How to reform the deposit guarantee system?

The analytical note is devoted to the problem of imperfection of existing bank protection safeguards.

In Ukraine, one of such safeguards is the deposit guarantee system for the population. At the same time, it must protect the banks from bank runs, while depositors – from “moral hazard”.

It is typical for Ukraine to have the situation where depositors bring their money to the banks that offer the highest interest rates on the deposits. Furthermore, people do not consider the reliability of the banks since the Deposit Guarantee Fund will return their deposit with interest in the guaranteed amount (it is UAH 200 000 now).

This makes the banks compete, increasing interest rates on deposits. The banks, in turn, are forced to look for more profitable, and therefore, more risky tools – i.e. to lend to risky borrowers at higher rates.

This behaviour of depositors and banks increases the overall risk of the system and ultimately leads to bank collapses.

The problem of effective design of the deposit guarantee system aimed at finding a balance between “moral hazard” and “bank runs” is very relevant for Ukraine, because saving banks is an expensive thing for taxpayers. During the crisis of 2008-2009, Ukraine spent 5% of GDP for the recapitalization of banks, while during the crisis of 2014-2015 – 14% of GDP. Every time it led to an increase in public debt (government bonds) – thus, in a deterioration in the country’s financial stability.

In order the guarantee system could respond more effectively to crises, we offer 5 changes:

To increase the guaranteed amount up to UAH 500 000 (to index the inflation);

To decrease the start of payments to depositors up to 7 days (starting with the time when the bank is recognised insolvent);

To reduce the guarantee of interest on deposits up to half of the official rate of the NBU;

To stimulate the implementation of the policy of liability of owners with all their property in practice, not only on paper;

To promote increased financial literacy of the population and to reduce the information asymmetry. When calculating the optimal amount of guarantee, we took into account:

the inflation rate, which made up 140% for the period from September 2012 (when the amount of UAH 200 000 was fixed) to mid 2018;
European guaranteeing practices, in particular, the ratio between the guarantee amount and GDP in the EU (post-Soviet states, e.g. Estonia, Slovakia).