SYSTEM FOR GUARANTEEING DEPOSITS TO BE CHANGED
The National Assembly will pass an amendment to the Deposit Insurance Act, stipulating that all citizens' and firms' money up to BGN40,000 will be guaranteed still before Bulgaria's accession to the European Union (EU). Thus, the deposits' and accounts' insurance by the State will be made uniform with that in the European community. According to BNB's statistics, almost 2 million accounts of citizens and firms will be protected after the new legislative provisions are voted. The increase of the guarantee will raise clients' trust in the domestic bank sector and will therefore contribute to its additional stability. However, this measure is just an element of a larger initiative for reducing the risks to our financial and crediting sector.
The BANKER weekly has already written that the law on credit institutions, passed by Parliament in June, contains provisions enabling the Bank Deposit Insurance Fund to acquire a bank which has fallen into financial difficulty by increasing its capital and thereby become its majority shareholder. The idea is that after rehabilitating the troubled credit institution the fund will sell its stocks to a serious investor and thus strengthen it.
By receiving the right to rehabilitate institutions the Bank Deposit Insurance Fund will practically increase its importance as a factor maintaining the banking sector's stability. Thus, both citizens and business will get yet another, albeit indirect guarantee for their money. According to some bank managers, however, the forthcoming change in the size of the State's protection on savings gives reason to consider an overall redesigning of the Deposit Insurance Act and more especially of
the present system of collecting instalments into the Bank Deposit Insurance Fund
Currently, till end-March of each year banks in Bulgaria 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 credit institutions have been commenting for almost two years now that the present 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.
On the basis of data from the poll to banks the Management Board of the Bank Deposit Insurance Fund will 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. Their application 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 basis for comparing the state of credit institutions in Bulgaria according to indicators of one and the same type. Most probably, however, 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.