1. The principle objective of a deposit insurance system 1. to contribute to the stability of a country’s financial system 2. to protect less-financially-sophisticated depositors A deposit insurance system needs to be part of well-designed financial safety net supported by:  strong prudential regulation and supervision  effective laws that are enforced, and  sound accounting and disclosure regimes IMPORTANCE OF A DEPOSIT INSURANCE SYSTEM

2. K O S O V A  Country with 2 milion inhabitant  Authority of Banking and Payments of Kosova (BPK) as Authority for Bank Licensing, Supervision and Regulation  7 Commercial Banks  2 Banks comprised by foreign capital-Market share of 67 %  5 Banks comprised by mainly domestic capital – Market share of 33 %  Total Deposits in Commercial Banks of 500 Milion EURO - As of 31 December 2001485 milion Euro - As of 31 December 2002 419 milion Euro - As of 30 October 2003 501 milion Euro

3. KOSOVA CASE Key points explored in analyzing the adoption of Deposit Insurance System 1. Contextual issues Advantages:  high liquidity of banks  international banking prudential regulation (with national features, as well)  good bank supervision  healthy banking system  increase deposits (still high cash out of banking) Disadvantages:  BPK does not have function of lender of last resort  Moral hazard, incentive for excessive risks, banking system is not yet mature  Average deposit account low (less monitoring of banks by depositors)  No prudential deposit regulation ( need longer time)

4. 2. Adoption and maintain of deposit insurance system Advantages:  Bring more confidence to banks, less bank runs  Good liquidity, capital and credit quality  Level of enforcement  Effective licensing  Law level of non-performing loans Disadvantages:  Low level of economic activities  Privatization in process (initial phase)  Risk-management policies and practices  Efficiency of judicial system  Ability to support early legal intervention and dealing with troubled banks

5. 3. Structure and design features Advantages:  Relation with supervisory authority  Compulsory membership (automatic membership)  No domestic currency (EURO currency used)  Government funding ?  Public awareness Disadvantages:  Professional staff for insurance of deposits, manage risks  No law on insurance  Governing body – sound strategy planning, risk management processes and internal controls

6. 4. Resolutions, reimbursements, claims and recoveries  Resolution of the failed bank – BPK  Reimbursement of insured depositors ( who will be reimbursed, limits and scope)  Liquidation of bank assets  Settlement of claims in accordance with applicable laws  Disposition of pending or outstanding litigation Summary - IMF discouraged the establishment of Deposit Insurance System - BPK didn’t consider up to now, but, now it consider possibility of Deposit Insurance System (increase viability of banking system)