The FINANCIAL — It’s hard to say when deposit insurance will become mandatory in Georgia. At least in the short term it seems a bit unrealistic to me,” Zurab Gvasalia, President of the Association of Banks of Georgia (ABG), told The FINANCIAL.
The FINANCIAL — It’s hard to say when deposit insurance will become mandatory in Georgia. At least in the short term it seems a bit unrealistic to me,” Zurab Gvasalia, President of the Association of Banks of Georgia (ABG), told The FINANCIAL. Georgia remains the only PFS Beneficiary country that doesn’t have a system of deposit insurance, which puts depositors under high risk of losing their money in the event of instability.
Georgia is one of the leading countries in the world in terms of high interest rates on deposits. It follows Belarus, Iran, Serbia and some African countries. The average rate on term deposits reaches 11% for USD and 12% for GEL, while in the EU deposit rates are up to 3%.
The population of Georgia seems to be more concerned with bank specific risks (41%) than political risks (20%), according to a survey about saving behaviour assessment in Georgia. While deposit insurance is considered to be a highly important mechanism to prevent bank runs and to boost depositor confidence, Georgia does not plan to switch to this mechanism any time in the near future.
“If Georgia becomes an EU member, Georgian citizens would be equally protected,” Djurdjica Ognjenovic, Deposit Insurance Expert at World Bank, told The FINANCIAL.
The saving behaviour survey’s finding is in line with previous speculation that trust in banks is low. Such an attitude could be resulting not only from the massive loss of deposits that took place after the breakdown of the USSR, but also from the war of 2008 – during this military conflict people faced difficulties when trying to withdraw money from banks and these difficulties led to panic.
“World Bank is actively involved in the deposit insurance issue. They are consulting the banking sector and government including ABG and NBG. However, today it’s hard to say when it might be expected to come in to operation. At least in the short term it seems a bit unrealistic to me. It should rather be discussed in a medium-term perspective,” Zurab Gvasalia, President of the Association of Banks of Georgia (ABG), told The FINANCIAL.
NBG avoided commenting on the issue, realizing that it is ignoring international recommendations.
The major objectives behind deposit insurance are protecting small unsophisticated depositors in the event of individual banks’ failures; promoting domestic savings in the formal financial sector; increasing public confidence in banks and enhancing financial stability in general.
Two of the most important bank selection criteria that emerged on making a deposit are: reliability of a bank/trust in a bank (29%), and high interest on deposits (23%).
According to the survey, out of the use of bank products and services, credit is the most-used bank product (16%), followed by credit plastic cards (13%) and quick money transfers (11%). The use of bank deposits is just 6%.
“In every country deposit insurance has helped to enhance confidence and trust if the system was designed properly,” said Djurdjica Ognjenovic, Deposit Insurance Expert.
“Deposit insurance is one of four pillars (elements) of a financial safety net. Under deposit insurance (DI) we understand the legal mechanism of explicit protection of depositors, up to a certain amount (coverage level) and for certain types of depositors and deposits (coverage scope) in the case of individual banks’ failures. If there is no deposit insurance in the country, depositors are not protected and sometimes the Government may decide to protect them, in other cases not. Such ad hoc individual cases ruin the confidence of the public in the banking sector and may be very costly for the budget. With clear deposit insurance rules, it is always known how much potential failure of any bank would cost and depositors are aware that deposit insurance authority will provide compensation in a very short period of time (which would be prescribed in the law),” she explained.
In Ognjenovic’s words, DIS is one of the rules of the EU which Georgia is aiming to become a member of. “At the level of the EU, deposit insurance is recognized as one of the key elements of stabilization of financial markets and by creating uniformed rules for all EU countries, the EU is creating equal playing fields for all citizens of the EU, regardless of their nationality.
DI is one of the key focuses of the creation of the so-called Banking Union of the EU. The EU issued its first directive on deposit insurance in 1994 and amended it in 2009 (EC/Directive/94/19 and 2009/14).
The advantage for any citizens of EU member states is that all are protected equally regardless of if they live in Latvia or France, in the case that a bank fails minimum protection is EUR 100,000/depositor/bank. If Georgia becomes an EU member, Georgian citizens would be equally protected.”
“In 1999 NBG submitted a draft law of the mandatory insurance of deposits to the Georgian parliament. It was withdrawn due to unpreparedness. The bill included a mandatory form of deposit insurance only for individuals. It was not extended to legal entities and non-residents. Meanwhile international practice includes individuals as well as legal entities insurance,” said Gvasalia.
According to him, the involvement of legal entities in the insurance system should guarantee the increase of funds attracted by banks, improve investment activity and extend the resources of insurance funds.
“Therefore, it is recommended to discuss all alternative options while preparing the draft. Institutional understanding of deposit insurance should be emphasized. In this regard, the draft law should be developed in a few moments. The forms of deposit insurance are the first task,” said Gvasalia.
“It is impossible to say by how much (what percentage) deposits in banks will grow if there is deposit insurance. First of all, nobody knows for sure how much money is outside of the system now. Secondly, deposit insurance is only one of four pillars of the safety net. For example, if depositors still think that laws and regulations are not of good quality or that supervision is not sound or that there are some problems with banks, they may still have low confidence in the system. Some events from the past when depositors lost their savings also have an effect on savings behaviour especially with the older population,” Ognjenovic said.
“Thus, as we see it, we have much work to do. Bank deposit insurance is a complex set of measures. It should ensure the protection of commercial banks in the event of their failure. The general attitude towards banks is also important. The insurance system should protect banks from financial risks,” said Gvasalia.
“However, the banking association plans to actively cooperate with the World Bank, NBG and the Government on these issues. As a result it will allow us to develop it in the appropriate time. This will ultimately have a positive impact on the banking and financial system,” Gvasalia told The FINANCIAL.
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