% of the Authorized capital

Member-banks premiums Funds recoveries from liquidated banksAccumulated net income 50% of the Authorized capital

64%

28%

4% 4%

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Funding of the KDIF reserve’s Funding of the KDIF reserve’s deficitdeficit

KDIF reserve’s deficit

Banks’ additional premiums

Borrowing from Central Bank

Banks’ extraordinary

premiums

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«Primary responsibility for paying the cost

of deposit insurance should be borne by

banks since they and their clients directly

benefit from having an effective deposit

insurance system»

(11(11thth Principle, Core principles for effective deposit Principle, Core principles for effective deposit

insurance system, BCBS and IADI)insurance system, BCBS and IADI)

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KDIF’ special reserveKDIF’ special reserve

0

10

20

30

40

50

60

70

80

90

jan-05

apr-05

jul-05

oct-05

jan-06

apr-06

jul-06

oct-06

jan-07

apr-07

jul-07

oct-07

jan-08

apr-08

jul-08

oct-08

jan-09

apr-09

jul-09

oct-09

dec-09

Member-banks premiums Fund recoveries from liquidated banksAccumulated net income 50% of the Authorized capital

bln

.KZ

T

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Premiums’ levy Premiums’ levy mechanismsmechanisms

• Flat rate premium system

• Differential rate premium system

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Flat rate premium systemFlat rate premium system

In Kazakhstan: 1999 – 2006 years

Rates: 1) 0.16% per quarter (0.64% annually)2) 0.25% per quarter (1% annually) for

new banks for first 2 years

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Flat rate system advantagesFlat rate system advantages

• Simplicity • Clarity • Usability• Key element in initial reserve

accumulation• Simple infrastructure• Motivation of the market to self-regulation

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Flat rate system Flat rate system shortcomingsshortcomings

Inability to• predict member - bank failure

• estimate a DI’ fund sufficiency

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Differential rate premium Differential rate premium systemsystem

Main tasks of the system: Growth of the DI’ reserve at maintained pace Adequate assessment of the member-banks’

financial soundness and risk profile on the base of the existed reports and statements

Prediction of the member-bank failure Estimation of the reserve sufficiency and

effective funds’ planning and investment Taking of timely measures within insurance

case

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The KDIF has developed national differential premium system - «BATA», which is in effect since November of 2006

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Banks’ regular premiumsBanks’ regular premiums

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1-Q-06

2-Q-06

3-Q-06

4-Q-06

1-Q-07

2-Q-07

3-Q-07

4-Q-07

1-Q-08

2-Q-08

3-Q-08

4-Q-08

1-Q-09

2-Q-09

3-Q-09

Introduction of the DPS on Nov. 2006

mln

.KZT

Decrease of the DPS’ ratesWorsen conditions of two systemic banks

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Effects of the DPS Effects of the DPS ««BATABATA»»

Member-banks have been encouraged to follow discreet deposit policy

KDIF closely monitors identified risky banks (group “E”):

1. keeps track of their financial positions and any events with negative potentiality

2. inspects correctness and comprehensiveness of depositors’ records in the banks’ software

3. starts consultations with Regulators

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Is it always possible in the Is it always possible in the practice to cover reserve’ practice to cover reserve’ deficit by member-banks’ deficit by member-banks’

extra premiums?extra premiums?

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Case studyCase study

• «Valut-Tranzit Bank» JSC – big regional bank failed in 2007 (number of guaranteed depositors exceeded 200,000 persons)

• In two cases out of three the KDIF’ reserve deficit was financed by its Sole Shareholder – the National Bank of Kazakhstan

It has established a precedent

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Lesson learnedLesson learned

In practice it is complicated to implement theoretically attractive scheme on covering a reserve’ deficit by member-banks as market would always try to impose whole responsibility for bank’ failure on Regulator

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The Kazakhstani DIS in crisisThe Kazakhstani DIS in crisis

1. The coverage amount was increased more than 7 times – from 700 thousand KZT (≈4.7 ths.$) up to 5 million KZT (≈34 ths.$) the KDIF’ potential financial burden increased by 60%

2. The financial positions and soundness of the banks, especially big ones, significantly deteriorated (since middle of 2009 two systemic banks are in the worse group – “E”)

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Classification groups of the Classification groups of the DPSDPS

1

10

19

1

14

16

1

3

17

11

11

2

14

16

2

9

16

9

2

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

4-Q-05 4-Q-06 4-Q-07 4-Q-08 4-Q-09

E D C B A

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The The KazakhstaniKazakhstani DIS in DIS in crisis crisis

3. The Kazakhstani banking sector is highly concentrated – 5 largest banks holds about 75% of total amount of retail deposits as well as total amount of the banks’ assets

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Outcomes for the KDIFOutcomes for the KDIF

• The main portion of the premiums to the KDIF paid by mentioned 5 banks

• In case of the failure of some of these banks the reserve deficit might be significant

• The mechanism of reserve deficit’s financing by member-banks extra premiums in crisis environment is not applicable

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State’ financial support of the State’ financial support of the DIDI

o the authorized capital of the KDIF was increased by the Central Bank from 16 bln. KZT up to 110 bln. KZT (≈735 mln.$)

o the Central Bank will continue to increase every year the KDIF’ authorized capital by 10% till end of 2011 within State Anti-crisis Program

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Thank you forThank you foryour attentionyour attention