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Banking policy initiative capable of solving multiple problems

Author: Christopher Kenneth Section: Editorials

Issue: October 2012, Vol. 7, No.9

Tags: Insurance deposits

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The plans, though still in their embryonic stage, of the government to increase the amount of bank deposits by citizens under the state’s full guarantee, from the current level of RUB 700,000 to at least RUB 1-1.5mln, in case of bankruptcies of commercial banks, are the types official economic steps that will also deserve full praise, endorsement and support on the pages of this journal.

Such plans made headlines recently after the Deposits Insurance Agency (DIA), the state organ tasked with protecting Russian citizens’ savings in local banks, has said it will soon start serious consultations with all the interested parties on the subject of increasing the benchmark to reflect, amongst others, inflationary changes, boost trust in the banking system and pump additional liquidity into the economy that will lend it additional reliability and resilience in case of any unforeseen exigencies.

The benchmark that was hurriedly increased to RUB 700,000 in 2008, as a part of the government’s life-saving anticrisis programs, has fully served its purpose since it fully prevented then-imminent catastrophic bank runs that would have completely ruined the whole banking system at the peak of the global economic downturn that negatively impacted on the national economy.

It is now clear that the current threshold was based on the absolutely wrong assumption, or distorted statistical premises, that most Russians, or more specifically, almost 95% of the citizens’ bank deposits are either of this amount or less, irrespective of currency denominations. These people hold almost 99% of all the deposits in Russian banks, according to DIA’s data.

Apart from the inherent fallacy of such statistical extrapolations, the assumption also alienated the 5% citizens that had the “misfortune” of having financial assets in excess of this benchmark. The government, in effect, practically disavowed itself from its legally binding constitutional responsibility to guarantee these citizens’ assets. In reality, this was not only unconstitutional, as the onus is on the state to fully guarantee the security of all the properties of all its citizens, it was also socially unjustified and economically discriminative as these citizens were practically “fiscally disenfranchised” on the basis of their “alleged excess wealth.”

Most government policies, such as the penalties for violations of civil norms that usually carry monetary fines are adopted with the so-called regional coefficients – a policy that takes into conditions the differences in standards of living across the country. But the upper limit on bank deposits failed to see the gaping differences in personal savings of citizens living in major industrial cities and the residents of the so-called backward regions thriving on huge state subsidies.

The blatant disregard of these regional differences fully distorted the statistical data used by the government, and hence the wrong assumption that led to the enactment of the universal benchmark. It was totally wrong and sociologically myopic to assume, for example, that most Muscovites and St. Petersburgers only have a maximum of RUB 700,000 of savings in the banks for the “rainy day.”

One of the arguments used by the state to support the policy was that similar limitations also exist in other countries, such as the US and EU states, Japan and other major economies. As an argument, it was very solid, but the government forgot to indicate that similar limitations in those countries envisage a much higher benchmark than the equivalent of about $20,000 envisaged by the Russian system. For instance, in the U.S., this benchmark stands at $250,000; EUR 70,000 in France; BP 50,000 (about $91,000) in the UK and EUR 103,290 in Italy, currently the highest in Europe. If the U.S. threshold’s domination of the Russian benchmark is understandable, it is difficult to comprehend why Italy can afford to guarantee over EUR 100,000 of its citizens’ savings, and richer and bigger Russia cannot.

By all standards, even by those existing in much poorer regions, the current benchmark was set too low, and consequently failed to galvanized more citizens to pull their hard earn, life savings, estimated at “tens of billions of U.S. dollars” and reserved under mattresses and other crevices for the rainy days, from such hideouts into commercial banks. It was just not logical to expect reasonable people to put their money in excess of the benchmark in financial institutions, when the banks themselves, and more importantly, the government, cannot absolutely guarantee it.

Some citizens have tried to overcome the limitations by opening different accounts in several banks with the maximum amount of deposits that is fully guaranteed by the state, but that means some of these people were forced to put their money in banks that would otherwise not have held any appeal for them. On the other hand, such small, but numerous accounts, put more pressure, at least, from the point of view of larger paperwork and documentations, on the banks. This increases their overhead expenses, and hence decreases their profits. One does not need to be a visionary to know that the new, higher benchmark will practically remove all these shortcomings, and consequently, solve two major social and economic problems for the state and its citizens.

Socially, by putting their savings in the banks in larger volumes under the higher benchmark requirements, the citizens will make their financial assets, and more importantly, their lives much safer, as people often fall victims to thieves and even armed robbers, losing not only their life-long savings, but also their more precious lives, in the process.

Economically, by pulling these rubles from “non-banking saving havens” into the nation’s banking system for a much longer timeline and larger volume without fractioning them into different smaller accounts in different banks will provide the local economy with an unprecedented amount of free and unleveraged liquidity. According to experts, it will taken even such energy giants as Gazprom and other titans, decades to generate such a cash load, working at full throat and at maximum projected output capacity. For instance, according to DIA’s data, the volume of insured deposits increased by RUB 894.2bn in H1’2012. One does not need to be a mathematical genius to calculate how this volume would have increased if the insurance benchmark was set at much higher level.

Then, this begs the ultimate question, why didn’t the government and CB experts think of reviewing this policy much earlier. The answer to this question, if any, will be rhetorical, and therefore, has no practical value, except for the wasted time and opportunities. But, in such circumstances, there is an apt proverb, which, though not exclusively of Russian origin, often helps explain the mentality of most citizens, including those at the helms of the country’s political power hierarchy: “better late than never.”

Bravo to the state and its fiscal agencies for adhering to both the spirit and letter of this aged adage.