|Title:||Estonia, Latvia, and Lithuania deposits in banks in Lithuanian litas including covered and not covered as a percentage for 2005 to 2009|
|Source:||Journal of Business Economics and Management|
Start of full article - but without data
The deposits in the banks of the Baltic States and
the amounts in deposit insurance funds from 2005 to 2009
Year Deposits in Deposit Covered Not covered banks, million insurance fund, deposits, deposits, LTL million LTL per cent per cent
Lithuania (covers up to XXX thousand LTL--XXX thousand EUR)
2005 XX.XXX XXX X.XX XX.XX 2006 XX.XXX XXX X.XX XX.XX 2007 XX.XXX XXX X.XX XX.XX 2008 XX.XXX X.XXX X.XX XX.XX 2009 XX.XXX X.XXX X.XX XX.XX
Latvia (covers up to XXX.X thousand LTL--XX thousand EUR)
2005 XX.XXX XXX X.XX XX.XX 2006 XX.XXX X.XXX X.XX XX.XX 2007 XX.XXX X.XXX X.XX XX.XX 2008 XX.XXX X.XXX X.XX XX.XX 2009 XX.XXX X.XXX X.XX XX.XX
Estonia (covers up to XXX.X thousand LTL--XX thousand EUR)
2005 XX.XXX XXX X.XX XX.XX 2006 XX.XXX XXX X.XX XX.XX 2007 XX.XXX XXX X.XX XX.XX 2008 XX.XXX XXX X.XX XX.XX 2009 XX.XXX XXX X.XX XX.XX
During the recent decades the economic and financial systems of the whole world became very dependent on one another. The processes in the financial markets affected both the national economies of countries and the behaviour of individual investors and savers by creating new types of risks for market actors. Due to these reasons the world financial markets and changes in them manifested through globalization processes and influencing the stability of the financial system of a country have become the object of scientific research during the last decade. The importance of financial crises and their influence on the economies of the countries, stability of the financial sector, highlighting the role of banks, is proved by scientific research not only in the world (Drehmann 2002; Hoque 2009; Laeven, Valencia 2008; Ingves, Lind 1996; Ucal et al. 2010; Dahl-heim, Nedersjo 1993; Viotti 2000, Maysami, Lim 2004; Sabourin 2007; Kopcke 2000), but also in Lithuania (Strumickas, Valanciene 2006; Macerinskiene, Ivaskeviciute 2008; Martinaityte 2008; Leika 2008; Lakstutiene, 2008, Lakstutiene et al. 2006, 2009; Boguslauskas, Mileris 2009; Zukauskas, Neverauskas 2008). Such research does not speak about the financial security net which is necessary to reduce the risk of financial crises. Santomero (1997); Aktan, Masood (2010), Bernat (2009); Ince, Aktan (2009); Gine-vicius, Podvezko (2008); Arslan, Karan (2009); Aluko (2007) states in his works that a financial system would not exist without financial institutions, which play the critical role in the economy: they not only support the expenditure of the private sector, but manage to finance part of the government's expenditure, and at the same time serve as an accumulator of savings providing the country with financial resources. However, the financial institutions may create instability in the financial sector and the main reason for instability is the fact that the worth created by the financial institutions is financed by obligations, i.e. funds of depositors. Due to this reason, which is named by the majority of scientists (Bernat 2009; Demirguc-Kunt, Kane 2002; Frolov 2004; Demirguc-Kunt et al. 2005; Hoque 2007; Schich 2008), almost all governments of the world created a security net for the financial system, which would ensure stability and integrity of the financial system. The proper financial security net is necessary to reduce the risks during major financial crises. Without the proper financial security net any rumor about solvency or liquidity of a financial institution may have a possibility to justify itself and become an absolutely exaggerated financial crisis (Schich 2008). Demirguc-Kunt et al. (2005) distinguish the following possible components of the security net: (X) explicitly defined or undefined deposit insurance, (X) regulation and supervision of bank activities, (X) the function of the central bank as the last creditor and (X) creation of procedures for bank bankruptcy decision. Upon analyzing the components of the security net, other authors (Santomero 1997; Titarenko 2002; Hoque 2007; Schich 2008) narrow them down slightly, distinguishing only three main components of this net: (X) bank supervision system, (X) the function of the last creditor and (X) deposit insurance. Schich (2008) suggests a slightly wider concept of the financial security net, indicating that by adding the function of mechanism of management of failures to the functions above it becomes possible to extend the scope of discussed problems. Scientists (Santomero 1997; Demirguc-Kunt et al. 2005; Schich 2008), analyzing the financial security net, maintain that the elements of the financial security net cannot exist separately: the individual components of the financial security net are strongly interrelated. The foundation of any regulation structure is directed towards ensuring financial stability, thus enabling the appearance of the element of insurance of a certain type of deposits, which is one of the important indicators of the stability of the banking sector.
