## _cr06179

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---

### I. Current status of the deposit insurance system in Belarus
- Legal framework
  - Two separate legislations govern deposit insurance:
    - Presidential decree of April 20, 1998: full coverage for foreign exchange accounts in six state banks.
    - Article 121 of the Banking Code (effective October 12, 2000): legal basis for coverage for all other deposits.
  - NBB resolutions elaborating the legislations:
    - Resolution of the Board of the NBB of December 27, 2000, N 33.14 (came into force March 1, 2001): rules for the 1998 decree and coverage for foreign currency accounts in authorized banks.
    - Resolution of the Board of the NBB of March 29, 2001, N 75: rules for Article 121 and compensation of all other accounts.
  - Article 121 is being amended to remove a contradiction involving paragraph 2 (state guarantee language).
- Current system features and preferential treatment
  - Belarusbank and Belagroprombank benefit from full guarantee on all their deposits and do not pay contributions to the Guarantee Fund.
  - Four authorized banks (Belpromstroybank, Belinvestbank, Belvnesheconombank, and Priorbank):
    - Foreign currency deposits are fully guaranteed.
    - Local currency deposits covered up to 1,000 U.S. dollars equivalent.
    - Monthly contribution to the Guarantee Fund: 0.1 percent of household deposits.
  - All other banks:
    - Coverage up to 1,000 U.S. dollars equivalent for both local and foreign currency deposits.
    - Monthly contribution schedule:
      - 0.1 percent if level of deposits do not exceed the capital of the bank;
      - 0.2 percent if level of deposits exceed the amount of the own capital of the bank two times;
      - 0.3 percent if level of deposits exceed the amount of the own capital of the bank three times.
- Sources for fulfillment of obligations (as per NBB resolution N 33.14) include specified sources listed by the resolution (see resolution text).
- Key statistics and structure (preserved exactly as in source)
  - Average deposit sizes:
    - Belarusbank average deposit: 29 U.S. dollars equivalent.
    - Authorized banks excluding Belarusbank and Belagroprombank: 1,680 U.S. dollars equivalent.
    - Non-authorized banks excluding Poisk bank: 2,295 U.S. dollars equivalent.
  - Concentration of household deposits:
    - Belarusbank accounts for almost 65 percent of all household deposits.
    - Belarusbank household deposits: 419.2 (millions of U.S. dollars).
    - Belagroprom household deposits: 55.2 (millions of U.S. dollars).
    - Four authorized banks (Belpromstroybank, Belinvestbank, Belvnesheconombank, Priorbank) total household deposits: 178.5 (millions of U.S. dollars).
    - Others (5 non-authorized banks included): 11.9 (millions of U.S. dollars).
    - Total household deposits (11 banks reporting): 664.89 (millions of U.S. dollars).
  - Distribution of household deposits by size (volume in millions of U.S. dollars; NBB exchange rate as of 01.01.2003 (1,920 ruble/$)):
    - Up to 1,000 $: Belarusbank 160.6; Belagroprom 21.1; 4 authorized 24.4; Others 1.43; Total 207.53.
    - 1,000 - 2,000 $: Belarusbank 78.5; Belagroprom 10.5; 4 authorized 28.1; Others 2.28; Total 119.38.
    - 2,000 - 5,000 $: Belarusbank 103.8; Belagroprom 12.6; 4 authorized 52.1; Others 3.77; Total 172.27.
    - Over 5,000 $: Belarusbank 76.3; Belagroprom 11.7; 4 authorized 3.9; Others 4.5; Total 165.71.
    - Note: 76.3 million out of Belarusbank’s 419.2 million household deposits are over 5,000 U.S. dollars equivalent.
  - Current monthly contribution rates under existing resolution for four authorized banks: 0.1 percent of balances attracted.

