Home  Journals  Financial Analytics: Science and Experience  44(230) - 2014 November

Problems and prospects of implementing risk-based approaches to building the Russian deposit insurance fund

Available online: 30 November 2014

Subject Heading: BANKING SECTOR

JEL Classification: 

Pages: 2-11

The article studies the effects of moral hazard in the context of the deposit insurance system functioning and evaluates the options of reforming the mechanisms of building and using the Russian deposit insurance fund. The author stresses the need for a shift to the risk-oriented scale of rates of insurance contributions payment to the deposit insurance fund. The paper demonstrates that in the conditions of high frequency of insurance events, this would allow limiting the scope of inefficient subsidies of depositors of the most reliable banks, who receive the minimum interest rates on their deposits and finance the deposit insurance fund, to the depositors of the least reliable banks receiving both the maximum interest rates on their deposits and insurance compensation from the deposit insurance fund. The author discloses the conflict of interest of small and large banks as for determining payment conditions of insurance indemnity, an algorithm for calculating the differentiated contribution rates, and possible ways of the conflict resolution providing for using the multifactor models application. While determining insurance payments, the author substantiates the need not only to take into account the likelihood of bankruptcy of a bank, but also its contribution to the system risk of the entire banking sector. To encourage investors to behave responsibly, the paper proposes to exclude from the insurance coverage a part of interest accrued in excess of the base interest rate, which should be in the interval between the rate on demand deposits and the interest rate on time deposits of banks with the most aggressive deposit policy. The author demonstrates that such an option of compensating depositors' loss, unlike the traditional reduction franchise, does not create the threat of run on the bank in the case of financial market deterioration and, at the same time, it limits the incentives to place deposits in banks with the highest degree of risk.

Keywords: deposit insurance system, moral damage, risk-based insurance contributions, interest rate policy, financial sustainability

References:

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ISSN 2311-8768 (Online)
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