More Contributions May be Needed for the Mandatory Deposit Insurance Fund

On 13 December, the Bank of Russia revoked the banking licenses of three mid-sized banks: Investbank, the Bank of Project Financing, or BPF, and Smolensk Bank. The reasons that Russia's financial regulator gave for the closure of each of the three banks are pretty similar: inadequate liquidity, failure to meet legal obligations to creditors and depositors, and low asset quality resulting from risky credit policies.

As of 1 November 2013, Investbank was among Russia's top 100 banks by its asset size, and among top 50 by its volume of individual deposits. In terms of these parameters, it was only slightly behind Master Bank, whose license was revoked on 20 November 2013. By the former indicator, the Bank of Project Financing and Smolensk Bank were listed among Russia's top 150 banks, and by their volumes of individual deposits - close to 100th place.

The aggregate volume of the population's money held by all the banks amounted, as of 1 November 2013, to Rb 70.5bn, or 1.5 times more than the volume of funds held by Master Bank as of the same date. The Deposit Insurance Agency's total insurance payout for the three banks, according to its preliminary estimate, will be Rb 51bn. This sum amounts to 27% of the mandatory deposit insurance fund (Rb 186bn, less reserves earmarked for reimbursements against prior insured events.   

Thus, after the claims filed with regard to the insured events that have already occurred are satisfied, the mandatory deposit insurance fund's volume will amount to Rb 135bn. As stated in the Deposit Insurance Agency's report for the first 9 months of 2013, the fund as of the end of Q3 2013 amounted to Rb 237bn. Thus, it can be expected that, by the end of Q4, its volume will have shrunk by more than Rb 100bn.

As a consequence, the Deposit Insurance Agency will become more limited in its ability to compensate the losses sustained by clients of big banks in an event of their licenses being withdrawn. Thus, for example, if at the end of Q3 2013 the mandatory deposit insurance fund's volume was sufficient to cover the aggregate volume of individual deposits held by any single bank, in early 2014 (if the insurance contributions received from banks in Q4 2013 are not to be taken into account) its volume will no longer match the corresponding indexes of 13 biggest banks. It is evident that in a situation like that, in order to maintain stability on the deposit market, the Deposit Insurance Agency will probably need support from the RF Government or the RF Central Bank.

M.Yu. Khromov – Senior Expert of the Structural Research Center