How we can reform the deposit guarantee scheme - a solution for increasing confidence in the banking system

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Publishing date: Tuesday, 24 January 2017
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Increasing the deposit guarantee coverage is imminent in order to maintain the confidence in the banking sector. The current deposit guarantee scheme is unable to cover the economic costs caused by the bankruptcy of a national medium or large bank (as proved by the banking crisis resulting in the collapse of three banks). Certainly, it is unlikely that a similar crisis will occur again in the future. However, given the transposition in the national law of the European Directive establishing a framework for the recovery and resolution of credit institutions and investment firms and establishing the date of 01.01.2018 as the deadline for enforcing the bail-in instrument, the law on Bank Deposits Guarantee Fund needs to be amended, too.

The need to ensure a real protection of depositors, on the one hand, and the need to protect banks from systemic risks, on the other hand, calls for a gradual increasing of the maximum coverage level, up to an acceptable level. At the same time, this growth implies increasing the banks' individual contributions to the Fund, which could create an extra financial pressure on bank balance sheets. Even so, the aggregate profitability indicators in recent years prove that theoretically there are some resources for a significant growth.

Also, the Deposits Guarantee Fund should have a more important role in preventing crises and maintaining financial stability, having the opportunity to intervene in a bank before it is declared bankrupt.

To support the above mentioned, the following recommendations need to be implemented in the nearest future:

• initiate the harmonization of the national law to the provisions of Directive No 2014/49/EU;
• increase gradually the maximum deposit guarantee coverage to 24 average salaries per economy by 2020;
• extend the protection scheme to cover other types of deposits, of individuals, individual entrepreneurs or legal entities;
• implement a formula for contribution calculation, that will take into account the risk generated by each banking institution separately;
• establish some types of risks, taking into account the representative indicators of the banking activity, correlated with the economic realities of our country;
• grant some legal tools for early intervention to the Fund, so that it can help prevent crises and maintain the financial stability;
• ensure an efficient cooperation between NBM and DGFBS on a qualitative and quick reform of the national framework of bank deposit guarantee.

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This publication was produced under the ”Support for structural reforms in the banking, energy and state-owned enterprises sectors from Moldova”, funded by the British Embassy in Chisinau through the Good Governance Fund. The content of this publication is the sole responsibility of the author and does not necessarily reflect the views of the British Government.”


Tags: Natalia Chitii


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