Upon assessing the influence of insurance of deposits on the stability of the banking system of the Baltic States, what is the main objective of this research, X targets could be set and they could help to answer the main question of the article, i.e. what influence insurance of deposit has on stability of the banking system in case of the Baltic States: X) to evaluate whether in a critical situation the government could provide guarantees that are declared; X) to establish whether the increased government guarantees during one crisis can encourage banks and depositors to accept larger risks that could cause a new crisis; X) to analyze whether introduction of different levels of protection could give rise to unfair competitive advantages among establishments accepting deposits; X) to determine whether the increased limits of insurance of deposits cause moral risks if the insurance limits are not restricted.
X. Literature review
When discussing the elements of the financial security net, the importance of the system of insurance of deposits does not raise any doubts. Santomero (1997), Demirguc-Kunt and Kane (2002) stress that the system of insurance of deposits strengthens the trust of the society of a country in the banking system. Taking into account the importance of the banking sector, together with its characteristic instability, the insurance of deposits creates a clear role of the security of the financial system. The insurance protects or reduces the crisis-related losses of less competent depositors and may be seen as a part of a wide consumer protection program operating in many countries. And though the influence of the insurance of deposits on the banking system has been discussed in scientific literature for over fifty years, it has to be noted that the subject is still on the level of deep theoretical discussions. Such discussions are encouraged by different attitudes towards the influence of the insurance of deposits on the financial sector. The supporters of insurance of deposits criticize authors (Kuritzkes et al. 2000; Demirguc-Kunt, Detragiache 2002; Hoque 2007; McCoy 2007) envisaging major risks to the banking system, when the stability of the system is supported by deposit insurance. The scientists supporting insurance of deposits (Santomero 1997; Diamond, Dybvig 2000; Tauraite 2003; Demirguc-Kunt et al. 2005) underline the fact that the main purpose of insurance of deposits is not to compensate the deposits to the depositors in case of bankruptcy of the bank but to support the stability of the whole financial system, to reduce the probability of a financial crisis. Different views on the system of insurance of deposits, performed empirical research, fragmented and repetitive scientific studies determine the fact that scientific sources present rather different evaluation of the influence of the system of insurance of deposits; besides many of the studies analyze the situation of the last century, the influence of the system of insurance of deposits on financial crises that took place during 1980-1997. The last decade has seen many changes in the global financial markets, which resulted in changes in the system of insurance of deposits, especially during the economic crisis that started in 2007. In the opinion of Laeven (2001); Garcia (2002); Demirguc-Kunt, Kane (2002); Hoque (2007), suitable evaluation of the system of insurance of deposits and correct reorientation at the necessary moment may essentially change the situation of the banking system and at the same time save the economy of the whole country. The events of the recent years force a different view on the system of insurance of deposits, it becomes necessary analyze new and relevant events in the financial markets. Many countries had to quickly re-orientate the existing system of insurance of deposits in order to manage the financial crisis.
The scientists who performed research on the system of insurance of deposits (Diamond, Dybvig 2000; Frolov 2004; Ioannidou, Dreu 2006; Hoque 2007, 2009; Demirguc-Kunt, Kane 2002; Eisenbeis, Kaufman 2006; McCoy 2007) state that irrespective of the fact that the use of the system of insurance of deposits is common throughout the world and this system is constantly improved, different uses of the system may cause a totally opposite result than the anticipated one. Santomero (1997); Demirguc-Kunt, Kane (2002) analysis of the necessity of the system of insurance of deposits also reveals the negative sides of deposit insurance highlighting the larger risks undertaken by banks, less care for depositors on the one hand and on the other hand, maintaining that insurance of deposits reduces the stimulus of depositors to control banks. Santomero (1997); Demirguc-Kunt, Kane (2002); Demirguc-Kunt et al. (2005); Schich (2008) point out the following problems of the insurance system as the main negative consequences of insurance of deposits: risk of moral damage, reduced stability of the banking system and increased probability of a banking crisis as well as reduced market discipline. Different authors distinguish moral risk as one of the main risks the system of insurance of deposits. It is stated that moral risk is most likely when the insurance of deposits is covered infinitely. Upon analyzing the negative effects of insurance of deposits, scientists (Santomero 1997; Demirguc-Kunt, Kane 2002; Schich 2008) also suggest possible alternatives for reduction of such effects (Fig. X).
