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Contingency funding:

back to the future?


Antoaneta Geala
Bank Deposit Guarantee Scheme
Romania
High-level Seminar on Challenges for European Deposit Insurance
Systems:
Funding, Investment Practices and Reimbursement
February 26, 2015, Warsaw, Poland

Contents

1.

Funding governance

2.

Contingency funding a historical perspective

3.

Contingency funding tools pros and cons

4.

Case studies

5.

Stand-by credit lines

6.

Lessons learned

7.

Contingency funding: Back to the future?

8.

Challenges for smaller DGSs outside the eurozone

Funding governance

National Bank of Romania


(NBR) Board

Statutory approval on:

Annual funding policy


Annual contributions
Special contributions

FGDB
Supervisory Board

Borrowings from:
Ministry of Finance
Financial institutions

CEO

Credit institutions
Bond issuance
Any suspension of
contribution payment

Funding policy
3

Contingency funding a historical


perspective

Over time, FGDB


included various
contingency funding tools
in its funding mix:
- Special contributions
- Borrowing from NBR
(when the law allowed it)
- Stand-by credit lines

Contingency funding tools pros and


cons

Case studies

Factsheet

In 2000 two small-to-medium sized Romanian Banks went bankrupt:


Bankcoop and Banca Internationala a Religiilor (BIR)

Covered banks: 32 Romanian banks and 8 branches of foreign banks


Eligible deposits in the banking system (December 31st, 1999) : lei 53,178 bln.
Covered deposits of the two bankrupt banks: lei 4,629.7 bln.
FGDB resources at the time of the first bankruptcy: lei 434.7 bln. (9.4% of pay-out
amount)
Covered amount: H1 2000: lei 54.764.000, H2 2000: lei 65.169.000
Cover ratio elgible deposits (December 31st, 1999): 0.8%

Legal framework

Legal provisions (pay-out):


Pay-out period: to start at the latest in 2 months from the official bankruptcy
Pay-out period through the agent bank to be decided by FGDB; it may be extended two
times by three months each, upon the NBRs approval; after that, FGDB carries out the payout using its own resources

Legal provisions (financing):


Initial contribution: 1% of the banks equity capital
Annual contribution: up to 0.8% of the amount of eligible deposits of individuals
The law gave FGDB the power to increase the annual contribution of a bank up to 1.6% if
the bank had pursued risky and unhealthy policies

Special contributions from banks: up to two times the level of the annual contributions
Special contribution: up to 1,6% of the amount of eligible deposits of individuals
Incomes from recovery of FGDBs claims
Incomes from investment of FGDBs own resources
Borrowing.

Case study no. 1- Bankcoop


Share in the banking as at December 31st, 1999: 0.89% of net assets and 9.28% of equity capital
Covered deposits: lei 2,754.9 bln. (5.5% of the covered deposits in the banking system)
Amount paid-out: lei 2,728.9 bln.

Funding:
FGDB resources
Borrowing from NBR: lei 2,000 bln.
Maturity 5 years with 2 years grace period
Repayment in 6 half-year equal installments
Drawdown during 12th April 24th May 2000
Interest rate (reset every half-year): 1.67% p.a. 9.30 % p.a.
Special contributions: equal to annual contributions in 2000

Pay-out timeline
8th February, 2000
Bankruptcy date

12th April 2000

20th June, 2000

Pay-out by agent bank

31st December, 2000

Pay-out by FGDBs own cashier desk


and postal cheques
9

Case study no. 2- BIR

Share in the banking system as at December 31st, 1999: 2.17% of net assets and 2.09% of equity capital
Covered deposits: Lei 1,874.8 bln. (3.5% of the covered deposits in the banking system)
Amount paid-out: Lei 1,848.7 bln.

Funding:
FGDB resources
Borrowing from NBR: lei 1,500 bln.
Maturity 5 years
Repayment: yearly, equal installments
Drawdown during 5th October 2nd November 2000
Interest rate: flat, 15% p.a.
Special contributions: equal to annual contributions in 2000

Pay-out timeline
10th July, 2000
Bankruptcy date

9th October,
2000

30th November, 31st December,


2000
2000

1 month delay because


the shareholders
Pay-out by
contested the NBRs
agent bank
decision

Pay-out by FGDBs
own cashier desk
and postal cheques

Structure of funding

Stand-by credit lines

Contingency funding stand-by credit


lines

In 2007 FGDB put in place stand-by credit lines with the member banks:
The agreements were renewed annually during 2007 - 2010
FGDB paid 0.5% commitment fee
The total amount was calculated based on the target ratio and the eligible deposits of the
banks
The number of banks was reduced gradually to make their management easier

The purpose of their implementation:


To have emergency funding available
To reduce the burden for banks
the annual contribution rate was reduced from 0.3% in 2006 to 0.1% in 2007 and incresed
again from 0.2% in 2009 to 0.3% in 2010 when the stand-by credit lines were given up
1

Stand-by credit lines impact

33 banks

32 banks

7 banks

10 banks

Lessons learned
Contingency planning is essential to early detect and fix any problems in funding
pay-outs
Good liquidity management plays a vital role in timely and cost-efficient funding
Orderly liquidation of assets is depenent on several factors:
Types of assets (Bonds, T-Bills, deposits etc.)
Capital market stage of development (depth, width, liquidity) and
conditions
Adequate maturity structure of investment
Readily available funding sources
Existing arrangements with the Government structures, financial or credit
institutions (including special contributions)
Access to capital market
Cost/benefit analysis of alternative sources of funding (if possible)

Contingency funding: Back to the future?

Pa
st
la
w

Curre
nt
law*

Directive
2014/49/
EU

Special
contributio
ns

Extraordinary contributions not exceeding 0.5% of


the DGSs covered deposits per calendar year; in
exceptional circumstances and upon consent of
competent authority, higher extraordinary
contributions can be raised.

Borrowing

DGSs shall have in place adequate alternative


funding arrangements to enable them to obtain shortterm funding to meet the claims against them.
A DGS is entitled to an amount equal to the amount
of the mandatory contributions up to the target level,
which the MS will make immediately available to that
DGS upon request for use exclusively for the purposes
set out in Article 11 (if the competent authority
considers that the DGS cannot raise extraordinary
contributions). DGS shall repay the amount through
contributions from its members.

Funding
source

Comments

Payment
X
X

Payment commitments shall not exceed 30% of the


amount
DGSs
available
financial means.
*commitmen
The new DGS law to transpose the DGSD in the localtotal
legislation
has notof
been
adopted
yet.

Challenges for some DGSs


outside the eurozone

Thank you!
For further details visit www.fgdb.ro

Annexes

FGDBs resources

FGDBs borrowing rates a comparison

Impact of RON/EUR adverse


movement on FGDBs cover ratio

Net profit / loss


in Romanian banking system