The draft federal law to amend the Federal Law on Insuring Individual Deposits with Russian Banks and the Federal Law On the Central Bank (Bank of Russia) has been worked out by the Finance Ministry in accordance with a Government instruction issued on November 1, 2012.

The bill raises the ceiling of insurance compensation to be paid to a bank’s client if an insurance event occurs to 1 million roubles. It also introduces measures to reduce the risks of the deposit insurance system by raising the insurance premium paid by banks that offer excessively high interest on deposits, and establishes sources of financing the compulsory deposit insurance fund deficit. In accordance with the Federal Law on Insuring Individual Deposits with Russian Banks, the upper limit of insurance compensation to be paid to the client is 700,000 roubles. However, over the period that this law has been in effect, several objective factors have developed which suggest that this limit needs to be revised upward. The level of savers’ security has declined due to inflation. Furthermore, the level of savers’ security in Russia is below the European level and even in that of some of the CIS countries (Azerbaijan and Kazakhstan).

With a deposit insurance system in place, the banks’ interest policy is one of the key tools they use to compete for clients who prefer depositing solutions with the highest possible insurance compensation offered. At the same time there is a risk that savings will be redistributed in favor of less financially stable banks that offer higher interest.

Therefore, to restrain the potential increase in this risk, the bill proposes introducing a baseline and additional insurance premium rates, as well as requiring banks whose current operation creates additional risks to pay higher contributions to the compulsory deposit insurance funds (based on the additional rate).

Meanwhile, to expand the sources of funding in the event that the economic situation deteriorates and the compulsory deposit insurance fund runs a deficit, the board of directors of the Deposit Insurance Agency (state corporation) will be authorised to request an unsecured loan from the Bank of Russia for a term of up to five years. The loan will be repaid with the future contributions to the compulsory deposit insurance fund.

The new legislation will contribute to greater financial sustainability of Russian banks, lower risks in the deposit insurance system and greater security of banks’ clients.

Along with boosting savers’ security, this move should also promote growth of bank deposits in general as well as savings deposited with the new insurance rules. This should promote growth of the banking sector’s liquidity in the long term.

The bill was discussed and approved at a Government meeting on June 6, 2013.