The process on cancelling licenses has speeded up notably

On 24 June, the Bank of Russia took decisions to cancel the licenses of two credit participants: MAST-bank which submitted to the RF CB unreliable reporting and from commercial bank TEST which was involved in carrying out dubious transactions aimed at assets outflow from Russia. Thus, in June the Bank of Russia cancelled the licenses of 10 banks.

Cancellation of the licenses to perform bank operations in April-May 2015 speeded up notably: solely for April the Bank of Russia revoked the same amount of licenses as for the whole Q1 2016 (9 licenses). As many credit organizations lost the right to continue their operations in May and 10 - in June.

Intensive process of cancellation of licenses led to a depletion of Deposit Insurance Fund assets and raising concerns regarding financial stability of the deposits insurance system.

Latest released data regarding the fund size relates to 30 March. Then, the fund size constituted Rb 84.7bn. At the same time, part of the amount had already been reserved for the payouts of loss occurrence for that moment. Minus this reserve, the fund size was estimated at Rb 69bn. In April-May, the Compulsory Deposit Insurance Fund was to get insurance premiums from the banks for Q1 2015. According to our estimates, the amount could come to Rb 18.7 bn. Thus, prospective volume of the fund's assets available for payouts to insured depositors in Q2 2015 constituted about Rb 88.0bn.

Before long, regular banks' insurance premiums to be paid to the deposit insurance system even with account of differentiating rates of insurance premiums introduced effective starting H2 2015, would be insufficient for the payouts to insured depositors. This means that both the stability of the banking sector and the depositors' trust to the banks will depend on the capability of the state to support "Deposit Insurance Agency."

The aggregate responsibility of the Deposit Insurance Agency (DIA) regarding bank deposits whose licenses were cancelled in April-May 2015 came to Rb 60bn. Out of this amount, Rb 54bn fell on two banks: Transnational bank (license cancelled on 13 April) – Rb 16.2bn and Transport bank (license cancelled on 20 May) – Rb 37.6bn. This means that by the end of May the fund's assets minus the reserve for payouts for loss occurrence will fall to Rb 28bn. This being said, following cancellation of the licenses of the Transport bank mass media released information that the fund's assets would be exhausted after the insurance indemnities paid to the insured depositors of this bank. These estimates, however, did not take into consideration two aspects. First, insurance premiums for Q1 2015, second, that not all deposits but solely part of them (usually, less than 90% of the overall volume of deposits) are subject for payouts. As we have just demonstrated, by early June, the DIA still had certain reserve which allowed to remove from the market those banks which did not answer the regulator's requirements.

Three more licenses were revoked on June 2015. The aggregate amount of funds of the population in these banks as of the last reporting date (1May 2015) reached Rb 16bn. Data of the amount of insurance cover on the population's deposits in these banks has not been released so far. On the basis that the ratio of the DIA cover and the deposit base of the banks

whose licenses were cancelled (88% in 2014, 89% in 2015), the aggregate volume of cover regarding these three banks can reach Rb 14bn which amounts to the half of the remaining assets in the Compulsory Deposit Insurance Fund by early June 2015 with account for already due loss events.

At the last meeting of the Board of Directors of the DIA, a possibility to turn to the Bank of Russia for a loan in the amount of Rb 110bn for 5 years was approved. Moreover, according to the law in the event of the DIA's deficit, the latter has the right to turn to the Government for budget funds to cover fund's deficit. In such a case, before long depositors of the potentially troubled banks preserve a chance to obtain insurance indemnities. However, there is a question, will the requested from the regulator amount last long.

For partial two years starting from 1 July 2013, the volume of the DIA's cover exceeded Rb 400bn. Herewith, banks' insurance premiums for the same period constituted Rb 133bn. What is more, the major share of cancelled licenses and correspondingly insurance indemnities fell on 2013-2014 when banks' problems connected with the currency crisis and economic recession did not come out yet. 2008-2009 experience demonstrates that during the crisis the number of the troubled banks increases markedly. For instance, for the first three quarters of 2008, 14 licenses were revoked (less than 5 licenses per quarter), and in Q4 2008 – 62, and another 15 banks were subject to the procedure of financial rehabilitation (12 banks losing licenses per quarter, or 15 bank resolutions). Even with the current speed of removal of troubled banks from the market and insurance indemnities paid to depositors at the level of the first months 2015, requested Rb 110bn from the Bank of Russia will be sufficient through the end of the current year.

Another Rb 37bn the DIA will receive as insurance premiums from banks if the estimate in done by using the base rate (0.1% from an average deposit base for a quarter). From 1 July 2015, a mechanism for differentiating the rates of banks' insurance premiums to be paid to the compulsory deposit insurance fund will be introduced. The maximum rate can reach 0.25% of the average deposit base for a quarter. However, in 2015 there will solely one contribution of insurance premiums in line with the differentiated rate. In Q3 2015, insurance premiums will be contributed in estimate with the Q2 deposit base and a single base rate. Moreover, taking into consideration the fact that about 60% of deposits refer to major state banks which offer invariably lower interest rates, then the overall effect of the introduction of differentiated rates will not significantly affect the amount of contribution. According to our estimates, the aggregate differentiated insurance premiums will be by 10-15% above the base rate which will provide additional Rb 2.5-3bn.

Thus, the main source for the fund replenishment in the near future will remain the funds from the Bank of Russia or the budget. As far as the importance of the bank system stability and insurance of the private depositors assets is not in doubt, additional contribution of insurance premiums to the budget funds insurance system is unavoidable within two to three years.

Michael Khromov – director of the Center for Structural Research