### II. Key characteristics of the new deposit insurance scheme (draft law)
- General design and objectives
  - Draft law under preparation by the National Bank of Belarus; not yet presented to parliament (completed on January 2006).
  - Objective: level the competitive playing field between state-owned banks and privately owned rivals; eliminate preferential treatment of state-owned banks.
  - Expected opposition from Belarusbank and Belagroprombank (they currently do not pay premiums) and potential criticism from the Finance Ministry (expected to make initial capital contribution to the fund).
- Main features of the draft law
  - Scope and membership
    - Treats state and non-state owned banks equally.
    - Covers all banks and nonbank credit-and-financial organizations registered at the Reserve Corporation and licensed by the NBB to attract individuals’ deposits (call, time, and escrow deposits).
    - Membership of the Reserve Corporation is mandatory.
  - Currency treatment
    - Treats foreign and local currency deposits equally (reduces incentives for dollarization).
  - Organizational arrangements
    - Relations for compensation of bank deposits of individuals regulated by a specially created legal entity—the Reserve Corporation for Compensation of Bank Deposits.
    - Reserve to comprise mandatory contributions of banks and investment returns.
    - Shortfalls in resources may be financed with loans, including loans granted against guarantee of the NBB, as well as budget loans.
  - Pricing, contributions, and coverage
    - Membership fee: 0.5 percent of the bank’s own resources (capital).
    - Quarterly contributions: 0.3 percent of the individual level of deposits by the banks (noted as high by international standards).
    - Coverage limit: Full coverage up to 2,000 Euro equivalent and 80 percent coverage up to 5,000 Euro equivalent (maximum coverage per individual per bank EUR 5,000 equivalent).
- Assessment versus international best practices (summary of Box 2)
  - Positive aspects
    - Compulsory membership (addresses adverse selection).
    - Equal coverage of foreign and local currency deposits.
    - Ex-ante premiums assessed on member banks (reduces moral hazard relative to unfunded guarantees).
  - Concerns and deviations
    - Maximum coverage up to EUR 5,000 is high by international standards and may not sufficiently prevent moral hazard.
    - No ex-post contingent financing from member banks is provided in the draft.
    - Quarterly premiums of 0.3 percent are high by international standards; premium structure is flat (not risk-adjusted).
    - Mandate appears to be a “pay box” (limited to payout) rather than a broader “risk-minimiser” role.
    - Need for improved supervision, prompt corrective action and early intervention rules emphasized as essential prior to introducing a limited insurance scheme.
- Implementation implications
  - The annual contributions to the Reserve Corporation are to be made in equal proportion to the deposits a bank attracts and at an actuarial fair price by all banks, including the fully state owned banks—this would eliminate current preferential treatment.
  - The envisaged quarterly premium of 0.3 percent of attracted deposits is high; may be justified temporarily while the Corporation builds resources from a low base, but intention should be to move to a more normal premium at an early stage.
  - Draft law in principle represents about US$80 million reduction in contingent liabilities relative to current blanket guarantees.
- Draft law’s premium and fee levels (preserved exactly)
  - Membership fee 0.5 percent of bank capital.
  - Quarterly contributions 0.3 percent of deposits.
  - Maximum coverage per deposit account per bank: full up to EUR 2,000 equivalent and 80 percent from EUR 2,000 to EUR 5,000 equivalent; maximum coverage per individual per bank EUR 5,000 equivalent.

