Conference on Measures for Improving Confidence in the Banking System - Bishkek, the Kyrgyz Republic, 1 - 2 July 2004.

1. International Conference
MEASURES FOR IMPROVING CONFIDENCE
IN THE BANKING SYSTEM
Bishkek City, 1-2 July 2004
Implementation of Deposit Insurance in
Transition Economy: the Case of Bulgaria
Roumyana Markova, Chief Expert, International Cooperation and PR
Bulgarian Deposit Insurance Fund

2. Presentation Outline
The main challenges encountered:
Proper timing to launch DIS
Criteria for membership and funding
Scope and level of coverage
Efficient repayment procedures
Public awareness
International Conference Bishkek City, 1- July 2004

3. Proper Timing to Launch DIS
Implicit government guarantee till Jan 1996
First explicit limited coverage DIS - introduced Jan 1996
(Regulation of the Central Bank - BNB)
– only deposits of physical persons were insured
– level of coverage - appr. EUR 2,500
International Conference Bishkek City, 1- July 2004

4. Proper Timing to Launch DIS
Outbreak of the financial crisis - mid 1996
(within ten months 17 banks comprising 25% of total
banking system assets failed)
Extraordinary legislation - Law on State Protection of
Deposits; Repayment of deposits from the budget:
– 100% to physical persons
– 50% to legal entities
International Conference Bishkek City, 1- July 2004

5. Proper Timing to Launch DIS
Introduction of Currency Board - mid 1997
– curbing the crisis
Explicit DIS with limited coverage on deposits - Law on
Bank Deposit Guaranty - Apr 1998
Bulgarian Deposit Insurance Fund (BDIF) - Jan 1999
– independent legal entity
– accountable to Council of Ministers, BNB, National Audit Office
– financial activities audited by the National Audit Office
International Conference Bishkek City, 1- July 2004

6. Mandates and Powers of BDIF
1998 Law on Bank Deposit Guaranty (LBDG)
– determines and collects premiums from banks
– invests its assets under LBDG provisions
– repays insured amount of deposits with failed banks
1999 Amendments to Law on Banks: Art.89a (repealed by LBB)
– very limited control over trustees
2002 Law on Bank Bankruptcy (LBB)
– administers bank bankruptcy proceedings by
controlling trustees and preparing draft regulations
– control over 4 failed banks
International Conference Bishkek City, 1- July 2004

7. Criteria for Membership
Mandatory membership for all banks licensed to take
deposits
Under certain circumstances only foreign banks’ branches
may be allowed not to participate in the system
32 members institutions (incl. 3 foreign banks’ branches)
Branches of Bulgarian banks operating abroad – ?
International Conference Bishkek City, 1- July 2004

8. Funding
DIS of ex-ante type funding by banks
– entry and annual premiums paid by banks
No initial capital contribution from the budget
Other sources of funding
– interest on BDIF investments
– proceeds from BDIF subrogated claims
– loans, etc.
International Conference Bishkek City, 1- July 2004

9. Banks Premiums
Flat rate system
Entry premiums - 1% of registered capital
Annual premiums - 0.5% of total amount of previous year’s
deposit base; due by 31 March in current year
– deposit base determined on average daily basis (end 2001)
BDIF is considering the introduction of a risk-adjusted
premium system
International Conference Bishkek City, 1- July 2004

10. Target Size of Funds
Under LBDG - 5% of total amount of insured deposits in
the banking system
– Management Board may decide to reduce annual
premiums if funds exceed 5% target ratio
Ratio of BDIF funds / deposits - 2.23%
– Current funds of BDIF - BGN 249 Mio / € 127 Mio
International Conference Bishkek City, 1- July 2004

11. Scope of Coverage
Insured are:
– deposits of physical persons and legal entities
– deposits in national and foreign currency
Exclusions:
– banks and non bank financial institutions, insurers, pension and
social securities funds, investment intermediaries, privatization
funds, government and government institutions, municipalities, BDIF
– bank’s senior officers and auditors, shareholders of more than 5% of
bank’s equity, and their close relatives, preferential rate deposits
– deposits associated with ‘money laundering’ (end 2001)
International Conference Bishkek City, 1- July 2004

12. Coverage
Level of coverage
– currently 100% up to BGN 15,000 / € 7,670
Application of coverage limits
– per depositor per bank
International Conference Bishkek City, 1- July 2004

