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. Last Updated: 07/27/2016

A Proposal to Insure Deposits of Up to $3,000

A key aspect of the government's banking reform program, deposit insurance, is on its way to becoming a reality.

A bill on guaranteeing private bank deposits received the Cabinet's approval Thursday and is scheduled for submission to the State Duma this week after minor adjustments.

The legislation aims to build confidence in the banking sector, lower bank risks and attract unofficial "mattress" savings into banks and, subsequently, the economy. It is seen as an important step in a long-overdue banking sector reform; attempts to introduce such a law date back to 1995.

"We view the legislation as an important step in banking reform and probably as good as could be hoped for right now," said Madina Butayeva, an analyst with Aton Capital brokerage. "Banking reform is moving in the right direction."

"Once you have a deposit insurance scheme in place, you can be fairly certain that more depositors are going to put money into the system, and therefore, the amount of money in the banking system translates automatically into the amount of money available for investment into the economy," said Richard Hainsworth, general director of RusRating bank rating agency. "So the real benefit for the country of a deposit insurance scheme is high levels of lending."

After the new system begins to operate, deposits of up to 20,000 rubles ($637) are to be covered 100 percent and deposits of between 20,000 and 120,000 rubles are to receive 75 percent coverage. However, given that the maximum payout envisaged in the bill is just 95,000 rubles ($3,000), the deposit insurance scheme has clear limitations.

"The law will affect low-income Russians," said Alexei Zabotkine, chief economist with United Financial Group. "Maximum compensation of less than $3,000 is of little interest for the middle class. However, the most proactive of those may diversify their savings between several banks."

The legislation allows depositors to keep their savings in several banks, and those savings would be equally insured.

Hainsworth said, however, that economically savvy high earners would rather invest their money in assets rather than bank accounts.

The good news, he said, was that the government would have for the first time a vested interest in ensuring that banks don't go belly up.

"By accepting the deposit insurance scheme and having risk in those banks, the government is going to do more in ensuring that those banks don't fail. Now, that's a greater guarantee to depositors that the nominal value of the deposits," he said.

The deposit insurance plan is also expected to create a clear division between "pocket" banks and universal banks, he said.

"With the implementation of a deposit insurance scheme, the banks that want to be true financial intermediaries -- who want to work with the population -- will have to accept tougher provisions, tougher regulations," Hainsworth said. "And that means that the deposit insurance scheme is going to distinguish very clearly between banks that only want to exist for their companies and banks that really want to be financial institutions."

The system will be obligatory for all banks accepting retail deposits. Participating banks will be required to make quarterly contributions of 0.15 percent of the value of their total retail deposits into a fund administered by the Agency for Restructuring of Credit Organizations. The government has said it plans to make the first contribution of 3 billion rubles to the agency.

While the legislation may bring about increased confidence in the banking system as a whole and, as a result, increase the deposit base, banks are likely to pass on the insurance costs to their customers and to lower deposit rates, Zabotkine said.

State-owned Sberbank, with almost 70 percent of the country's retail deposits, stands to lose the 100 percent state guarantee those deposits currently enjoy. After the Cabinet approved the bill last week, Economic Development and Trade Minister German Gref said state guarantees on Sberbank deposits would be maintained either for two years after the deposit insurance system is created or four years after the law comes into effect, Interfax reported.

The legislation will enable increased competition on the market for private deposits, Gref said. He emphasized that the creation of equal conditions for competition was one of the main goals of the legislation, and this would mean higher-quality services that would benefit depositors.

Analysts said the legislation should create a more level playing field among banks competing for household savings deposits.

"Sberbank is a monopolist, especially in the regions where it has an extensive and well-established branch system," said Butayeva of Aton. "If its clients decide to switch to a different bank -- we predict that by 2006 it will retain about 50 percent of its client base -- it will happen in Moscow, St. Petersburg and other large cities where other banks have their outlets, but the pace will not be as fast in the regions."

Hainsworth disagreed, saying Sberbank's client base would stay the same.

"There are economic reasons to believe there is two or three times as much money in the economy underneath the mattress than there is in Sberbank," he said. "And therefore, once the commercial banks begin to offer higher levels of service, plus the fact that there is a partial government guarantee that will give the government a vested interest in maintaining deposits, then the banks will begin to attract the money that is under the mattress, not necessarily the money that is already in Sberbank."

The government plans for the law to come into effect by April 2003 and for the deposit insurance scheme to be in place from January 2005. By that time, all banks already working in or wishing to enter the retail market will be required to undergo re-licensing by the Central Bank. The re-licensing is intended to help ensure the system is protected against weak banks. There are concerns, however, that many banks will not be able to meet the requirements and that the Central Bank's rulings will not be fully objective.

Gref said last week that six criteria had been formulated, of which four had a subjective or optional character, Interfax reported. The criteria would be further developed with the participation of the Association of Russian Banks in order to give them clearer definition, he said, adding that all six criteria would likely remain in the legislation. The proposed criteria are financial stability, transparency of ownership structure, satisfactory quality of current and strategic management, internal control and business planning systems.

"Banks will be monitored on a regular basis by the Central Bank and ARCO," said Natalia Nikolayeva, head of regulatory relations at Citibank Russia. "This should ensure that the banks will be meeting the criteria of sound risk management."

But whether the new law will cause more Russians to trust their savings to banks remains largely unclear, despite some growth in the sector.

"Credit quality of banking institutions is neither the only nor the major roadblock for retail deposits flowing into the banking system," Zabotkine said. "Indeed, Sberbank always had a 100 percent state guarantee, but people still did not put their money in Sberbank.

"Our opinion is that the major restraint has been tax evasion -- most of the savings have been accumulated with considerable tax avoidance. Personal income tax reform and higher tax compliance are changing this. Since mid-2001, we have seen a steady growth in the retail deposits/GDP ratio."

Butayeva said that by setting a relatively low limit on guaranteed deposits, the moral hazard inherent in any deposit insurance scheme could probably be minimized. "But it is difficult to judge whether the system will be effective in restoring the public's confidence in the banking system -- and whether it could deal with an actual default situation," she said. "This will only be known once the system is up and running."