### III. Transition to a limited coverage deposit insurance scheme
- Transition risks and considerations
  - Removing a blanket guarantee from systemically important banks (Belarusbank and Belagroprombank) risks loss of depositor confidence if systemic liquidity problems are not addressed.
  - Belarusbank’s dominance in the retail market (almost 65 percent of household deposits) implies that removing the guarantee overnight could prompt deposit withdrawals.
- Role of proposed coverage levels in transition
  - Envisaged high coverage (EUR 5,000) in the draft law may serve as a transition mechanism since it is close to a blanket guarantee and could limit panic among depositors while the large banks are reformed.
  - Given concentration of small depositors in Belarusbank and Belagroprombank, the envisaged coverage is effectively close to a blanket guarantee for those banks and may be appropriate during reform.
- Comparative experience and country-specific context
  - Experiences in neighboring countries may be informative:
    - Russia: transition dominated by thousands of small banks and many insolvent banks; cleaning up the banking system was primary.
    - Ukraine: introduced limited coverage for all banks excluding its Savings Bank.
  - Belarus-specific factor: dominance of Belarusbank in the retail market affects the optimal transition model.
- Policy implications emphasized
  - Improving supervision, prompt corrective action and early intervention rules is essential for the successful introduction of limited deposit insurance.
  - While high initial premiums and high coverage may be defensible temporarily to build trust and reserves, the long-run objective should be to reduce premiums to normal levels and limit moral hazard.

### IV. Transition approaches and international experience (Section 2)
- Russia: transition approach and practice
  - Russia chose to transition to a limited insurance scheme in a step approach.
  - It is currently transitioning Sberbank from full government guarantee to limited guarantee.
  - Sberbank accounted for 64.9 percent of all retail deposits as of September 1, 2003.
  - The government announced that it will continue to provide unlimited coverage to Sberbank’s existing deposits that were opened before November 1, 2004.
  - New deposits will be covered according to the limit set by the new deposit insurance scheme.
  - Further, the full state guarantee will only remain in force until January 1, 2007.
  - Whether the transition will be successful remains to be seen, but the lessons learned from the current experience in Russia can be useful in planning the transition in Belarus.
- Ukraine: operational example
  - Ukraine has built a well run system for its deposit insurance scheme; however, did not address the issue of providing full coverage to its savings bank.
  - Ukraine introduced its deposit insurance scheme with limited coverage for all banks excluding its Savings Bank.
  - As of December 2001 only about 19 percent of all household deposits were in Ukraine’s Savings Bank, compared to almost 65 percent in Belarusbank.
  - Other than that Ukraine’s deposit insurance fund is well run and transparent and could from an operational aspect serve as a model.
  - Whether deposits that are attracted by commercial banks are increasing in this system remains to be seen.
- Sequencing, liquidity, and transitional arrangements
  - Independently of whether Belarus chooses to follow a step approach or provide a blanket coverage while it reforms its banking system, it will be essential to address the current liquidity shortage.
  - The Government will need to exercise caution in sequencing the changes in deposit insurance with other banking sector reforms.
  - If the insurance coverage is lowered, it is necessary to either:
    - (i) put in place transitional arrangements to address potential concerns Belarusbank’s and Belagroprombank’s depositors may have while moving from full to partial coverage; or
    - (ii) put Belarusbank and Belagroprombank on a sound financial footing prior to reducing coverage.
- Equalizing contributions and leveling the playing field
  - Further Belarus could already require that all banks including the state owned banks start paying annual contributions towards an insurance scheme.
  - Currently, private banks are paying 1.2 percent in annualized contributions to the insurance scheme, which leads to a significant cost disadvantage vis-à-vis state owned banks.
  - This practice allows the state owned banks to offer attractive interest rates, in addition to the competitive advantage they already have by being backed by a full state guarantee.
  - Requiring state owned banks to pay the same fee would eliminate the current preferential treatment of state owned banks and is an important step forward in leveling the playing field between banks.
  - This step can be implemented independent of the transition of state owned banks to a limited deposit insurance scheme.
- Managing fund risk from large state owned banks
  - However, state owned banks due to their size would endanger the funds of the deposit insurance scheme.
  - One possible solution would be to require state owned banks to start paying annual contributions towards the insurance scheme, while at the same time keeping the funds that are put aside to bail out private banks and state owned banks separately.
  - These funds would need to be kept separately until the large differences in size between state owned and private banks have diminished.

