The influence of deposits insurance on the stability of the Baltic States banking system/Indeliu draudimo itaka Baltijos Saliu banku sistemos stabilumui.
Lakstutiene, Ausrine ; Krusinskas, Rytis ; Rumsaite, Dalia 等
1. Introduction
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: (1) explicitly defined or undefined deposit insurance, (2)
regulation and supervision of bank activities, (3) the function of the
central bank as the last creditor and (4) 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: (1) bank supervision system, (2) the function of
the last creditor and (3) 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, 4 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: 1) to evaluate whether in a critical situation the
government could provide guarantees that are declared; 2) 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; 3) to analyze whether introduction of different levels of
protection could give rise to unfair competitive advantages among
establishments accepting deposits; 4) to determine whether the increased
limits of insurance of deposits cause moral risks if the insurance
limits are not restricted.
2. 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. 1).
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 1).
[FIGURE 1 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 2).
From Figure 2 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 2 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.
3. 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 4 steps, encompassing
targets of the paper:
1. 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.
2. 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.
3. 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.
4. 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: 1) establishing the key correlations, 2)
calculation of reliability indicators, 3) composition of the regression
model, 4) determination of the strength of the correlation, 5)
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.
4. Results and findings
European Union Directive 94/19/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 90% of aggregate deposits until the amount to be paid under the
insurance reaches the minimum amount of compensation of deposits (i.e.
20.000 EUR). In other words the directive provides for a 10 per cent
joint insurance possibility, i.e. European Union member states, which
decide to apply the 10% joint insurance had to specify the minimum
deposit compensation limit at 22.000 EUR.
In practice until changes in the EU deposit insurance market of 7
October 2008 the principle of joint insurance was supported by 12 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 10 per cent joint insurance. In
some cases the deposits not exceeding the limits of compensation of
deposits were insured at 90%, however in other cases--in order to
protect small depositors--the deposits were partially insured at 100%
and partially at 90%. In the 7 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 7
October 2008 approved the increase of the limit of compensation of
deposits to at least 50.000 EUR for at least one year. After this
decision many EU member states decided to increase the limit of coverage
of deposits even to 100.000 EUR. On 11 March 2009, the European
Parliament and Council passed a new Directive 2009/14/EC amending
Directive 94/19/EC on deposit-guarantee schemes as regards the coverage
level and the payout delay. This Directive establishes that by 31
December 2010 the amount of insurance should be not less than 100.000
EUR and the term for claims for insurance to be 20 businees days, which
can be extended for 10 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 100.000 EUR from 1 November 2008
to 31 October 2009. According to the new procedure of insurance of
deposits, in case of an insured event depositors will be compensated 100
per cent of the deposit--amount in litas equal to up to 100.000 EUR.
From 21 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 16 October 2008 the Seimas of the Republic of Latvia increased
the limit of insured deposits from the amount in lats equal to 20.000
EUR to 50.000 EUR, compensating 100 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 50.000 EUR, compensating 100 per cent of the
deposit in one credit establishment and cancelling the 10 per cent joint
insurance.
Though the amount of deposits in banks in Lithuania is nearly two
times less than in Latvia and 13 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 3.
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. 3), 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 (9 per cent) than bank
Snoras (12 per cent), the long-term credit rating of which is much worse
but the interest rate for deposits is much higher (see Table 3).
In Latvia, a rather large share of deposit market (11 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 1.2 to 0.02
per cent). A very similar situation is in Estonia, where besides SEB,
Swedbank, Nordea bank and Danske bank, 13 per cent of the market is
shared by AB Eesti Krediidipank (0.96 per cent), MARFIN PANK ESTI AB
(0.18), Tallinna Aripanga AB (0.07), Baltic Investment Group Bank AB
(BIG) (0.25), LHV Bank (0.73), etc.
The result of the set target shows that a rather large share of the
market is held by the banks that offer higher interest rates and the
long-term credit ratings and perspectives of which show the undertaken
larger risk.
Not all banks operating in a country participate in the deposit
insurance system, as the branches of foreign banks are not under
obligation to participate in it, however, they have to insure the
deposits at terms that are not worse than those of the banks
participating in the deposit insurance system. But the danger of
dishonest competition remains, as the local deposit insurance limits may
be higher than the insurance limits applied by branches of foreign
banks.
The banks and branches of foreign banks operating in Lithuania,
Latvia and Estonia at the end of 2009 are presented in Table 4.