There are instruments in the market allowing to reduce the negative effect of insurance of deposits on the banking system. In order to reduce the risk of moral damage, it is necessary to let the market discipline operate if the stability of the bank system decreases, it may be necessary to increase the limits of liability of bank management and increase the transparency of bank activity, if the probability of a banking crisis increases, management of deposit insurance should be transferred to the government level, if the market discipline is reduced, then it is necessary to change the model of financing of the insurance of deposits.
Quite a few methods for solving problems of financial stability have been created according to historical data they allow evaluating direct correlation between the key mac-roeconomic factors and certain risk measures, such as indicators of financial stability. Striving for more detailed analysis of the models of research of the influence of insurance of deposits on the stability of the banking system, comparison of such models was carried out (see Table X).
[FIGURE X OMITTED]
Based on the comparison of different theoretical and empirical models, it can be stated that research models are directed towards support of different research solutions. While static research models (Demirguc-Kunt, Detragiache 2002; Demirguc-Kunt et al. 2005; Hoque 2007) are more oriented towards the factors influencing the deposit insurance system and their interrelations, the dynamic research supporters (Tauraite 2003; Schich 2008) highlight the consequences of the decisions of management of the deposit insurance system. The static models are more similar than different according to their structure, i.e. such models underline the factors influencing the process, only the number of these factors variables of the system under analysis differ. The logical consistency of the static research methods provided on the influence of deposit insurance on the stability of the banking system is easier to present than that of the dynamic methods (see Figure X).
From Figure X it is possible to note that three phases are characteristic to static methods. The first and second phases are interrelated by feedback, and it means that the consequence influences factors influencing the deposit insurance system by feedback. When analyzing the static research methodss of the influence of deposit insurance on the stability of the banking system and their logical consistency, it can be stated that these methods (Demirguc-Kunt, Detragiache 2002; Demirguc-Kunt et al. 2005; Hoque 2007) stress the correlation of determining factors and consequences, but it should also be noted that it is more of a reflection of the process of decisions of the static research on the influence of insurance of deposits on the stability of the banking system, which is attempted to correct in the dynamic methods. The drawback of the static methods is that these research methods analyze just the state of the system at a certain period and its influence on the stability of the banking system without changing its parameters under certain economic conditions.
[FIGURE X OMITTED]
The analyzed dynamic (Schich 2008) research method of the influence of deposit insurance on the stability of the banking system highlights the changes of the system itself in maintaining the stability of the banking system. The author outlines the possible consequences to the financial system of the country, after making certain key changes in the deposit insurance system. The following key internal changes to the deposit insurance system should be noted: changes to the limit of coverage of the insurance, changes to the financing of the system, introduction of joint insurance. The said internal changes in the dynamic influence research method are not only presented according to the importance but this model also presents the possible mistakes of such key changes that can have a totally different influence on maintaining the stability of the banking system. The changes to the deposit insurance system analyzed in the dynamic research method of the influence of deposit insurance on the stability of the banking system (Schich 2008) allow us to conclude that to achieve desirable influence on the stability of the banking system the deposit insurance system should be reorganized effectively with changes in the world economy. Though the authors of static research methods (Demirguc-Kunt, Detragiache 2002; Demirguc-Kunt et al. 2005; Hoque 2007) focus more on tangible objective internal factors in their models, they also highlight the importance of macro-economic factors, such as GDP growth rate, inflation, devaluation and others.
Summarizing literature review of the previous researches on the deposit insurance problems, could be stated that country specific problems and macroeconomic environment changes can form a different character of the research. This can be influenced by rapid grow of the banking system and country's economy, with limited allowance for economy stagnation period readiness. This research can be extended by analyzing the Baltic states case, as the example of fast growth and sharp downfall, allowing to derive assumptions on deposit insurance system effectiveness.
X. Research method
Based on analysis of scientific literature, it can be stated that for further research it would be purposeful to combine the concepts of static (Demirguc-Kunt, Detragiache 2002; Demirguc-Kunt et al. 2005; Hoque 2007) and dynamic (Tauraite 2003; Schich 2008) research models and to perform an assessment research on the influence of insurance of deposits on the stability of the banking system in the Baltic States.
