THE DEPOSIT INSURANCE SYSTEM PLANS TO CHANGE ITS CHIP
If a bank goes bankrupt, the Deposit Insurance Fund will pay each individual or company concerned up to BGN25,000 of the deposit or account open with the insolvent institution. This is stipulated by an amendment to the Deposit Insurance Act that has been aging in the National Assembly since last September. The raise of the guarantee which is currently BGN15,000 corresponds to the schedule for harmonisation of the Bulgarian system and protects the money deposited by individuals and companies in banks according to the requirements of the European Union (EU). These rules require that each amount of an individual or nonfinancial commercial company not exceeding EUR20,000 must be insured. Until the time Bulgaria joins the EU in 2007, this amount or its equivalent of BGN39,800 must be guaranteed, too.As the Parliament voted for the amendment to the Deposit Insurance Act and raised the protected deposit amount from BGN15,000 to BGN25,000, the regulation will provide protection for 97% of all individual bank deposits. According to the statistics of the Bulgarian National Bank (BNB), deposits of up to BGN25,000 account for 10.96 million of a total of 10.99 million accounts of individuals.Practice has shown thatthe fund pays insured amounts within a month and a halfafter the bank is declared insolvent. It happened in 1999, when Credit Bank was closed and again in 2000, when the Balkan Universal Bank was declared bankrupt.It should be noted, however, that if a company or individual holds a BGN30,000 deposit in a bank that goes bankrupt, the fund will pay him the BGN15,000 due. The client may only hope to regain the remaining BGN15,000 in case the trustee in bankruptcy of the insolvent institution collects enough money by cashing down the assets in order to cover the bank's debts to creditors in order defined by art. 94 of the Bank Insolvency Act. According to its requirements, first to be covered are debts to creditors who own mortgages issued by the bank or in whose favour a special pledge has been established. Then the insolvency proceedings costs are paid and finally, the trustee in bankruptcy is allowed to pay off debts to the Deposit Insurance Fund as well as to individuals and companies. It's clear that individuals and companies have little chance of getting back even part of the money that has not been insured by the fund. In order to feel safe about their savings, they'd rather keep no more than BGN15,000 in a single bank. They can increase this amount to BGN25,000 when the amendment to the law is adopted.However, the managers of several large institutions (with assets exceeding BGN500MN) disagree with the insurance fund collecting systemIt is regulated by art. 15 and art. 16 of the Deposit Insurance Act. At the time it is established, each credit institution has to pay the fund an amount equal to 1% of its shareholders' equity but not less than BGN100,000. West-East Bank is a good example in this aspect. It was established in August 2003 with a capital amounting to BGN15.8MN and the initial instalment that it paid to the fund was BGN158,000.However, banks' expenses begin to grow after their establishment because every year they have to pay the fund 0.5% of the total amount kept in accounts of individuals and companies. In the case of BULBANK, DSK Bank, UBB and HVB Bank Biochim, these expenses vary from BGN5MN to BGN12MN. Institutions like them pay up to 60% of the total amount of instalments received by the fund by March 31 of every year. Some managers of big banks hold the view that spending so much money is unreasonable. They say that banks do not need to pay so much fresh money to the fund. The problem is still to be discussed by the Association of Commercial Banks and will probably become a topic of discussion at the association's spring meeting. But even now some bankers think that for part of the instalments guarantees could be issued in favour of the fund and it would be able to cash them down if necessary. Another proposal to be discussed is that instalments should not depend only on the amount of funds attracted from individuals and companies, but also on the stability of the credit institution. The aim is to let the bank pay the fund a smaller percentage of its deposits as it grows more reliable. The question is who and how should makeassessment of the risk of each bank and then determine its instalment to the Deposit Insurance Fund. That can be done on the basis of the international ratings that a few Bulgarian banks already receive. For example, if the solvency rating a bank receives from Standard Poor's is equal to the country's debt rating, the bank will be paying the fund an instalment equal to 0.2% of the funds it attracts (or will provide guarantees of a similar size). In case its rating is lower than the state one, the instalment (or the guarantee) will be 0.5% of the deposits and accounts of individuals and companies that it is running. If the bank is not rated by an international agency, the instalment will amount to 0.7 per cent.In Bulgaria, the BNB Bank Supervision Department assesses the banks twice a year according to its own internal methodology. It includes the CAMEL and CAMELS systems and its results may serve as a basis for calculating the payments to the insurance fund, too.There is no single world practice in defining how bank deposits of individuals and companies are guaranteed. According to the Association of Commercial Banks Chairman Dimitar Kostov, in some countries such as Canada the insurance institutions themselves have their own system to assess the risk of each bank, but do not oblige them to pay instalments. Banks do not even issue guarantees in favour of the insurance fund, but commit themselves to cover its expenses on the payment of protected deposits in case a bank goes bankrupt. Elsewhere, in France for example, banks are obliged to pay instalments. In Germany, the commitment only refers to the savings banks and credit institutions of the different regions. For the rest of the credit institutions they are just a matter of willingness and prestige. According to Dimitar Kostov, a possible change in the system for protection of the people's money will cause a lot of discussions as it concerns various interests - of the aggressive banks which find the current instalment scheme favourable, of the conservative credit institutions that do not want to cover risks for their counterparts, and of the customers who must have their rights unharmed. Anyway, the change of the protection scheme will definitely be among the hottest topics of discussion in the bank circles.