*International Monetary Fund. Financial Sector Assessment Program. Technical Note — Deposit Insurance. January 2006.*

### Section 1

### _cr06179 - Section 1

### I. Current status of the deposit insurance system in Belarus
- Legal framework
  - Two separate legislations govern deposit insurance:
    - Presidential decree of April 20, 1998: full coverage for foreign exchange accounts in six state banks.
    - Article 121 of the Banking Code (effective October 12, 2000): legal basis for coverage for all other deposits.
  - NBB resolutions elaborating the legislations:
    - Resolution of the Board of the NBB of December 27, 2000, N 33.14 (came into force March 1, 2001): rules for the 1998 decree and coverage for foreign currency accounts in authorized banks.
    - Resolution of the Board of the NBB of March 29, 2001, N 75: rules for Article 121 and compensation of all other accounts.
  - Article 121 is being amended to remove a contradiction involving paragraph 2 (state guarantee language).
- Current system features and preferential treatment
  - Belarusbank and Belagroprombank benefit from full guarantee on all their deposits and do not pay contributions to the Guarantee Fund.
  - Four authorized banks (Belpromstroybank, Belinvestbank, Belvnesheconombank, and Priorbank):
    - Foreign currency deposits are fully guaranteed.
    - Local currency deposits covered up to 1,000 U.S. dollars equivalent.
    - Monthly contribution to the Guarantee Fund: 0.1 percent of household deposits.
  - All other banks:
    - Coverage up to 1,000 U.S. dollars equivalent for both local and foreign currency deposits.
    - Monthly contribution schedule:
      - 0.1 percent if level of deposits do not exceed the capital of the bank;
      - 0.2 percent if level of deposits exceed the amount of the own capital of the bank two times;
      - 0.3 percent if level of deposits exceed the amount of the own capital of the bank three times.
- Sources for fulfillment of obligations (as per NBB resolution N 33.14) include specified sources listed by the resolution (see resolution text).

### II. Key characteristics of the new deposit insurance scheme (draft law)
- General design and objectives
  - Draft law under preparation by the National Bank of Belarus; not yet presented to parliament (completed on January 2006).
  - Objective: level the competitive playing field between state-owned banks and privately owned rivals; eliminate preferential treatment of state-owned banks.
  - Expected opposition from Belarusbank and Belagroprombank (they currently do not pay premiums) and potential criticism from the Finance Ministry (expected to make initial capital contribution to the fund).
- Main features of the draft law
  - Scope and membership
    - Treats state and non-state owned banks equally.
    - Covers all banks and nonbank credit-and-financial organizations registered at the Reserve Corporation and licensed by the NBB to attract individuals’ deposits (call, time, and escrow deposits).
    - Membership of the Reserve Corporation is mandatory.
  - Currency treatment
    - Treats foreign and local currency deposits equally (reduces incentives for dollarization).
  - Organizational arrangements
    - Relations for compensation of bank deposits of individuals regulated by a specially created legal entity—the Reserve Corporation for Compensation of Bank Deposits.
    - Reserve to comprise mandatory contributions of banks and investment returns.
    - Shortfalls in resources may be financed with loans, including loans granted against guarantee of the NBB, as well as budget loans.
  - Pricing, contributions, and coverage
    - Membership fee: 0.5 percent of the bank’s own resources (capital).
    - Quarterly contributions: 0.3 percent of the individual level of deposits by the banks (noted as high by international standards).
    - Coverage limit: Full coverage up to 2,000 Euro equivalent and 80 percent coverage up to 5,000 Euro equivalent (maximum coverage per individual per bank EUR 5,000 equivalent).
- Assessment versus international best practices (summary of Box 2)
  - Positive aspects
    - Compulsory membership (addresses adverse selection).
    - Equal coverage of foreign and local currency deposits.
    - Ex-ante premiums assessed on member banks (reduces moral hazard relative to unfunded guarantees).
  - Concerns and deviations
    - Maximum coverage up to EUR 5,000 is high by international standards and may not sufficiently prevent moral hazard.
    - No ex-post contingent financing from member banks is provided in the draft.
    - Quarterly premiums of 0.3 percent are high by international standards; premium structure is flat (not risk-adjusted).
    - Mandate appears to be a “pay box” (limited to payout) rather than a broader “risk-minimiser” role.
    - Need for improved supervision, prompt corrective action and early intervention rules emphasized as essential prior to introducing a limited insurance scheme.
- Implementation implications
  - The annual contributions to the Reserve Corporation are to be made in equal proportion to the deposits a bank attracts and at an actuarial fair price by all banks, including the fully state owned banks—this would eliminate current preferential treatment.
  - The envisaged quarterly premium of 0.3 percent of attracted deposits is high; may be justified temporarily while the Corporation builds resources from a low base, but intention should be to move to a more normal premium at an early stage.
  - Draft law in principle represents about US$80 million reduction in contingent liabilities relative to current blanket guarantees.