The recent world economic crisis affected the stability of the banking system governments of countries have started to create a security net for banks and other financial establishments for strengthening this system. When creating this net, several elements of the security net were designed; one of them is insurance of deposits, its terms were reviewed in many states. The governments especially widened the existing guarantees and introduced new insurance limits, the majority of states increased the limits temporarily, several countries established them permanently. Thus the performed research on the influence of insurance of deposits on the stability of the banking system in the Baltic States commences with identification of changes in a clearly defined deposit insurance system.
In the performed research Schich (2008) underlined the possible consequences of extending the limits of insurance, which were not based on real facts. After 2008 and 2009, the consequences of increased insurance limits can already be evaluated based not only on theoretical provisions, but by analyzing real statistical data, evaluating the influence of extending of these limits on the stability of the banking system of the Baltic States. The set targets in article introduction concerning the influence of increased deposit insurance limits on the stability of the banking system will be analyzed using the adapted methods used by Demirguc-Kunt, Detragiache (2002), Demirguc-Kunt et al. (2005), Hoque (2007) in their researches.
The research design can be listed in to X steps, encompassing targets of the paper:
X. To estimate country's government financial guarantees; In order to achieve the first target, we analyze the dynamics of the size of deposits and the funds accumulated in the deposit insurance fund and the possibilities of the deposit insurance fund to compensate the deposits in the banks.
X. To monitor, whether government guarantees encourage banks and depositors to accept larger risk; The second target is achieved by analyzing the credit rating of the banks of the Baltic States and shares in the Baltic market. The long-term credit ratings of the banks are interpreted on the basis of the rating values announced by the Ministry of Finance of the Republic of Lithuania.
X. To evaluate possible deposit insurance system introduction influence to unfair competition amount deposits accepting institutions;
The third target of the article calls for a comparative analysis of deposit insurance systems employed by the Baltic country and branches of foreign banks, distinguishing the banks of the Baltic States not participating in the local country deposit insurance system.
X. To analyze the influence of increased deposit insurance limit to moral risk; When performing the analysis of the influence of insurance of deposits on the stability of the banking system, the main indicator showing the influence of insurance of deposits on the stability of the banking system is identified. Stability of the banking system is endangered when depositors start withdrawing deposits from banks because depositors lose trust in banks, therefore the main indicator showing the stability of the banking system is the size of deposits in the banks. The stability of the banking system is influenced by the size of deposits in the banks and at the same time by macroeconomic factors, thus upon analyzing the influence of insurance of deposits on the stability of the banking system, it is important to establish and distinguish the most important macroeconomic factors affecting the system. The analysis of the influence of macroeconomic factors on the size of deposits in the banks covers the analysis of the control variables distinguished in the Demirguc-Kunt, Detragiache (2002) and Hoque (2007) research: GDP growth rate; GDP per capita; Trade growth rates; Inflation; Real interest rate; Foreign currency reserves; Credit growth. Binary correlation analysis is used for analysis of the influence of macroeconomic factors on the size of deposits in the banks and its main phases are: X) establishing the key correlations, X) calculation of reliability indicators, X) composition of the regression model, X) determination of the strength of the correlation, X) assessment of the reliability of the obtained parameters. The main sources of the research statistical data are statistical offices of the national banks in Baltic States, national offices of the statistics for macroeconomic indicators.
X. Results and findings
European Union Directive XX/XX/EC states that the member states may decide themselves whether the depositors have to accept a certain percentage of loss in case of bankruptcy of a bank. According to the directive, member states may limit the level of compensation of deposits to a specified percentage of deposits, which should be equal to or exceed XX% of aggregate deposits until the amount to be paid under the insurance reaches the minimum amount of compensation of deposits (i.e. XX.XXX EUR). In other words the directive provides for a XX per cent joint insurance possibility, i.e. European Union member states, which decide to apply the XX% joint insurance had to specify the minimum deposit compensation limit at XX.XXX EUR.
