DIA Russia: Achievements and Challenges

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1 DIA Russia: Achievements and Challenges DICJ Round Table 13 March 2018 Kyoto, Japan Nikolay Evstratenko, DIA Russia

2 DIA Russia: History at a Glance: 2004 January DIA establishment (Pay-box) 2004 August Bank Receiver (Pay-box +) 2008 October Bank Resolution Authority (Loss-Minimizer) 2014 Liquidator of Failed Non-Government Pension Funds 2015 Operator of Pension Savings Guarantee System 2016 Liquidator of Failed Insurance Companies 2

3 Deposit Insurance: Achievements Payouts (billion rubles) Number of Payout Cases In total DIA Russia has paid 1,750 billion rubles (about US$33 billion) to 3.7 million of insured depositors of 430 failed banks 3

4 Deposit Insurance: Challenges Large number of bank failures including failures of large banks as a result of failure of Yugra-Bank in 2017 DIA has paid insurance to its 215 thousand depositors for the total amount of 173 billion rubles (about US$3 billion) Late access to depositor data in failed banks only after a member bank s closure by the Bank of Russia Large number of fraudulent transactions with deposits such as transfer of funds from uninsured accounts to insured ones, non reflection of deposits in failed banks records/books, falsification or destruction of databases, etc. Lack of funds in the Deposit Insurance Fund DIA has borrowed from the Bank of Russia 821 billion rubles (about US$13 billion) as a backup funding 4

5 Deposit Insurance: Prospects The coverage is to be expanded to deposits of small businesses the draft law has passed first reading in the State Duma (the lower chamber of the Parliament of the Russian Federation) DIA and the Bank of Russia are considering the possibility of introducing higher coverage limits for accounts with temporary high balances and for joint accounts DIA s Board of Directors has increased the premium rates in the existing differential premium system to maximum levels allowed by the Deposit Insurance Law to speed up repayment of loans to the Bank of Russia Digitalization of services that DIA provides to bank depositors: interactions with depositors will be supported by special services available through DIA web site, mobile apps, the national system of identification of bank customers and storage and maintenance of data on customer transaction/single portal of government services New software tools that help to identify suspicious and fraudulent transactions with bank deposits, assets and other liabilities committed prior to a bank s failure 5

6 Bank Liquidation: Achievements Dynamics of Satisfaction of Creditor Claims (percent) and Number of Banks Liquidated by DIA in Bankruptcy Forced liquidation Satisfaction of Creditor Claims Since 2005 DIA has been appointed as receiver in 615 failed banks. In 292 banks DIA has completed liquidation proceedings. Average length of liquidation/receivership is 3 years.

7 Bank Liquidation: Challenges DIA is appointed as receiver/liquidator (by court) in 2-3 months after a bank closure, and provisional administration (appointed by the Bank of Russia) that manages the failed bank s affairs in this interim period is not active in collecting/recovering assets, challenging dubious transactions, collection and verification of creditor claims, etc. P&A transactions are allowed only after a bank s closure and have some legal impediments Ranking of insured depositors in insolvency is different: households deposits are the first priority claims while deposits/accounts of individual entrepreneurs are the third priority claims Sale of any asset requires creditor committee s prior approval (minimum price, conditions of sale ). In some cases creditors do not support expenses on legal actions to recover misappropriated assets DIA is obliged to investigate circumstances of a bank s insolvency, to collect and analyze evidences of mismanagement, suspicious transactions, to take all necessary legal actions to recover misappropriated assets and to bring parties at fault of the bank s failure to responsibility it is a costly and lengthy process 7

8 Bank Liquidation: Prospects DIA and the Bank of Russia are developing legislative proposals to make the liquidation proceedings more cost and time effective. They include: Appointment of DIA as Provisional Administration of any bank immediately after the bank s closure (license revocation) by the Bank of Russia Requirement for the Provisional Administration to immediately after appointment start inventory, assessment and marketing of the failed bank s assets Authorizing DIA to define the procedure for marketing and sale of failed banks assets. The procedure should be approved by the Bank of Russia but should not require creditors consent Allowing DIA, when it arranges a sale of a failed bank s assets, to transfer to an acquirer certain liabilities of the failed bank instead of payment for the acquired assets (P&A) and/or to defer (for up to 12 months) repayment to DIA of acquired liabilities that result from reimbursement of insured depositors by DIA The use of digital services for communications with bank debtors and creditors 8

