Guidance on F unding in the Core Principles for Effective Deposit Insurance Systems

1. Guidance on Funding in the Core Principles for Effective Deposit Insurance Systems Nikolay Evstratenko State Corporation«Deposit Insurance Agency», Russia 1

2. Background Information • February 2008 – Core Principles of IADI • April 2008 – Financial Stability Forum Report • June 2009 – BCBS and IADI Core Principles for Effective Deposit Insurance Systems • Next step – BCBS and IADI Methodology for the Core principles (in September 2009 sent to the IMF) 2

3. Core Principles Methodology • Essential Criteria (Compliance with a Core Principle) • Additional Criteria (Advanced Practices) • Evaluation of Compliance (Guidance, Format and Methodology)

4. Principle 11: Funding • 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. 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. • For deposit insurance systems (whether ex-ante, ex-post or hybrid) utilizing risk-adjusted differential premium systems, the criteria used in the risk-adjusted differential premium system should be transparent to all participants. As well, all necessary resources should be in place to administer the risk-adjusted differential premium system appropriately. 4

5. Factors Influencing DIS Funding Needs • DIS Mandate • Structure and State of the Banking System • Deposit Insurance Coverage • Adequacy of the Regime of Early Detection and Timely Intervention and Resolution 5

6. Essential Criteria 1. Funding arrangements for the deposit insurance system are clearly defined and established in law or regulation. Funding can be assured in many ways, including: • government appropriations • levies or premiums assessed against member banks • market or government borrowings • a combination thereof Funding can be provided on an ex-ante or ex-post basis or some (hybrid) combination thereof 6

7. Essential Criteria (2) 2. Funding arrangements for the deposit insurance system are sufficient to ensure the prompt reimbursement of depositors’ claims. It can be achieved by: • accumulation and maintenance of a fund to cover deposit insurance claims and related expenses (ex-ante funding) • having in place arrangements that ensure rapid access to funds necessary for paying deposit insurance claims and related expenses (ex-post funding) 7

8. Essential Criteria (3) 3. Funding arrangements include a source (s) of back-up funding for liquidity purposes such as: a funding agreement with the central bank, or a line of credit with the government treasury 4. Member banks are responsible for funding the deposit insurance system in ordinary times 5. Additional sources of funding may be required in the event of a systemic crisis. Policymakers have considered and arranged for additional sources of funding to be used in such circumstances 8

9. Essential Criteria (4) 6. An ex-post funding system should be designed so that: member banks pay the cost of deposit insurance and adequate funding is available to ensure prompt reimbursement of depositor claims 7. If a deposit insurance fund is established (ex-ante funding): size of the fund (the fund reserve ratio) should be determined in light of economic and banking conditions and the deposit insurer’s objectives the fund reserve ratio should be expected to vary over time as banking conditions change Detais: IADI Guidance Paper on Funding (2009) 9

10. Essential Criteria (5) 8. The fund size should be adequate to handle potential bank failures and enable the deposit insurer to promptly reimburse insured depositors and otherwise meet its goals. The deposit insurer should have (some) control over the size of the fund Details: IADI Research Paper on DIF Sufficiency 9. The deposit insurance fund should have sound investment policies and procedures, internal controls and disclosure and reporting systems 10

11. Essential Criteria (6) 10. Deposit insurers that utilize differential or risk-adjusted assessments are able to effectively assess bank risk and administer the assessment system appropriately. The approach used to differentiate risk among banks and assign premiums should be: effective at differentiating banks into appropriate risk categories utilize a variety of relevant information be forward looking be well accepted by the banking industry and financial safety-net participants. 11

12. Essential Criteria (7) 11. The adoption of differential premium systems requires policymakers to ensure that the deposit insurance authority has the necessary authority, resources and information in place to administer the system appropriately A balance needs to be struck between: requiring necessary information for the classification of banks into premium categories and concern that the demands for information not be unduly burdensome 12

13. Funding of DIA Russia Deposit Insurance Fund – 93.1 billion rubles (US$3.1): Initial Government Contribution - 5.7 billion rubles Quarterly premiums by DIS member banks (0.1% per quarter – flat rate) - 87.4 billion rubles Backup Funding: From the State Budget (unlimited) Bank Rehabilitation: Special Government Contribution (Nov. 2008) – 200 billion rubles Borrowings from the Bank of Russia (unlimited) – 172 billion rubles Bank Liquidation and DIA Operational Expenses: Earnings from Investment of Funds of Special Initial Government Contribution (2.85 billion rubles) 13 13

14. Managing DI Fund Target Reserve Ratio – 5% of Insured Deposits (excluding major state-owned banks) Quarterly Assessment of DIF adequacy: Econometric Model Market Data Model Adjustment of Premium Rate and Coverage Limit Investments in Various Liquid and Reliable Instruments: Government and Corporate Bonds Corporate Shares Domestic and Foreign 14 14

15. Deposit Insurance Agency Thank You! www.asv.org.ru 15