NEW SYSTEM FOR GUARANTEEING DEPOSITS DEMANDED BY AUDIT OFFICE
The system of the Bank Deposit Insurance Fund where banks make their instalments should be changed, read the conclusions of the report, drafted by the Audit Office member Svilena Simeonova on the basis of the inspection of the fund in 2005.
The Audit Office recommends to discuss the issue with concerned institutions and decide if it's necessary to amend the Deposit Insurance Act in its part regarding the setting of premium instalments, binding their size with the factors influencing banks' financial stability, the report reads.
Of course, the fund's management cannot fulfil these recommendations by itself because they necessitate changes to the Deposit Insurance Act. It depends on the MPs if the law will be amended, but equipped with the Audit Office's stance the Bank Deposit Insurance Fund's Chairman Bisser Manolov can already more actively insist for the necessary legislative changes. Especially as it explicitly reads: No procedures are stipulated and applied for direct control by the Bank Deposit Insurance Fund on the actual size of funds, deposited in banks. No differentiation of banks when fixing the instalments is stipulated, e.g. depending on their financial state. Information about the deposits made by banks, about the extended credits and their capital adequacy, is not bound with the premium instalments they made. In fact, the idea is not a new one.
The BANKER weekly has twice written that the fund's Chairman and the managers of big commercial banks share the opinion that
the current system of collecting instalments into the Bank Deposit Insurance Fund
should be changed. Presently, till end-March of each year domestic credit institutions deposit into the fund annual instalments amounting to 0.5% of all the money, attracted from citizens and firms. As a result of these instalments the Bank Deposit Insurance Fund has accrued about BGN390MN so far. However, the heads of some banks have been commenting for almost two years now that the effective system of collecting the instalments is not fair because bigger and more stable banks pay on an equal basis with those whose operations are riskier. Thus, credit institutions' managers are not encouraged in any way to follow more prudent policies.
Since 2004 the Bank Deposit Insurance Fund's experts have been studying the possibility to replace the present system of equal instalments by a more contemporary one, i.e. banks will be making instalments, determined according to
the degree of risk to each credit institution
Several conferences were dedicated to that issue, attended by representatives of the French, Canadian and US institutions for guaranteeing bank deposits, as well as experts from Standard Poors. During these discussions a conclusion was arrived at that the introduction of a system of differentiated instalments to the Bank Deposit Insurance Fund will be in compliance with the most recent tendencies in this sphere and will have a disciplinising effect on banks in the country, contributing to the sector's stability in that way.
The Bank Deposit Insurance Fund sent a questionnaire to commercial banks and their answers had to show the structure of their capital, the size of deposits and assets of domestic credit institutions, the priorities in their business, and the risks connected with them. The heads of credit institutions also had to reply questions on whose answers the fund's decision about the system for evaluation of the banks' risk profile would depend, and hence the determination of the size of instalments to be made by credit institutions. Banks' managers were allowed to choose between quite a number of options, regarding the ways to determine the degree of risk. One of them is to do that on the basis of
the evaluations of international rating agencies
such as Standard Poors, Moody's and Fitch Ratings. The second option is to determine the risk on the grounds of BNB's annual evaluation of credit institutions as per the CAMELS international bank-rating system with which bank supervisory authorities rate institutions according to six factors: capital adequacy, asset quality, management quality, earnings, liquidity and sensitivity to market risk. The third option is to design a system for evaluation based on a combination of the first two methods. Of course, there is also a possibility that the Bank Deposit Insurance Fund creates its own independent system for evaluation of risk to each of the credit institutions.
The idea is that the Management Board of the Bank Deposit Insurance Fund together with the Association of Commercial Banks define the specific parameters for risk evaluation and draft
a model for evaluation
of their risk profile and a table for differentiated instalments. It's making will be to a great extent facilitated by the enforcement in 2007 of the new capital adequacy requirements, known as Basel II.
The application of the differentiated model will make all domestic banks demand to be conferred a credit rating and update it at least once a year. That will make possible the establishment of a database for comparing the state of credit institutions in Bulgaria according to indicators of one and the same type.
According to present expectations, the fund will work out its model for evaluation by combining the ratings awarded by international companies, BNB's ratings as per the CAMELS system, and several additional criteria of its own. An orderly and complete system for risk evaluation that would satisfy all credit institutions could be made only in that way. However, their managers are quite jealous to any change in the bank market rules. And the size of instalments to the Bank Deposit Insurance Fund is quite a morbid issue as these expenses directly influence banks' competitiveness. Whatever the new risk evaluation system, it should result in increasing the fund's possibilities to guarantee citizens' and firms' savings.
Bank managers believe that in all probability credit institutions will fall into three groups according to the evaluations they get. According to some experts, the institutions in the group of the lowest risk will continue to pay annual instalments amounting to 0.5% of all attracted money, while banks in the other two groups will be paying instalments, increased by a certain coefficient, to be calculated by purely mathematical methods. It is more important what scheme for risk evaluation the fund's experts would finally choose. That will probably become known only in 2007 when all other legislative amendments in the financial sector connected with Bulgaria's EU accession will be already a fact.