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Archive 2008

  • 06.11.2008

    Deposit Insurance in Ukraine: Time for Reform?

    (Code:PP_08_2008)

    The recent international financial crisis has also hit the Ukrainian banking system. The withdrawal of deposits, a weakening of the hryvnia (UAH) and ownership conflicts around Ukraine's sixth largest bank, Prominvestbank, caused liquidity problems and led to panic purchases of foreign currency in the population. As an answer to these problems, the NBU issued a legal act that brought important temporary changes to the system, among them a suspension of early deposit withdrawal. As another consequence of the crisis, the role of the deposit insurance fund has received special attention lately.

    This paper deals with several proposals to deal with the crisis, with special respect to the deposit insurance scheme (DIS). It is argued that a DIS is an important component in stabilizing the banking sector and in enhancing depositor's confidence in banks. But it has to be accompanied by the central bank as a lender-of last-resort. DIS can only cope with singular banking failures. In the event of a systemic collapse it is overburdened.

    The present paper develops several proposals and supports certain proposals put forward recently by Ukrainian authorities to react in the short-term:

    1. A comprehensive solution is always better than tactical crisis containment.
    2. The new ceiling of guarantees should be kept at UAH 150,000.
    3. Corporate non-bank deposits should be included in DIS.
    4. NBU should lend to the fund without collateral.
    5. According to a passage in the "Anti-crisis"-law from 31 October, the government should contribute UAH 1 bn (excess profits of the NBU) in 2008/2009 to the Deposit Guarantee Fund (DGF).

    These short-term proposals are complemented by different proposals regarding longterm measures:

    • In Ukraine, DGF should be allowed to invest a limited amount in EUR and USD assets.
    • Coinsurance of 10% should be imposed and banks should be obligated to issue uninsured subordinate debt.
    • In the long-term, foreign deposits should be compensated in foreign currency. Sufficient access to foreign assets or other sources of foreign currency are a prerequisite for this.
    • The target reserve ratio for the DGF should be set at UAH 4 bn. However, should the fund extend its coverage to all non-bank-deposits incl. corporate deposits the fund should increase its target volume accordingly to ca. UAH 7 bn.
    • The private sector should participate in DIS oversight more strongly.
    • In Ukraine, DIS should be actively involved in decisions when and how to resolve individual bank insolvencies. The DGF should be assigned additional functions that exceed the paybox function.
    • Great efforts should be taken to reduce the time needed to pay out depositors in Ukraine. To put this into perspective, the EU currently plans to shorten the respective deadline from nine months as of today to three days in the future.
    • Risk-based premiums should be assessed on banks for funding the DGF. The recommendation is to set different premiums for different rating-classes of banks and to try to add market-based information.
    Attached file  (185.8 kb)
    Authors:  Kravchuk Vitaliy, Øòåäåí Ô³ë³ï, ʳðõíåð Ðîáåðò, Äæó÷÷³ гêàðäî
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