deposit insurance as an element of financial safety net: the case of bulgaria

DEPOSIT INSURANCE AS AN ELEMENT OF BANKING SECTOR STABILITY

Organized by Eurasia Regional Committee of IADI

Kiev, 25-27 May 2004

Deposit Insurance as an Element ofFinancial Safety Net: the Case of Bulgaria

Ms. Stefana Drianovska, Expert, International CooperationBulgarian Deposit Insurance Fund

Participants in the Financial Safety Net

Central Bank (BNB)

Banking Supervision Department

Bulgarian Deposit Insurance Fund

Eurasia Regional Conference Kiev, 25-27 May 2004

Bulgarian National Bank

Lender of last resort (LLR)

Introduction of the Currency Board in mid 1997– no LLR– lending facility – the deposit of the Banking Department

with the Issue Department


BNB Banking Supervision Dept.


Drafts regulations (approved by the BNB)Supervises banksBanking Supervision Directorates– Supervision Policy and Methodology– Supervision Administration– On-site Supervision– Off-site Supervision and Analysis– Special Supervision

Bulgarian Deposit Insurance Fund

Bulgarian Deposit Insurance Fund (BDIF) wasestablished by the Law on Bank Deposit Guaranty passed in April 1998

BDIF is a legal entity effectively operating as ofJanuary 1999


BDIF Mandates and Powers

Law on Bank Deposit Guaranty (1998)- determines and collects annual and entry premiums from banks- invests its assets in accordance with the provisions of the LBDG- repays the insured amount of deposits in failed banks

Law on Bank Bankruptcy (2002)


BDIF Mission

The Bulgarian Deposit Insurance Fund insures depositors’funds in banks and protect the interests of creditors in bank bankruptcy proceedings, hence promoting stability and confidence in the banking system, and contributing to economic growth and prosperity in Bulgaria.


Bulgarian DIS - Main Features

Membership

Coverage

Funding

Investment

Repayment


Membership

Mandatory membership for all banks legally licensed totake deposits

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

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


Coverage

Scope of coverage

– deposits of physical persons and legal entities

– deposits in national and foreign currency


Coverage

Exclusions

– deposits of: banks and nonbank financial institutions; insurers;pension and social securities funds; investment intermediariesand companies; privatization funds; government and government institutions; municipalities; the BDIF

– bank’s senior officers and auditors, shareholders of more than5% of bank’s equity, and their close relatives; preferential rate deposits

– deposits associated with ‘money laundering’


Coverage

Level of coverage– currently in full up to BGN 15,000 (EUR 7,670)

Application of coverage limits– per depositor per bank


Increase of Coverage

1998 BGN 6,900 (EUR 3,528)2002 BGN 10,000 (EUR 5,113)

2003 BGN 15,000 (EUR 7,670)

2005 BGN 22,000 (EUR 11,248)2007 BGN 39,400 (EUR 20,043)


Funding

Entry premiums from banks

Annual premiums from banks

Interest on BDIF investments

Proceeds resulting from BDIF subrogated claims

Other (loans)


Banks Premiums – Flat Rate System

Entry premiums – 1% of registered capital; to be paidwithin 30 days from the date of bank registration

Annual premium contributions – 0.5% of total amount of previous year’s deposit base (insured) determined onaverage daily basis; due by March 31 in the current year

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


BDIF Investment Activity

DIF resources are invested in:

– securities issued or guaranteed by the Bulgarian government

– short-term deposits with commercial banks – authorizedprimary dealers of government securities

– deposits with the Bulgarian National Bank


Financing within Shortfall of Resources

By decision of BDIF Board shortfall may be covered by:– requiring an advance payment of premiums– increasing the annual premium (max. 1.5%)– drawing loans

Loans:– from the market– from the budget after a decision of Parliament

Loans may be secured by government guarantee or BDIFassets, incl. future claims on banks for annual premiums


BDIF Resources

Target size of resources – 5% of the total amount of insureddeposits in the banking system

Current funds of BDIF – BGN 247 mio (EUR 126 mio)

Ratio of BDIF funds / deposits – 2.23%


Repayment of Insured Amounts of Deposits

Deposits are repaid only in national currency

Repayment of insured amounts of deposits is done via aservicing bank determined by the BDIF ManagementBoard

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


Repayment of Insured Amounts of Deposits

BDIF has successfully performed its insurance functionin the only two bank failures since its establishment

Credit Bank (Jan. 1999) – 94%

Balkan Universal Bank (Feb. 2000) – 63%


BDIF Functions under Law on Bank Bankruptcy

Performs control over the lawful and appropriate exerciseof trustee’s powers:– appoints and removes a trustee– determines trustee’s remuneration– controls trustee’s expenses– controls transactions made by the trustee– issues methodological instructions to trustee relating to the

exercise his powers


Functions under Law on Bank Bankruptcy

Prepares drafts regulations:

– Regulation on the reporting requirements and trustee’s budget – Regulation on trustee’s remuneration– Regulation on the BDIF inspections in the banks in bankruptcy– Tariff on the fees collected by the DIF relating to the exercise

of its controlling powers in the bankruptcy proceeding


Control over Failed Banks

Under LBB BDIF has taken control over four failed banks

Expressed interest for purchase of failed banks

Negotiations under way


Accountability of BDIF

Council of Ministers, BNB, National Audit Office

BDIF financial activities audited by National Audit Office


Management of BDIF

Managed by a Management Board of five members –physical persons who are designated as follows:– the Chairman – by the Council of Ministers– the Vice Chairman – by the Bulgarian National Bank– one member – by the Association of Commercial Banks– two members – jointly by the Chairman and the Vice Chairman

Four years mandate; no restriction on reappointment


BDIF Organization Chart(as of 1 January 2004)

Management Board

Chairman of the MBAssistant

SupportingActivities

Personnel &Qualification

Dept.

InternationalCooperation& PR Dept.

AccountingDept.

InvestmentManagement

Dept.

BankingDept.

LegalDept.

ChiefAccountant

Expert

SeniorAccountant

2 LegalAdvisors

4 ChiefExperts

Expert

2 InvestmentOperationsManagersInvestmentOperations

Expert

ChiefExpert

Expert

Driver

Steward

2 Guards

Cleaner


BDIF Dedicated Staff

15 dedicated experts

Personnel Management Policy

Internal Rules for Ethical Behavior

Training


BDIF Public Relations

Objectives and principles

Organization of activities

Public Relations Rules

PR and communications activities


BDIF International Cooperation

International Association of Deposit Insurers – IADI

European Forum of Deposit Insurers – EFDI

Bilateral cooperation


Interrelationship Among Safety Net Participants

Law on Bank Deposit Guaranty stipulates that Bulgarian National Bank (BNB) provides BDIF with the informationon bank deposits needed to calculate contributions paid bybanks as well as bank financial information to facilitateassessment of BDIF insurance risk


Interrelationship Among Safety Net Participants

Memorandum of Understanding between BNB and BDIF,signed Nov. 1999

Letter of Cooperation signed with the Association of Commercial Banks, Aug. 2001


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. Stefana Drianovska, ExpertTel: +359 2 981 3809; E-mail: [email protected]


Thank you for your attention


deposit insurance as an element of financial safety net: the case of bulgaria

Economy & Finance

insured deposits

bdif investmentsproceeds

bdif mandates

bdif mission

coverage exclusions

bdif banks senior officers

bank deposit guarantypassed

commercial banks