- Key statistics and figures preserved from the source
  - Average deposit sizes:
    - Belarusbank average deposit: 29 U.S. dollars equivalent.
    - Authorized banks excluding Belarusbank and Belagroprombank: 1,680 U.S. dollars equivalent.
    - Non-authorized banks excluding Poisk bank: 2,295 U.S. dollars equivalent.
  - Concentration of household deposits:
    - Belarusbank accounts for almost 65 percent of all household deposits.
    - Belarusbank household deposits: 419.2 (millions of U.S. dollars).
    - Belagroprom household deposits: 55.2 (millions of U.S. dollars).
    - Four authorized banks (Belpromstroybank, Belinvestbank, Belvnesheconombank, Priorbank) total household deposits: 178.5 (millions of U.S. dollars).
    - Others (5 non-authorized banks included): 11.9 (millions of U.S. dollars).
    - Total household deposits (11 banks reporting): 664.89 (millions of U.S. dollars).
  - Distribution of household deposits by size (volume in millions of U.S. dollars; NBB exchange rate as of 01.01.2003 (1,920 ruble/$)):
    - Up to 1,000 $: Belarusbank 160.6; Belagroprom 21.1; 4 authorized 24.4; Others 1.43; Total 207.53.
    - 1,000 - 2,000 $: Belarusbank 78.5; Belagroprom 10.5; 4 authorized 28.1; Others 2.28; Total 119.38.
    - 2,000 - 5,000 $: Belarusbank 103.8; Belagroprom 12.6; 4 authorized 52.1; Others 3.77; Total 172.27.
    - Over 5,000 $: Belarusbank 76.3; Belagroprom 11.7; 4 authorized 3.9; Others 4.5; Total 165.71.
    - Note: 76.3 million out of Belarusbank’s 419.2 million household deposits are over 5,000 U.S. dollars equivalent.
  - Maximum coverage proposed: per deposit account per bank up to EUR 2,000 equivalent in full and 80 percent from EUR 2,000 to EUR 5,000 equivalent; maximum coverage per individual per bank EUR 5,000 equivalent.
  - Draft law’s premium and fee levels: membership fee 0.5 percent of bank capital; quarterly contributions 0.3 percent of deposits.
  - Current monthly contribution rates under existing resolution for four authorized banks: 0.1 percent of balances attracted.