9 Bank Resolution: Achievements DIA has participated in resolution of 65 systemic banks including 6 cases when DIA arranged Purchase and Assumption (P&A) transactions and 59 projects that envisaged implementation of measures to prevent bank failures Bank resolution projects in relation to 39 banks have been completed, including: Financial rehabilitation of 21 banks (open bank assistance), including 3 banks where DIA used quasi-voluntary bail-in resolution tool. Purchase and assumption transactions 6 banks. Banking licenses of 12 banks were revoked prior to actual start of implementation of bank failure prevention measures. One resolution project in February 2018 was transferred to the Banking Sector Consolidation Fund s Management Company of the Bank of Russia As at 1 March 2018 DIA participates in 25 bank resolution projects. Financial rehabilitation of 23 banks is conducted with the participation of new investors. In AO GENBANK and PAO «Timer Bank» DIA is acting as provisional administration to manage their affairs and operations. 9

10 Bank Resolution: Challenges The Bank of Russia does not share information from recovery and resolution plans and DIA is not involved in their review Both the Bank of Russia and DIA are resolution authorities with similar powers (duplication of powers): it is the discretion of the Bank of Russia to resolve a failing systemic bank with or without DIA involvement As there isn t any prefunded bank resolution fund, DIA depends on the Bank of Russia s funding and the final decision on the resolution tools to be used Lack of preparation time. It is essential that the DIA have access to the failing institution at the early stage of deterioration of its financial position. It would widen the scope of applicable resolution strategies and tools Substantial decrease in market interest rates makes the use of such resolution strategy as provision of subsidized loans to new investors ineffective. Large amounts of non-performing loans in failing banks prevent the use of traditional resolution tools 10

11 Bank Resolution: Prospects New resolution tools that need to be used more frequently include Bail-in, P&A, Bridge-banks, etc. as they do not require large amounts of government funding The Banking Sector Consolidation Fund of the Bank of Russia established in 2017 is an important source of funding for resolving D-SIBs through recapitalization, merger, etc. The Bank of Russia and DIA are considering feasible options for establishing a bad bank(s)/amc(s) for dealing with NPLs in the banking sector DIA has received the possibility to challenge dubious transactions of a bank that were executed prior to the start of the implementation of bank resolution measures at any stage of the implementation of the plan of the Agency s participation in such measures 11

12 DIA Russia s New Projects: Business Process Reengineering and Digital DIA Business Process Reengineering Goals Improving customer orientation Provision of information to depositors and creditors in electronic form Improving operational effectiveness of DIA operations Improving adaptability of business processes 12 Digital DIA Goals Improving accessibility of DIA services for all customer groups through provision of modern digital interaction channels (Any Service Any Time) Improving quality and range of services provided by DIA Ensuring convenience and user friendliness for customers

13 Business Process Reengineering October November December January February March April May June July August 2018 г. Start 1 Stage 1 Development of methodology for process and project management Development of internal regulations Business process mapping, selection of Long list and Short list of business processes 2 Stage 2 Description and analysis of business processes, development of proposals for their reengineering, Selection of pilots from the Short list Description of existing business processes from the Long list Analysis of existing business processes from the Short list, identification of deficiencies and KPIs Development of pilot business processes from the Short list, target levels for KPIs, roadmap, estimation of costs 13 Progress status: - All required internal regulations developed, four of them approved, two regulations are at the final stage of endorsement and approval (Methodology for pricing and Regulation on process management) - Map of 2 nd level business processes and Long list of key business processes approved, detailing of 3 rd level business processes endorsed - Directions for the improvement of DIA operation and criteria for selection of pilots have been approved - Key business processes are described and analyzed Stage 3 Пилотирование и внедрение целевых бизнес - процессов «короткого» списка Pilot projects with selected 10 business processes, evaluation of results and KPIs, adjustment of the business processes Implementation of pilot business processes including their scaling, development of additional regulations, structural changes, training of staff, etc.

14 Digital DIA: Electronic channels for provision of services Stages A B C D Depositors Creditors Acquirers of assets Borrowers Beneficiaries of PGS Agent banks Payment systems Government agencies Board of Directors Creditor committee DIA staff members Single portal of government services Portal for asset sale Personal accounts at DIA website, Mobile applications DIA partners communication channels Bilateral exchange of data/ documents Interagency electronic interaction system Corporate portal Personal accounts DIA s information services, contact center, website E 14 Contractors Bilateral/multilateral exchange, personal accounts

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