13. Increase of Coverage
1998 BGN 6,900 / € 3,528 – to BGN 2,000 - 95%
– over BGN 2,000 - 80% (max 5,000)
2002 BGN 10,000 / € 5,113 – 100% (abolishment of coinsurance)
2003 BGN 15,000 / € 7,670 – 100%
2005 BGN 22,000 / € 11,248 – EU Timetable
2007 BGN 39,200 / € 20,043 – EU Timetable
International Conference Bishkek City, 1- July 2004

14. The Case of DSK Bank (former State Savings Bank)
State Savings Bank
– the ‘bank of the people’
– regulated by SSB Law of 1967
– accepting only household deposits in BGN
Till May 2000 - full government guarantee on deposits in SSB
Smooth transition to limited guarantee
– small average size of deposits
– two-year transitional period for SSB transformation into
commercial bank (DSK Bank);
International Conference Bishkek City, 1- July 2004

15. Repayment of Insured Amounts of Deposits
Deposits are repaid only in national currency
Repayment of insured amounts of deposits is done via a
servicing bank determined by BDIF Management Board
Repayment begins not later than 45 days from date of
revocation of bank’s license by BNB
Deadline for repayment of insured deposits
International Conference Bishkek City, 1- July 2004

16. Efficient Repayment Procedures
BDIF has successfully performed its insurance function
in the two bank failures since its establishment
– Credit Bank - 1999
– Balkan Universal Bank - 2000
Subrogation - in both failures BDIF recovered the
repaid amounts of insured deposits in full
International Conference Bishkek City, 1- July 2004

17. The Case of Credit Bank
12 Jan 1999 Revocation of license
1 Mar 1999 Start of repayment
1 Mar 2004 Expiration of prescriptive period
Insured deposits in total BGN 9.5 Mio
Repaid deposits BGN 8.9 Mio - 94%
Nov 2002 Termination of bankruptcy proceedings
Dec 2002 BDIF starts issuing certificates to depositors –
smooth process
International Conference Bishkek City, 1- July 2004

18. Public Awareness
Strong emphasis on public awareness
BDIF public relations policy
– objectives and principles
BDIF Public Relations Rules
– specify terms and procedures for relationships with media
and general public, and other communication activities
– chief spokesperson is BDIF Chairman
Organization of PR activities: in-house resources
International Conference Bishkek City, 1- July 2004

19. Public Awareness
Objectives
– popularization of DIS features & BDIF functions
– maintaining confidence in banking system
– enhancing BDIF image
Target audiences
– general public (present and potential depositors, uninsured
depositors and creditors of failed banks)
– media
– banks and their front line staff, banking association
– lawmakers and public officials
International Conference Bishkek City, 1- July 2004

20. Public Awareness
Communication techniques
– press releases and conferences, interviews for media
– Q & A Brochure on deposit insurance - 2000
– hot telephone line - 2000
– provision of information to general public in BDIF office
– written responses to requests and complaints
– web site - 2001 (both in Bulgarian and English)
– discussions and seminars
– paid advertisement in printed media
International Conference Bishkek City, 1- July 2004

21. Survey on Public Awareness of DI
National representative study - 2002 (quantitative & qualitative)
Findings
– 24% of respondents know in general about BDIF
– 43% of bank depositors are familiar with DIS in place
– level of awareness of population and depositors is low
Recommendations: enhance effectiveness in provision of public
information, higher involvement of banks’ employees, diversifying
communication channels
Findings and recommendations - presented also to BNB Banking
Supervision Dept. and Association of Commercial Banks
International Conference Bishkek City, 1- July 2004

22. New Communication Techniques
Use of additional communication techniques and tools
– educational radio-series on deposit insurance
– TV ads
– seminars for banks’ branch directors
– front-door and counter stickers
– product registers
– revamp of BDIF web site
– Q & A leaflet on bank bankruptcy
Cost issues and evaluation of results
International Conference Bishkek City, 1- July 2004

23. How to Contact BDIF
Bulgarian Deposit Insurance Fund
2, Graf Ignatiev Str. 3rd Floor, 1000 Sofia, Bulgaria
Tel. +359 2 980 1438; Fax +359 2 988 8207
E-mail contact@dif.bg
Internet http://www.dif.bg
or
International Cooperation and Public Relations Dept.
Ms. Roumyana Markova
Tel. +359 2 981 3809; E-mail r.markova@dif.bg
International Conference Bishkek City, 1- July 2004

24. Thank you for your attention
International Conference Bishkek City, 1- July 2004