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FUNDING sources, mechanisms and critical issues. Experience of the KDIF

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FUNDING sources, mechanisms and critical issues. Experience of the KDIF Presented by Mrs. Bakhyt Mazhenova Chair, KDIF – PowerPoint PPT presentation

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Title: FUNDING sources, mechanisms and critical issues. Experience of the KDIF


1
FUNDING sources, mechanisms and critical issues.
Experience of the KDIF
  • Presented by
  • Mrs. Bakhyt Mazhenova
  • Chair, KDIF

2
  • 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)

The VIII Asian Regional Committee Meeting
3
Sources 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)

The VIII Asian Regional Committee Meeting
4
Structure of the special reserve as of the 3
quarter 2009
28
64
4
4
The VIII Asian Regional Committee Meeting
5
Funding of the KDIF reserves deficit
KDIF reserves deficit
Banks additional premiums
Banks extraordinary premiums
Borrowing from Central Bank
The VIII Asian Regional Committee Meeting
6
  • 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
  • (11th Principle, Core principles for effective
    deposit insurance system, BCBS and IADI)

The VIII Asian Regional Committee Meeting
7
KDIF special reserve
bln.KZT
The VIII Asian Regional Committee Meeting
8
Premiums levy mechanisms
  • Flat rate premium system
  • Differential rate premium system

The VIII Asian Regional Committee Meeting
9
Flat 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

The VIII Asian Regional Committee Meeting
10
Flat rate system advantages
  • Simplicity
  • Clarity
  • Usability
  • Key element in initial reserve accumulation
  • Simple infrastructure
  • Motivation of the market to self-regulation

The VIII Asian Regional Committee Meeting
11
Flat rate system shortcomings
  • Inability to
  • predict member - bank failure
  • estimate a DI fund sufficiency

The VIII Asian Regional Committee Meeting
12
Differential rate premium system
  • 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

The VIII Asian Regional Committee Meeting
13
  • The KDIF has developed national differential
    premium system - BATA, which is in effect
    since November of 2006

The VIII Asian Regional Committee Meeting
14
Banks regular premiums
Worsen conditions of two systemic banks
Introduction of the DPS on Nov. 2006
Decrease of the DPS rates
mln.KZT
The VIII Asian Regional Committee Meeting
15
Effects of the DPS BATA
  • Member-banks have been encouraged to follow
    discreet deposit policy
  • KDIF closely monitors identified risky banks
    (group E)
  • keeps track of their financial positions and any
    events with negative potentiality
  • inspects correctness and comprehensiveness of
    depositors records in the banks software
  • starts consultations with Regulators

The VIII Asian Regional Committee Meeting
16
  • Is it always possible in the practice to cover
    reserve deficit by member-banks extra premiums?

The VIII Asian Regional Committee Meeting
17
Case 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
The VIII Asian Regional Committee Meeting
18
Lesson 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

The VIII Asian Regional Committee Meeting
19
The 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)

The VIII Asian Regional Committee Meeting
20
Classification groups of the DPS
The VIII Asian Regional Committee Meeting
21
The Kazakhstani DIS in crisis
  • 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

The VIII Asian Regional Committee Meeting
22
Outcomes 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 deficits financing by
    member-banks extra premiums in crisis environment
    is not applicable

The VIII Asian Regional Committee Meeting
23
State financial support of the DI
  • the authorized capital of the KDIF was increased
    by the Central Bank from 16 bln. KZT up to 110
    bln. KZT (735 mln.)
  • the Central Bank will continue to increase every
    year the KDIF authorized capital by 10 till end
    of 2011 within State Anti-crisis Program

The VIII Asian Regional Committee Meeting
24
Thank you for your attention
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