1. The target size of the fund and the methodology of estimation of DI Fund sufficiency July, 2015

2. 2 Deposit Insurance: Coverage Co-insurance

3. 3 Deposit Insurance: Key Indicators

4. Formation of the Mandatory Deposit Insurance Fund 4 The Mandatory Deposit Insurance Fund insurance premiums Recoveries from failed banks’ assets income from investment of temporary idle funds of the fund property contribution of the Russian Federation to the Agency

5. The target size of the fund 5 The Law defines the sizes of the fund that trigger reduction (or nullification) of the premium rate. In some way, they can be considered as target levels for the fund established by the Law According to the Law, the premium rate shall not exceed 0.15 % of the assessment base (the volume of eligible deposits) per quarter If the fund size exceeds 5 % of the total volume of eligible deposits with the banks, the premium rate shall be decreased to the level of no more than 0.05 % of the assessment base If the fund reaches 10 % of the total volume of eligible deposits with the banks, the payment of premium shall be automatically ceased

6. Characteristics of the target fund size 6 The target size of the fund for the purposes of reduction (or nullification) of the premium rate shall be defined as the ratio of the fund size to the total eligible deposits For defining the target size of the fund. We considered financial system structure and characteristics, the coverage limit and probability of member banks’ failures The target size of the fund for the purposes of reduction (or nullification) of the premium rate of the banks is formalized in legislation

7. Two remarks, important for evaluation of DI Fund Sufficiency 7 DI Fund should be sufficient for serious difficulties in the banking sector but not for systemic banking crisis Under certain conditions maintaining negative balance of DIF can be more reasonable than extraordinary financing of DI Fund or premium increase

8. Two independent tasks in evaluation of DI Fund adequacy 8 Some simplifying assumptions concerning stationarity of DIS parameters can be applied Short-term estimation of DIF adequacy Simplifying assumptions are not applicable. Methods of scenario analysis should be used Long-term estimstion of DIF adequacy

9. Estimation Methodology 9 The Agency uses a special Estimation Methodology to define the adequacy of the resources of the fund. Estimation Methodology is based on three mathematical models: econometrical model market-data model credit ratings model

10. Estimation Methodology (2) 10 It is used to assess the possible expenses of the fund in quite a long-term perspective: a quarter, six months and a year The model uses certain algorithms to process the bank's financial statements and estimate the probability of default of each member-bank econometrical model This model to estimate the probability of default of banks based on market quotations of bonds issued by the banks market-data model This is a supplementary model to refine the probability of default of banks based on information from credit rating agencies credit ratings model

11. PD estimation – on the basis of market- data models 11 market-data model PD is estimated not on the basis of previous history of defaults of similar member banks but taking into consideration current state of each real member bank in current conditions of the banking sector and economy as a whole PD of largest banks which is the most dangerous scenario can be adequately estimated only by market models In practice, two main types of market-data models are the most developed: Structural Model (Merton, Black-Shouls) - PDs are estimated on the basis of current market prices of shares issued by DIS members Reduced Form Model - PDs are estimated on the basis of current market prices of bonds, issued by DIS members

12. PD estimation - on the basis of credit ratings of member banks 12 credit ratings model Use of independent ratings is a very simple solution however substantial part of DIS members may not have any independent credit ratings Instead of independent ratings (or in a combination with them) there can be used internal ratings Deposit Insurers which use differential premium system can simply use the rating scale of this system for evaluation of DIF adequacy A mapping procedure is used for transformation of ratings into values of PD

13. 13 Determine implied solvency standard of the DIF Work out a list of «too big to fail» banks and remove them from analysis Map implied solvency standard nto a probability default Estimate probabilities of default (PDs) of DIS members Estimate Cumulative Loss Distribution function of the DIS Estimete the required DIF level as VaR at given level of significance Estimate default correlations of DIS members Estimate Loss Given Default (LGD) of DIS members The procedure of short-term estimation of DI Fund sufficiency

14. 14 Thank you for your attention!