INTRODUCTION OF THE DIFFERENTIAL

PREMIUM SYSTEM IN THE DEPOSIT

GUARANTEE SCHEME IN THE BANKING

SECTOR OF MONTENEGRO

3rd EFDI Balkan Region Meeting

11 March 2016

INTRODUCTION OF THE DIFFERENTIAL PREMIUM SYSTEM IN THE DEPOSIT INSURANCE SCHEME IN

THE BANKING SYSTEM OF MONTENEGRO

Montenegro is in the EU accession process and needs to align its legislation with the EU Acquis Communautaire. Deposit insurance is particularly important as a part of negotiations on Chapter 9 (Financial Services).

Although the Screening in Brussels indicated that the Deposit Protection Law is largely compliant with the EU Acquis, the new Directive 2014/49/EC brought about some new challenges with regard to the legislative alignment.

In order to prepare for full compliance with EU legislation, in accordance with the Directive 2014/49/EC, the Managing Board of the Fund has formed working groups that will propose draft amendments to the applicable legislation, with a particular emphasis on drafting the methodology for the calculation of the risk-based premium.

The starting points for the analysis cover the following parameters over the 2005-2015 time period:

Amount of total deposits;

Amount of guaranteed deposits;

Regular premium rate and premium revenues;

The Fund`s income (from premium and investments);

Amount of guaranteed deposit;

Coverage ratio;

Troškova poslovanja Fonda;

The current legislative solutions regarding the premium calculation

Proposal to introduce the risk-based premium

Relevant background information

2005-2015

Premium rate –linear

Amount of guaranteed deposits

Total deposits as at 31 December

2015

Guaranteed deposits as at 31

December 2015

Coverage ratio as at 31 December

2015

Targeted coverage

Ranged between 0.25 % – 0.50% of

total deposits in banks

5.000€ …… 2006 -2010;

20.000€ ...... 2010 – 2012;

35.000€ ....... 2013;

50.000€ ....... 2013 – until EU

accession date

2.6 billion €

1.15 billion € (44% of total deposits)

5.88%

10% of guaranteed deposits

Drafting of a study to be the basis for

proposing amendments to the

applicable Deposit Protection Law to

replace the current linear rate with

the differential premium on the basis

of predetermined differentiation

criteria.

1. Comparative analysis of

regulations and practices in the

relevant group of EU Member

States

2. Main guidelines governing the

differential premium introduction

3. Expected effects

STUDY CONTENT Comparative analysis

Main guidelines Expected effects

1. Revised Core Principles for Effective Deposit Insurance Systems;

2. A new legal framework for the improvement of deposit insurance standards in the EU Member States – Directive 2014/49/ EU;

3. Models of risk-based premium calculation in the EU Member States.

1. Determine the key elements for the introduction of the differential premium;

2.Adequate institutional capacity of the regulator and the Fund.

3. The EBA Guidelines on methods for calculating contributions to deposit guaranteed schemes.

1. Reduced deposit insurance expenses;

2. Encourage good corporate governance practice in banks.

3. Elimination of bad practice where collected premiums from sound and highly capitalized banks serve for the compensation of deposits of banks undergoing bankruptcy due to poor risk management and low capital base.

Principles for developing calculating methods:

1. Calculation methods should reflect an increased liability incurred by a DGS The contribution of each member institution should reflect:

the likelihood of the institution’s failure;

the potential losses stemming from a DGS intervention.

2. Calculation methods should be consistent with the build-up period envisaged in Directive 2014/49/EC The build-up period for the target level - 10 years; It may be extended by additional 4 years if there is cumulative disbursement exceeding

0.8% of covered deposits.

Directive 2014/49/EC does not prevent Member States from setting a higher target level.

3. Incentives provided by contributions to the DGSs should be aligned with prudential requirements

4. Calculation methods should take into account specific characteristics of the banking sector, and should be compatible with the regulatory regime, and accounting and reporting practices in the country

EBA –Guidelines on methods for calculating contributions to deposit guaranteed schemes

5. The rules for calculating contributions should be objective and transparent Institutions with similar should be categorised similarly;

Contribution schemes should be transparent for member institutions.

6. The required data for the calculation of contributions should not lead to excessive additional reporting requirements DGSs should make use of information already available to them;

DGSs should only require data that is not already reported on a regular basis;

In cases where the DGS does not gather information directly from member institutions but relies on the information provided by the competent authority either statutory provisions or formal arrangements should be in place;

7. Confidential information should be protected DGSs should keep confidential the information used for calculating contributions which is not

otherwise publicly disclosed. However, the DGSs should disclose to the public at least the description of the calculation method and the parameters of the calculation formula, including risk indicators but not necessarily their respective weights.

8. Calculation methods should be consistent with relevant historical data

data about institutions’ failures and events where an institution has been likely to fail;

Principles for developing calculating methods:

Essential elements for each

calculation method

1. calculation formula;

2. thresholds for aggregate

risk weights;

3. risk categories and core

risk indicators;

Elements of the calculation

formula

Ci = CR × ARWi × CDi × μ Ci = Annual contribution from member institution “i” CR = Contribution rate (identical for all member institutions in a given year) ARWi = Aggregate risk weight for member institution “i” CDi = Covered deposits from member institutions “i” μ = Adjustment coefficient (identical for all institutions in a given year)

Mandatory elements of the calculation methods

Thresholds for aggregate risk

weights (ARW)

- In order to help mitigate moral hazard

the ARWs should reflect the differences

in risk incurred by different member

institutions.

- the “risk classes” method should

designate specific values of ARW

applicable to each risk class;

- the “sliding scale” method used instead

of the a fixed number of risk classes

should set the upper and lower limits of

ARW;

- the lowest ARW should range between

50% and 75%;

- the highest ARW should range between

150% and 200%

Risk categories and core risk indicators

Minimum risk weights and core risk

indicators

a.Capital ................................................18

b. Liquidity and funding……..................18

c. Asset quality……….............................13

d. Business model and

management………………………............13

e. Potential losses for

DGS……………………….........................13

The sum of all minimum weights equals

75% of the total aggregate weights.

DGS should allocate the flexible 25% of

weights by distributing them among the

additional risk indicators and/or by

increasing the minimum weights of the core

risk indicators.

Mandatory elements of the calculation methods

Activities to be carried out

Hold a public discussion on

the methodology in December

2016;

Complete the drafting of the

law and the methodology by

end-April 2017;

The base – covered

(guaranteed) deposits;

Targeted level to be reached in

2024;

Hold a public discussion on the law in

December 2016;

Propose the law to become effective in early 2018;

General rate of 1% (to maintain neutrality – the same premium as the current one)

CAMELS methodology is used for risk assessment – EBA Guidelines

ALIGNMENT WITH NEW EU STANDARDS AND

BEST PRACTICES

The law should obligate banks

to submit to the Fund other

necessary information for

determining their risk profile, in

addition to the information

reported to the Central Bank of

Montenegro.

Data and information

verification directly in banks;

Taking data for protected

event simulation exercise

every two years;

Participation in resolution,

P&A transactions, and

establishment of the bridge

bank;

Thank you for your attention

See you in Montenegro!