Risk Monitoring and Determination of the Deposit Insurance Premium. Zlatibor, March 2016

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Allan McGee
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1 Risk Monitoring and Determination of the Deposit Insurance Premium Zlatibor, March 2016

2 Presentation issues How are the banks risks monitored? How is the premium rate determined? Importance of the actuarial approach in determining the premium rate? How is the potential DIF risk determined? 2

3 Risk monitoring and premium determination Database Financial reports/statements submitted by banks; DIF account balance; Bank risk assessment Methodology accompanying the concept paper for the banking sector risk monitoring/measuring; Premium rate 0.2 %; 10 years; 3 mid-sized banks; target level; 3

4 Data sources MoU with the NBS Banks Other Registration of a bank licensed by the NBS with the business entities register; Decision on withdrawal of the bank license; Appropriate decisions of the NBS imposing the obligation on foreign branches of domestic banks to insure their deposits with the DIA; Bank supervision; Types of measures imposed on banks; Termination of imposed measures; Initiation of a bank resolution process; Bank s financial indicators; Risk profiles; Findings of the on-site supervision; Systemically important banks; Report on total and insured deposits; Report on deposit maturity and average interest rate; Report on deposits of large legal entities; Capital requirements and CAR report; Capital elements report; Monthly reports on the banks cash-flow; Balance sheet and income statement; Daily liquidity data; Ministry of Finance; State Statistics Authority; State Pension Fund; State Employment Authority; 4

5 How is the premium rate determined? DIA shall determine the premium rate for the following year by considering : Condition of the Serbian overall financial and banking sectors Risk exposure of the banking sector Ratio between the available DIF level and estimated amount necessary for payment of covered deposits in the case of simultaneous failures of the three mid-sized banks Until 1 January 2025 inclusive, the Agency shall ensure that the DIF account balance reaches at least 5% of total insured deposits in the banking system and determine the regular premium rate accordingly. 5

6 Actuarial approach in determining the premium rate Beside legal preconditions, the following shall be taken into account when determining the premium rate: Level of insured deposits and level of insured amounts Projected growth rate of insured deposits Projected EUR rate growth Anticipated deposit currency structure Anticipated asset recovery of the DIA from the estate of the failed banks Required amount for payout of deposits in the case of simultaneous failure of the three mid-sized banks Model 1 Model with the maximum premium rate over first 3 years Option of imposing the extraordinary premium in 2017 Model 2 Lower rate than the legal maximum in the first year with an extension over following two years by 0.1%, but, as from 2019 a 0.1% drop 6

7 How is the bank risk monitored? Methodology for the monitoring and measuring risks of the banking sector shall comprise the data analysis on: Capital adequacy Liquidity Profitability Exposure of a bank to an entity or a group of related entities Total exposure to the entities related to the bank Sum of all exposures Sum of the bank s investments in the entities outside the financial sector FCY standing of the bank Monthly information for the risk monitoring and measuring of the banking sector: Basic macroeconomic indicators Aspects of monitoring and assessing of the banks risks Importance of the bank in terms of its potential liability on account of payout of insured deposits DIF level 7

8 Internal methodology bank s profile Normal business (very low and low risk) Risky business (mid risk) Methodology accompanying concept for monitoring and measuring the risks of the banking sector Early warning signs (high risk) Provisional administratio n (very low risk) 8

9 How is the potential DIF risk determined? The draft decision on the size of the quarterly insurance premium rate, within the DIF income/cost projection is made on the basis: Projection of the annual inflation rate Projection of the RSD rate trend to other currencies Projection of the return rate on DIF investments Projection of investment costs Projection of deposit growth rate Three mid-sized (ranked) banks internal methodology Mid size indicator (in Serbian: indikator srednje veličine: ISV) Average DIF exposure Total insured amount in the banking system per bank (ISV) = Number of member banks 9

10 How is the potential DIF risk determined? Minimum DIF coverage ratio Optimal (target) DIF coverage ratio 3 mid-sized banks Systemic banks DIF coverage Banks on which the NBS imposed measures Banks for which the NBS submitted reports on indicators of their deteriorated operation 10

11 Risk analysis importance Draft decision on the DIF investment DIF liquidity and solvency Determination of the premium rate Taking decisions on investment of the funds of the failed banks Risk analysis objective: Consideration of the condition of banks operating in Serbia (balance sheet structure, loan portfolio quality and deposit potential, reported financial results and compliance); Monitoring of the entire banking sector of the country and some banking groups depending on their size and ownership structure; 11

12 Institutional framework General plan for the implementation of the Institution Capacity Building Program of the DIA under PWC consultancy Drawing up and implementation of the new concept of the risk monitoring including setting of cross-points with the activities carried out in the case of the problem bank resolution; Designing of the insurance premium system aligned with the risk level and in collaboration with the NBS and MoF; 12

13 Thank you for your attention! Deposit Insurance Agency Knez Mihailova 2, Beograd Tel:

Chapter 9: Financial Services

Chapter 9: Financial Services Serbian Deposit Insurance Scheme Republic of Serbia Deposit Insurance Scheme Legal Framework EU regulations: Directive 2014/49/EU of the European Parliament and of the Council