In practice until changes in the EU deposit insurance market of X October 2008 the principle of joint insurance was supported by XX EU member states--mostly the new EU member states (Lithuania, Estonia, Malta, Cyprus, Hungary, the Czech Republic, Slovakia, Poland and others). Mostly, the countries applied XX per cent joint insurance. In some cases the deposits not exceeding the limits of compensation of deposits were insured at XX%, however in other cases--in order to protect small depositors--the deposits were partially insured at XXX% and partially at XX%. In the X October 2008 meeting the European Union Ministers of Finance unanimously decided to restore the confidence of people in the financial sector and its proper functioning and for that purpose to take all the necessary measures to protect the savings of depositors. The decision of EU Council of Ministers of Finance of X October 2008 approved the increase of the limit of compensation of deposits to at least XX.XXX EUR for at least one year. After this decision many EU member states decided to increase the limit of coverage of deposits even to XXX.XXX EUR. On XX March 2009, the European Parliament and Council passed a new Directive 2009/XX/EC amending Directive XX/XX/EC on deposit-guarantee schemes as regards the coverage level and the payout delay. This Directive establishes that by XX December 2010 the amount of insurance should be not less than XXX.XXX EUR and the term for claims for insurance to be XX businees days, which can be extended for XX business days. Based on this Directive the majority of EU member states should increase the increased limits of coverage of deposits that are below the established limit once more to the required amount. Thus countries that had established lower deposit coverage limits will have to change the existing limits once more. Lithuania, Latvia and Estonia, as well as other EU member states, increased the amount of coverage of deposits and amended other terms of insurance of deposits.
The Seimas of the Republic of Lithuania increased the maximum coverage amount payable to deposits to XXX.XXX EUR from X November 2008 to XX October 2009. According to the new procedure of insurance of deposits, in case of an insured event depositors will be compensated XXX per cent of the deposit--amount in litas equal to up to XXX.XXX EUR. From XX July 2009 the Seimas of the Republic of Lithuania passed amendments under which the limit of coverage of deposits is set for an indefinite period of time.
On XX October 2008 the Seimas of the Republic of Latvia increased the limit of insured deposits from the amount in lats equal to XX.XXX EUR to XX.XXX EUR, compensating XXX per cent of the deposit in one credit establishment. In Estonia in November 2008 the Law on Guarantee Fund was also amended and the limit of compensation increased to the amount in kroon equal to XX.XXX EUR, compensating XXX per cent of the deposit in one credit establishment and cancelling the XX per cent joint insurance.
Though the amount of deposits in banks in Lithuania is nearly two times less than in Latvia and XX per cent bigger than in Estonia, the deposit insurance fund of Lithuania would be able to compensate more deposits in banks than the deposit insurance funds in Latvia or Estonia. The first target of the research confirms that the deposit insurance funds of all three Baltic States would not be able to pay the compensations to depositors in case the banking sector of the country would experience a crisis caused by depositor panic and not one but several banks would go bankrupt. It can be concluded that insurance of deposits is more of a theoretical tool of maintaining the stability of the banking system than a practical one.
One of the main factors demonstrating reliability of banks is bank long-term credit rating announced by rating agencies. Based on the ratings assigned by Fitch Ratings, Moody's, S&P rating agencies the perspectives and risks of a bank can be judged. The ratings of the largest (according to property) Baltic States banks and their perspectives according to Fitch Ratings rating agency are presented in Table X.
From the table above we can see that highest Fitch Ratings rating agency ratings are given to the largest Scandinavian capital banks. The long-term credit ratings of these banks are from A to A- (SEB A+) and though the rating perspective is negative, these ratings show that the banks are reliable creditors and deposit holders. However, according to the data of poll of depositors carried out by the Bank of Lithuania, depositors often choose the bank which pays higher interest rate and it is rare for a depositor to analyze the ability of the bank to payout the deposit.
According to the analysis of deposit market shares of the Baltic States' banks (Fig. X), we can see that both in Lithuania as well as in Latvia and Estonia the largest deposit market shares are held by the banks that have high long-term credit ratings--AB SEB bank and AB Swedbank. However, in Lithuania AB DnB NORD bank, with high credit ratings, holds a smaller deposit market share (X per cent) than bank Snoras (XX per cent), the long-term credit rating of which is much worse but the interest rate for deposits is much higher (see Table X).
In Latvia, a rather large share of deposit market (XX per cent) is held by Nordea bank, the interest rates of which match the interest paid by SEB and Swedbank, while Danske bank and other banks and their branches hold a very small share of the deposit market (from X.X to X.XX per cent). A very similar situation is in Estonia, where besides SEB, Swedbank, Nordea bank and Danske bank, XX per cent of the market is shared by AB Eesti Krediidipank (X.XX per cent), MARFIN PANK ESTI AB (X.XX), Tallinna Aripanga AB (X.XX), Baltic Investment Group Bank AB (BIG) (X.XX), LHV Bank (X.XX), etc.