FUNDING sources, mechanisms and critical issues. Experience of the KDIF Presented by Mrs. Bakhyt Mazhenova Chair, 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» (11 th Principle “Funding”, Core principles for effective deposit insurance system, BCBS and IADI) The VIII Asian Regional Committee Meeting

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

Structure of the special reserve as of the 3 quarter % 28% 4% The VIII Asian Regional Committee Meeting

Funding of the KDIF reserve’s deficit KDIF reserve’s deficit Banks’ additional premiums Borrowing from Central Bank Banks’ extraordinary premiums The VIII Asian Regional Committee Meeting

«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 th Principle, Core principles for effective deposit insurance system, BCBS and IADI) The VIII Asian Regional Committee Meeting

KDIF’ special reserve bln.KZT The VIII Asian Regional Committee Meeting

Premiums’ levy mechanisms Flat rate premium system Differential rate premium system The VIII Asian Regional Committee Meeting

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

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

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

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

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

Banks’ regular premiums Introduction of the DPS on Nov mln.KZT Decrease of the DPS’ rates Worsen conditions of two systemic banks The VIII Asian Regional Committee Meeting

Effects of the DPS «BATA»  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 The VIII Asian Regional Committee Meeting

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

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

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

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

Classification groups of the DPS The VIII Asian Regional Committee Meeting

The Kazakhstani DIS in 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 The VIII Asian Regional Committee Meeting

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 deficit’s financing by member-banks extra premiums in crisis environment is not applicable The VIII Asian Regional Committee Meeting

State’ financial support of the DI 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 The VIII Asian Regional Committee Meeting

Thank you for your attention