The principle objective of a deposit insurance system 1.   to contribute to the stability of a country’s financial system2.   to protect less-financially-sophisticated depositors A deposit insurance system needs to be part of well-designed financial safety net supported by:       strong prudential regulation and supervision      effective laws that are enforced, and      sound accounting and disclosure regimes     

IMPORTANCE OF A DEPOSIT INSURANCE SYSTEM

K O S O V A  

     Country with 2 milion inhabitant       Authority of Banking and Payments of Kosova (BPK) as Authority for Bank Licensing, Supervision and Regulation       7 Commercial Banks       2 Banks comprised by foreign capital-Market share of 67 %       5 Banks comprised by mainly domestic capital – Market share of 33 %

       Total Deposits in Commercial Banks of 500 Milion EURO   - As of 31 December 2001 485 milion Euro - As of 31 December 2002 419 milion Euro - As of 30 October 2003 501 milion Euro   

KOSOVA CASE

Key points explored in analyzing the adoption of Deposit Insurance System

1. Contextual issues 

Advantages:        high liquidity of banks       international banking prudential regulation (with national features, as well)       good bank supervision       healthy banking system       increase deposits (still high cash out of banking)  Disadvantages:        BPK does not have function of lender of last resort       Moral hazard, incentive for excessive risks, banking system is not yet mature       Average deposit account low (less monitoring of banks by depositors)       No prudential deposit regulation ( need longer time)

2. Adoption and maintain of deposit insurance system 

Advantages:        Bring more confidence to banks, less bank runs       Good liquidity, capital and credit quality       Level of enforcement       Effective licensing      Law level of non-performing loans  Disadvantages:        Low level of economic activities       Privatization in process (initial phase)       Risk-management policies and practices       Efficiency of judicial system       Ability to support early legal intervention and dealing with troubled banks

3. Structure and design features 

Advantages:        Relation with supervisory authority       Compulsory membership (automatic membership)       No domestic currency (EURO currency used)       Government funding ?       Public awareness  Disadvantages:        Professional staff for insurance of deposits, manage risks       No law on insurance       Governing body – sound strategy planning, risk management processes and internal controls

4. Resolutions, reimbursements, claims and recoveries        Resolution of the failed bank – BPK       Reimbursement of insured depositors ( who will be reimbursed, limits and scope)       Liquidation of bank assets       Settlement of claims in accordance with applicable laws       Disposition of pending or outstanding litigation

Summary

- IMF discouraged the establishment of Deposit Insurance System - BPK didn’t consider up to now, but, now it consider possibility of

Deposit Insurance System (increase viability of banking system)