NEW RULES FOR DEPOSIT INSURANCE
The three months and a half remaining till the year-end will pass under the sign of considerable changes to three fundamental laws in the banking sector: for the credit institutions, for payments, and for guaranteeing deposits. Amendments to the Bank Deposit Insurance Act are in the most advanced stage. In fact, this is almost an entirely new legislative act because of the changed methodology for calculation of the premium installments which banks make each year to fill in the accounts of Bank Deposit Insurance Fund. Currently, these installments amount to 0.5% of the money attracted by credit institutions from citizens and firms, regardless of the individual banks' financial state.
Under the presently effective scheme
the applicable rule is: a bigger bank pays more
although the risk it undertakes in its transactions might be far lesser than that of credit institutions with lower balance sheet value. In fact, practice for the last ten years has shown that that smaller banks which are usually controlled by domestic capital, are much more endangered to go bankrupt. Let's recall that in 1998 Multigroup's Credit Bank was declared insolvent, a year later Balkan Universal Bank followed suit, and in 2005 International Bank for Trade and Development, controlled by the Bonevs bros. went bankrupt. The credit activities of them was characterized by two things. In the first place, they used to allocate a great number of loans to connected people and the servicing of credits was considerably delayed and at extremely non-advantageous terms for the creditor, such as long grace periods and artificially low interest rates (equal or quite close to the base interest rate). Secondly, the exceptionally high yields which the three banks offered for citizens' and firms' deposits, at that in foreign currencies, was a clear signal that they lacked fresh financial resource.
It turned out that the system for deposit insurance operates on the principle of shared responsibility, i.e. the stable banks pay for the adventures of poorly managed and unreliable financial institutions. In that situation it's all the same for clients if they will deposit their money in a stable banks or not. If the deposit is up to BGN40,000 or EUR20,000, it is insured by the State, no matter in which bank it is. Thus, the client is only interested in the yield it would bring. It is that vicious principle which some big credit institutions, led by UniCredit Bulbank objected, insisting to work out a apply
a scheme for risk-weighted installments
The idea is that the most stable and more conservatively operating banks would remit to the Deposit Insurance Fund money which as a percentage of the attracted funds is smaller than the installments made by the more aggressive credit institutions. According to the scheme, drafted by the fund's experts, the credit institutions' installments will vary between 0.2% and 0.6% of the attracted deposits, depending their financial stability. It might seem to many that the difference between these coefficients and the present 0.5% is negligible. Practically, however, when the attracted money is in the range of some BGN5-6BN, 0.1% id equal to BGN5-6MN which is the money necessary for allocation of a big investment loan which could bring the bank annual proceeds of BGN400,000-500,000.
In fact, the Bank Deposit Insurance Fund and the Finance Ministry have already agreed a draft bill in which the new scheme for calculating the installments has been applied. Bank managements' commentaries on it are now expected.
Some ten indicators have been picked
for evaluating the state of each bank in our country. They have been divided into two groups: quantitative and qualitative. Among the quantity criteria are: overall debt-to-equity ratio and primary debt-to-equity ratio (calculated on the basis of only part of the equity capital), return on equity and return on assets, liquidity ratio and ratio between overdue receivables and a banks' total assets. The qualitative indicators include the rating that the Bulgarian National Bank (BNB) confers on credit institutions and the rating awarded by a specialized international rating agency, such as Moody's or Standard Poors. The maximum number of points which a bank could receive is 100. Qualitative indicators account for 60 points at the most and qualitative criteria - for 40 points. For example, if the total debt-to-equity ratio of a bank is above 14%, it will get 30 points. In case it is between 13% and 14%, it will get 20 points, 10 points are given for 12%-13% ratio, and none - if it is below 12 per cent. The same holds true for the other criteria. If the credit institutions gets as much as the maximum of 100 points, its annual installment to the Deposit Insurance Fund will amount to 0.2% of the money it has attracted. In case a bank has gathered less than 50 points, its installment will be 0.6% of the attracted funds. When applying that approach it could turn out that a conservatively operating bank with deposits and accounts totalling BGN4BN could have to remit to the fund the same amount of money as an institution which has attracted only half of that money, but working more aggressively and riskier.
The difference in the various schemes
comes both from the underlying criteria (in some of the versions there are no indicators regarding the quality of assets, the return on equity capital and on the primary debt-to-assets ratio) and on the periods when they will be reported. On of the versions projects the evaluation to be made at the end of the accounting year, in another it is made on an average monthly basis. The differences in the final result will be considerable. Nevertheless, according to some bank experts, the calculations on a quarterly basis would be more correct. Here, however, a problem arises from the fact that practically the BNB and the international rating organisations do not confer their rating each three months. usually the central bank does that once a year, and the agencies - each six months. Therefore, the best option for the Bulgarian practice perhaps would be that the calculations to be made by the Deposit Insurance Fund should be based on the 6-month results. That is also the period during which the financial reports of credit institutions are checked and certified by expert accountants. What is more important in this case, however, is that
the evaluations of individual banks won't be made public
The size of their installments to the Deposit Insurance Fund will be also secret. In other words, again clients won't have whatsoever orientation which banks is more secure and would b deprived of the right of an informed choice where to deposit their money. In fact, the discussion about the publicity or secrecy of the banks' financial state has been going on for quite a long time. Regretfully, most experts share the opinion that any evaluations about the stability of credit institutions should remain in the sphere of internal information for the time being. For that reason the BNB does not make public data about individual banks' debt-to-assets ratio, liquidity ratio or the ratio between classified receivable vs assets due to apprehensions that this kind of information could be unfairly used by rivals or by mass media. The case with the attack of First Investment Bank a few months ago is quite indicative in that respect. At the same time, however, if the data about each credit institution are not made public citizens and firms won't know where to place their money and will continue to choose their banks as until now, that is - mostly on the basis of the interest rate on deposits they are offered. And as long as that practice continues no one could blame clients that they deposit they money in institutions of dubious financial state. The entire responsibility for that will be to the banking supervision, which has not managed to make banks following too risky policies go straight in due time.