### III. Transition to a limited coverage deposit insurance scheme
- Transition risks and considerations
  - Removing a blanket guarantee from systemically important banks (Belarusbank and Belagroprombank) risks loss of depositor confidence if systemic liquidity problems are not addressed.
  - Belarusbank’s dominance in the retail market (almost 65 percent of household deposits) implies that removing the guarantee overnight could prompt deposit withdrawals.
- Role of proposed coverage levels in transition
  - Envisaged high coverage (EUR 5,000) in the draft law may serve as a transition mechanism since it is close to a blanket guarantee and could limit panic among depositors while the large banks are reformed.
  - Given concentration of small depositors in Belarusbank and Belagroprombank, the envisaged coverage is effectively close to a blanket guarantee for those banks and may be appropriate during reform.
- Comparative experience and country-specific context
  - Experiences in neighboring countries may be informative:
    - Russia: transition dominated by thousands of small banks and many insolvent banks; cleaning up the banking system was primary.
    - Ukraine: introduced limited coverage for all banks excluding its Savings Bank.
  - Belarus-specific factor: dominance of Belarusbank in the retail market affects the optimal transition model.
- Policy implications emphasized
  - Improving supervision, prompt corrective action and early intervention rules is essential for the successful introduction of limited deposit insurance.
  - While high initial premiums and high coverage may be defensible temporarily to build trust and reserves, the long-run objective should be to reduce premiums to normal levels and limit moral hazard.

*International Monetary Fund. Financial Sector Assessment Program. Technical Note — Deposit Insurance. January 2006.*

### Section 2

### _cr06179 - Section 2

### Transition approaches and current practice in Russia
- Russia chose to transition to a limited insurance scheme in a step approach.
- It is currently transitioning Sberbank from full government guarantee to limited guarantee.
- Sberbank accounted for 64.9 percent of all retail deposits as of September 1, 2003.
- The government announced that it will continue to provide unlimited coverage to Sberbank’s existing deposits that were opened before November 1, 2004.
- New deposits will be covered according to the limit set by the new deposit insurance scheme.
- Further, the full state guarantee will only remain in force until January 1, 2007.
- Whether the transition will be successful remains to be seen, but the lessons learned from the current experience in Russia can be useful in planning the transition in Belarus.

### International experience: Ukraine
- Ukraine has built a well run system for its deposit insurance scheme; however, did not address the issue of providing full coverage to its savings bank.
- Ukraine introduced its deposit insurance scheme with limited coverage for all banks excluding its Savings Bank.
- As of December 2001 only about 19 percent of all household deposits were in Ukraine’s Savings Bank, compared to almost 65 percent in Belarusbank.
- Other than that Ukraine’s deposit insurance fund is well run and transparent and could from an operational aspect serve as a model.
- Whether deposits that are attracted by commercial banks are increasing in this system remains to be seen.

### Sequencing, liquidity, and transitional arrangements
- Independently of whether Belarus chooses to follow a step approach or provide a blanket coverage while it reforms its banking system, it will be essential to address the current liquidity shortage.
- The Government will need to exercise caution in sequencing the changes in deposit insurance with other banking sector reforms.
- If the insurance coverage is lowered, it is necessary to either:
  - (i) put in place transitional arrangements to address potential concerns Belarusbank’s and Belagroprombank’s depositors may have while moving from full to partial coverage; or
  - (ii) put Belarusbank and Belagroprombank on a sound financial footing prior to reducing coverage.

### Equalizing contributions and leveling the playing field
- Further Belarus could already require that all banks including the state owned banks start paying annual contributions towards an insurance scheme.
- Currently, private banks are paying 1.2 percent in annualized contributions to the insurance scheme, which leads to a significant cost disadvantage vis-à-vis state owned banks.
- This practice allows the state owned banks to offer attractive interest rates, in addition to the competitive advantage they already have by being backed by a full state guarantee.
- Requiring state owned banks to pay the same fee would eliminate the current preferential treatment of state owned banks and is an important step forward in leveling the playing field between banks.
- This step can be implemented independent of the transition of state owned banks to a limited deposit insurance scheme.

### Managing fund risk from large state owned banks
- However, state owned banks due to their size would endanger the funds of the deposit insurance scheme.
- One possible solution would be to require state owned banks to start paying annual contributions towards the insurance scheme, while at the same time keeping the funds that are put aside to bail out private banks and state owned banks separately.
- These funds would need to be kept separately until the large differences in size between state owned and private banks have diminished.

*Source: _cr06179 - Section 2*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06179.pdf_