4 bank)<sup>5</sup> . Foreign currency-denominated deposits are covered (up to 100,000 RUR equivalent), payable in rubles, and converted at the foreign exchange rate determined by the CBR. An important caveat is that the state-owned Sberbank, by far the largest Russian retail bank, did not participate in the DIS from its inception but will join it starting January 1, 2007.

**Participation:** The design adopted makes the DIS compulsory and automatic (i.e., without a legal formality) for all “natural persons’ deposits” (excluding corporate deposits, bearer deposits, trust deposits, and offshore deposits in Russian banks).

Overall, the structural framework provided by the Russian deposit insurance law reflects in many respects good practices from international experience. The system has clearly been designed to cover only healthy institutions, while encouraging weak ones to exit the market. The coverage is extensive, but low enough to minimize moral hazard problems with participating banks. Participation is compulsory, which in turns should help prevent the adverse selection problems often affecting voluntary schemes. The ex-ante guarantee, together with the commitment for ex-post state support also could, in principle, be powerful confidence-building instruments in the volatile Russian environment.<sup>6</sup> The remainder of the paper will focus on analyzing how effective the new system has been so far, and which issues still need to be addressed.

# _<u>2) Implementation Status and Recent Market Trends</u>_

At the end of 2005, the Russian DIS covered about 98.5 percent of the deposit accounts held by insured banks and 36 percent of the nominal value of total deposits.<sup>7</sup> The latter figure reflects the high concentration of individual deposits as well as the exclusion of all corporate deposits. A total of 870 out of the 1,097 banks collecting private deposits participate in the DIS, covering 99.2 percent of banking assets. Overall, 1,150 banks filed for licensing under the new law, out of which 824 banks were accepted to participate in the system in a first round of evaluations conducted by the CBR in its capacity as supervisory agency. Four banks withdrew their applications, and a few institutions lost their license to take deposits. Using the appeal procedure provided by the law, 265 banks resubmitted their applications to the DIS. As of January 2006, 931 banks have been admitted to the DIS. Yet, it appears that those banks not accepted into the DIS are still being allowed to continue taking private deposits until further notice.

The size of the deposit insurance fund increased rapidly to 16.6 bn. RUR (see Fig. 1), which represents about 0.6 percent of the individual deposit base. Of this amount, insurance premiums paid by participating banks amounted to 9.8 bn. RUR or 59 percent. The remainder of the funds consisted of contributions from the Russian Federation (6.1 bn. RUR or 36.7 percent), and the investment income of the Deposit Insurance Agency (0.7 bn. RUR or 4.2 percent).<sup>8</sup>

> 5 Debt offsets can be refinanced with a repayment period for a term of up to six months.

> 6 See Tompson (2004), p. 27 for a detailed discussion of this issue.

> 7 See DIA website / 2005 DIA Annual Report. In contrast, the total volume of deposits under RUR 100,000.- as of 1 July 2005 was equal to 39.1% of total deposits.

> 8 DIA website, 2005 DIA Annual Report, http://www.asv.org.ru/en/dia/reports/2005/