ASSESSMENT OF THE DEPOSIT INSURANCE FUND S ADEQUACY IN RELATION TO ESTIMATED RISK OF THE BANKS

Transcription

1 ASSESSMENT OF THE DEPOSIT INSURANCE FUND S ADEQUACY IN RELATION TO ESTIMATED RISK OF THE BANKS Ćamila Šalaka, Co-ordinator for Membership and Insurance Premium Gorana Krunić, Coordinator for the Assessment of Insurance Limit and Bank Resolution Zlatibor, March 2016

2 PRECONDITIONS To regulate by law the obligation of banks for regular delivery of off-site reports i.e.. reports requested by the supervision, the report of external auditors, and reports at the request of DIA Establish a database of member banks of the deposit insurance scheme It is necessary to have adequate cooperation with supervision in order to have the DIA timely informed about changes in reporting

3 ASSESSMENT PHASES OF THE DEPOSIT INSURANCE FUND S ADEQUACY ESTIMATION PHASE ONE BANK CLASSIFICATION PHASE TWO CALCULATION OF THE TARGET COVERAGE RATIO CR1 AND CR1 PHASE THREE STATE AND EXPECTED DEVELOPMENT OF THE DEPOSIT INSURANCE FUND PHASE FOUR COMPARISON BETWEEN REALIZED AND PLANNED COVERAGE RATION WITH TARGET SIZE

4 PHASE ONE BANK CLASSIFICATION By using the basic financial performance indicators (9*) and with the help of statistical models make bank rating for the quality of financial indicators Capital adequacy rate (risk weight 15%) Fixed assets/ core capital rate (5%) NPL rate (20%) Provisioning/ NLP relation rate (20%) Cost efficeincy rate: "cost-income (20%) ROA ratio(5%) Liquidity ratio 90d (5%) Loans / deposits ratio (5%) Cash / assets ratio (5%) *prposed European risk-based premium model uses 8 indicator

5 After determining a composite rating for individual banks, based on certain performance indicators, there is conducted also the rating of individual banks in relation to the entire banking sectorr of Bosnia and Herzegovina. Composite rate 25-B; 24-V; 23-U; 22-Q; etc. Disadvantage: it s not taking the quality of entire banking sector into account

6 Based upon determined bank rating banks are classified into three categories: A good banks (minimum risk for the Fund in forseable future, risk weight 0 which means that Fund is not making provisioning of fund for aforesaid banks) B banks under observation (small risk for the Fund in forseable future, risk weight 20%) C risky banks which present serious risk for the Fund in forseable future (risk weight 100%) Rating procedure: objective (visible from the calculation model) and subjective criteria (not included in the model, but are taken into account e.g. latest bank rating given by the supervisor, quality of shareholders, etc. primarely assessed by the bank analyst in charge for the given bank and Director of DIA Branch Office).

7 PHASE TWO CALCULATION OF COVERAGE RATIOS CR1 AND CR2 We simulate bank failure from C and B group with certain assumptions: % risk placments which cannot be recovered in liquidation or bancruptcy - 50% Withdrawal of insurde deposits before bank closure * - 20% Withdrawal of non-insured deposits before bank closure *- 50% Withdrawal of borowings taken and other liabilities before closure * - 50% Risk weight for C group - 100% Risk weight for B group 20% * Assmption on liquid assets ouflow is quite conservative taking into account the case of Bobar

8 By taking into account assumptions from scenario we calculate: CR1 expected loss in % of insured deposits in all banks (minimum required percentage) CR 2 amount of funds that we need in the moment of bank faliure (insured deposits after outflow expected loss of the Fund)

9 PHASE THREE STATE AND EXPECTED DEVELOPMENT OF DEPOSIT INSURANCE FUND To take into account the coverage ratio at lates available date (observed is a situation with and without EBRD credit line) there are complied projections of the development of the Fund and coverage ratio with certain assumptions (assumptions are adjusted in accordance with changes within environment) such as for example: There is no insured deposit pay-out There is no chnage in premium rate There is no change in insured amount Growth of eligible and insured deposits at cretain rate Planned net investment return rate of the Fund

10 By changing the afore mentioned scenario we also assess what happens with coverage ratio if we change premium rate or increase level of insured deposit. The most proper projections are for the next six months up to a year and they are taken into account when comparing the calculated target coverage ratio.

11 PHASE FOUR- COMPARISON BETWEEN THE REALIZED AND PLANNED COVERAGE RATIO WITH TARGET SIZES (CR1 AND CR2) RESULTS C B TOTAL Expected loss of the fund 277,140 6, ,814 Expected loss in % of insured deposits in banks CR1 3.69% 0.09% 3.78% Total funds needed 727, , ,264 Total funds needed in % of insured deposits in banks CR2 9.70% 1.75% 11.46% MINIMUM COVERAGE RATIO MUST CORRESPOND TO CR1

12 Brief introduction into risk-based premium Important preconditions for establishment of effective risk-based premium system*: Goals (avoid taking excessive risk incentive for appropriate risk management reduction of moral hazard effects) Analysis of the current state in the country ( state of economy, monetary and fiscal policy, structure of the banking sector, attitude and expectation of public, legislative frames, financial reporting) Approach towards banking risk differentiation (quantitative, qualitative, combined, expected and well perceived by the banks and supervisors) Authority, resources and information requirements (working procedures, from whom the reports are received supervisiors or banks) * General Guidance for Developing Differential Premium Systems (IADI 2005.,2011.)

13 Important preconditions for establishment of effective risk-based premium system (continued): Manner of bank categorization and premium rate determination per certain categories (premium rate should meet financing goals) Transitional period (transitional period defined by the plan, to introduce concerned parties, time necessary for adjustment both of banks and institution providing insurance) Transparency, public and confidentiality (aim to encourage banks to better manage risk, ie. reduce moral hazard, but on the other hand does not lead to a further deterioration in banks) Regular apprisal, up-dating and eventual review (avoid disputes)

14 Risk-based premium in Bosnia and Herzegovina: There is a legal possibility as main precondition Judgment on presence of significant moral hazar in the banking system of BiH justifies introduction of the risk-based premium system The most difficult period in the banking system since establishment of DI (bank faliures). Would a problem banks be additionally jeoperdized at this moment? Which approach to be used (model indicates the combined approach) Procedure of assement of Fund s adecuacy, level of the limit and premium rate level would be used for risk-based premium system Reports submitted by banks from both BiH entities must be identical

15 Risk-based premium in Bosnia and Herzegovina (continued): Premium rate shall be determined based on the financing level required, to take into account that there is no automatic support by the state, to take into account also future need to raise insured deposit limit in line with EU Directive It is not realistic to introduce risk based premium system at this moment, but due to advantages carried by the risk based premium and strengthening of the DIA BiH role in the improvement of the quality of the banking we should not give up. To use this period as preparatory period To use experience from other countries (take into account all advantages and disadvantages, and consider specifics of BiH banking sector and the set-up arrangement in general).

16 Thank you for your attention!