BDIF WORKSHOP “Risk-Adjusted Premiums and Credit Ratings” Radisson SAS Hotel, Sofia November 16, 2005 Co-organizer: Standard & Poor’s-London Sponsored by: Summarized analysis of the Questionnaire’s responses Mr. Dragomir Nedeltchev Bulgarian Deposit Insurance Fund 1. Bulgarian Banking Industry 2. Shift to Risk Based Premiums 3. Pattern of Risk Based Premiums 4. What do commercial banks expect from the introduction of Risk Based Premiums 1. Bulgarian Banking Industry 2. Shift to Risk Based Premiums 3. Pattern of Risk Based Premiums 4. What do commercial banks expect from the introduction of Risk Based Premiums branch 5% banks 95% FHCs BU 45% 55% assets Bg EU 29% Bg 45% 55% EU 71% equity deposit base Bg Bg 29% 34% EU EU 66% 71% assets n.a. specialized 5% 20% other 40% diversified diversified 60% 75% equity deposit base other other 21% 26% diversified diversified 74% 79% co rp or at e ba 0 2 4 6 8 10 12 14 16 18 20 nk in g m re or t a tg il cr a g ed in it g in ca ve r d st s m en ts ot he le r as in in su g ra nc e Areas of activity: Series2 Series1 Self-assessment by size and clientele 12 10 1 8 2 6 3 4 2 4 0 assets credits SME personnel assets n.a. 10% other 28% no CR CR 35% 55% CR 72% equity deposit base other other 29% 36% CR CR 64% 71% 1. Bulgarian Banking Industry 2. Shift to Risk Based Premiums 3. Pattern of Risk Based Premiums 4. What commercial banks expect from the introduction of Risk Based Premiums assets very n.a. important 11% 12% minor very importance important 32% 57% other 88% equity deposit base very very important important 15% 11% other other 85% 89% assets n/a other 20% 14% positive 10% negative negative 70% 86% equity deposit base other other 14% 23% negative negative 86% 77% de po si cr t pr 0 2 4 6 8 10 12 14 16 ed i c it ing pr ic la in cu w liq g i n cr s t e ed to ad uid re it m e he ity st ris r s re ra k re nce te m ris an latio k a m ge ns an m ag en em t c/ en a ba t c/ nk ca a s pi FH ta l m so C s an lve ag nc em y op di er vi ent at de iv nd e s ris o k th t ra er ns fe r Deposit Insurance and Banking Management: assets other combination risk based 36% 45% 45% risk based 64% flat 10% equity deposit base other other 36% 41% risk based risk based 59% 64% 1. Bulgarian Banking Industry 2. Shift to Risk Based Premiums 3. Pattern of Risk Based Premiums 4. What commercial banks expect from the introduction of Risk Based Premiums assets n/a 3-5 > 8 indicators 5% 5% indicators 5-8 26% 3-5 indicators indicators 50% 40% other 74% equity deposit base 3 -5 3-5 indicators indicators 30% 26% other other 70% 74% > 8 groups 6% 5-8 groups 6% 3 -5 groups 88% BDIF elaborates a Code of Best Bank Practices • Most of the banks support the suggestion; • Many banks propose that BNB and ACB participate; • 2 banks are against such a code. Qualitative indicators for assessing risk profile • CAMELS - 8 banks; • Credit rating – 7 banks (45% of the assets, 38% of the equity and 44% of the deposit base); • A combination of the above – 7 banks; • Banking Supervision rating – 5 banks (o/w 2 for on-site inspections); • BDIF rating – 1 bank; • Most of the banks have given more than one answer. ca pi ta lr eq as ui se re m 0 2 4 6 8 10 12 14 16 18 20 ts e po nt r tf s o liq li o c r u id e d it y i s o t r is in lv k te en re fu cy st n d r a in g ec o p c a te r o n er a sh isk o m tio fl o ic n a w s in l r i d i sk ca t in or s profile assessment co m ot e he r Quantitative indicators for risk Usage of market information for risk profile assessment The banks responded negatively… because of the lack of practice and a real market. Securities emission as a ground for different treating Most banks would not like it. Restrictions on risky behaviour of banks of systemic importance • 4 banks in favour; • The largest banks are against. Basis for determining the risk group and paying the premiums. • the annual period. 1.20 1.00 0.80 0.60 0.40 0.20 0.00 1 2 3 Funding BDIF as a function of the deposit base • Most of the banks consider that after the introduction of risk-based premiums the BDIF Management Board should preserve its right to reduce the rate of premiums provided that the BDIF resources reach 5% of the total deposit base, calculated on an average daily basis. Funding BDIF as a function of the deposit base • 4 banks suggest that BDIF MB should have the right to change the rate of premiums; • 3 banks – MB should have the right of changing the rate but within the range of 2 – 3%; • 6 banks – MB should have such a right, but the ratio should be floating; • 5 banks – MB should not have the right of changing the rate of the premiums due. Funding BDIF as a function of the deposit base • 3 banks suggest determining the rate in relation to the total deposit base; • Other 3 banks suggest changing both the rate and the basis for its calculation, i.e. the basis of the guaranteed amount; • 9 banks suggest changing the calculation basis but without advancing any arguments. 1. Bulgarian Banking Industry 2. Shift to Risk Based Premiums 3. Pattern of Risk Based Premiums 4. What commercial banks expect from the introduction of Risk Based Premiums Basel II • Banks expect that the implementation of BASEL II Capital Accord would affect positively the risk-based premiums system; • However, they have not referred to the interaction between BASEL II and the premiums. assets n/a other negative exp. 5% 22% 25% positive exp. for positive exp. enhancing 78% bank stability 70% equity deposit base other other 19% 21% positive exp. positive exp. 81% 79% n/a 5% moral hazard increase 15% moral hazard decrease 80% Banks vs. non-bank financial institutions • No substantial change in the competition is expected. 8 banks expect that the change of the premiums will favour non-bank financial institutions; • 3 banks do not expect that switching to risk-based premiums would preserve their comparative advantages; • 1 bank considers that the introduction of risk-based premiums will have a negative impact on operations of FHCs, 5 banks – positive impact; • 2 banks expect that the introduction of risk-based premiums would shift the risk to the non-bank financial entities within the holding. Preserving comparative advantages vis-a-vis FHCs • 3 banks expect to keep neither their comparative advantages as far as small and medium business is concerned, nor the customers’ interest; • 10 banks consider that they would manage to keep their advantages by focusing on better regulation, transparency, safety and awareness. banking serivces other expenses 50% increase 50% n/a no new 5% services 25% new services 70% assets middle-risk middle-risk high-risk banks banks banks 18% 30% 0% low-risk banks low-risk 70% banks 82% equity deposit base middle-risk middle-risk banks banks 20% 32% low-risk banks low-risk 68% banks 80% Thank you for your attention!