Increasing the Insurance Compensation Threshold To Rb 1m Will Help Sustain Small Banks

This issue was considered in the framework of developing a system designed to put restraints on the pricing competition in the deposit market which, as believed by the monetary authorities, increases risks for those banks that attract individual deposits at rates much higher than the average market rates. It is suggested as a measure designed to constrain the level of deposit rates, that the size of deductions transferred to the deposit insurance system should be increased for those banks that offer at least one deposit product with an interest rate above a certain established level.

At present, every quarter all the banks operating in the individual deposit market deduct and transfer to the insurance system 0.1% of their quarterly volume of attracted deposits. This results in an increase of the deposit base of banks by 0.4% per annum. It is suggested that, for banks with high rates on their deposits, the amount of this deduction should be increased to 0.14% per quarter, thus raising the value of the deposit base of banks to 0.56% per annum. In other words, the mean value of deposits for such banks will increase by only 0.16% per annum, which can hardly serve as an incentive for them to decrease their rates to the levels offered by big banks. Therefore the feasibility of such a measure from the point of view of bringing down the deposit rates remains questionable.

The effect of increasing the deposit compensation threshold for the entire market can hardly be great, either. According to the data published by the Deposit Insurance Agency as of 1 July 2012, the amount of insured deposits placed by the population with banks was Rb 12.7 trillion. The aggregate volume of deposits insured with full compensation (up to Rb 700,000) amounted to Rb 6.9 trillion, or 54.4% of the total deposit volume. The Deposit Insurance Agency's aggregate volume of insurance now amounts to Rb 8.5 trillion, or to 66.7% of the deposit volume. This is higher than the value of this index recorded prior to the 2008 г.crisis (63.6%), when the compensation threshold was raised for the last time, and higher than at the time of introducing the deposit insurance system in 2005 (61.3%).

At the same time, the deposits amounting between Rb 700,000 to Rb 1m constitute only 6.8% of the aggregate deposit volume, or approximately Rb 870bn. The size of the Deposit Insurance Agency's liability after increasing the deposit insurance threshold will increase to Rb 8.9 trillion, or 70% of the aggregate deposit volume - which means that the overall effect of introducing that measure will be negligible.

The depositors at small-sized regional banks (with the most typical size of deposits being from Rb 700,000 to Rb 1m) will benefit most. Besides, in case of an insurance event, the clients of small banks will have a better chance of getting compensation, because the size of the Deposit Insurance Agency's insurance fund is limited, and so there may not be enough money to pay compensation to the depositors of big banks. The size of that fund (Rb 165bn as of mid-2012) is roughly equivalent to the volume of deposits held by the fifth largest bank.

 

Thus, the planned increase of the insurance compensation threshold will be more supportive of smaller-sized banks. And increased deductions to the deposit insurance system (even if fully compensated for by depositors through lowering interest rates) will still keep the level of return on deposits for small-sized banks at a competitive level by comparison with that received by big banks.

 

M. Yu. Khromov - researcher, Structural Research Center