The terms of insurance of deposits applied by the branches of
foreign banks and the terms of the deposit insurance systems applied in
Lithuania differ. The analysis of the terms of deposit insurance systems
of Lithuanian, Latvian, Estonian banks and the branches of the largest
foreign banks operating in the Baltic States that publicly announce data
about limits of deposit insurance evaluating the characteristics of the
deposit insurance system (Table 1) is presented in Table 5.
There should not remain the main difference between the compensated
deposit amount from 31 December 2010--it will amount to 100.000 EUR. All
other branches of foreign banks operating in the Baltic States do not
provide information about applied deposit insurance, and that can
mislead depositors to expect the deposits to be insured by the insurance
of the Deposit and obligation to investors of the Republic of Lithuania.
Thus unfair competition actions can be seen in this respect, when a
branch of a foreign bank can attract deposits easier under the cover of
the insurance of deposits valid in the country. Such is the result of
the third target research.
In Lithuania, Latvia and Estonia the new limit of coverage of
deposits has an established limit (in Lithuania 100.000 EUR, in Latvia
and Estonia 50.000 EUR) and although the limit of compensation is rather
high, it is not indefinite. Thus it reduces the risk of moral damage
underlined in the research of Schich (2008). The influence of increased
limits of coverage of deposits on the stability of the banking system is
best reflected by the changes of the size of deposits in banks (before
the increase of the limit and after it). The dynamics of the size of
deposits in the banks of the Baltic States for 2007-2009 in quarters are
presented in Figure 4.
The size of deposits in Latvia is biggest as compared to deposits
in Lithuania and Estonia. However, with recession of the rate of growth
of the world economy, the size of deposits started to decrease as an
indicator of declining situation. The limit of compensation of deposits
was increased before significant recession of economies in the Baltic
States therefore with the economy of the country reaching the
"bottom" the size of deposits in the credit establishments of
the country started growing. In Estonia, contrary to the situation in
Lithuania and Latvia, both the economic situation and the changes to the
size of deposits differ. The decrease in the size of deposits was
influenced by the amount of withdrawn deposits as a result of changes in
the macroeconomic situation of the countries.
[FIGURE 4 OMITTED]
Correlation of macroeconomic factors and sizes of deposits in
credit establishments in 2002-2009 by quarters was evaluated using a
correlation matrix and assessing the reliability of the strength of the
correlation. The values of the correlation coefficient for the sizes of
deposits in the Baltic States and the macroeconomic factors as well as
the values of the Stjudent criterion are presented in Table 6.
Upon establishing the main links between the size of deposits in
banks and the analyzed factors, it is possible to establish the
statistical correlation between the size of deposits and the analyzed
variables, applying the multiple linear regression model. Upon composing
the multiple linear regression equation the independent variables, the
value of the Student's test of which exceeded the limit of 5 per
cent, would be rejected, i.e. inflation, trade growth rates, real
interest rate and credit growth. Upon eliminating these independent
variables, it is possible to compose the multiple linear regression
models for independent variables with the biggest influence on the size
of deposits and to evaluate their reliability with respect to the Baltic
States. The results of such mathematic modelling show that in the case
of all three Baltic States there is only one common analyzed
macroeconomic factor GDP per capita.
The application of the smallest quadrant method for composition of
regression equations produced the reliability indicators for the
parameters and they are presented in Table 7.
In conclusion, we may state that the decrease of the size of
deposits in Baltic banks was caused by unstable economic situation in
the countries. The size of deposits was most affected by slower economic
growth of the countries and declining situation of the residents of the
countries as well as disturbances in the banking sector. Although the
limit of coverage of deposits was increased to 100.000 EUR in Lithuania,
and to 50.000 EUR in Latvia and Estonia, it did not stop the decrease of
the size of deposits in banks, on the contrary, the sizes of deposits
decreased further in the Baltic banks after the increase of the
compensation limit. While the tendency of change of the size of deposits
in the banks of the Baltic States is adequate to the economic situation
of the countries, the risk of moral damage due to increased limit of
coverage of deposits still remains (result of the fourth target of the
research). When the economic situation of the country improves and the
size of deposits in banks will no longer decrease, banks may accept
growing activity risks due to especially high limit of coverage of
deposits and the depositors may lose their guard.
5. Conclusions
The scientists carrying out research on the influence of deposit
insurance on the stability of the banking sector mostly analyze a
clearly defined deposit insurance system therefore discussions arise
among scientists about the effect of a clearly defined deposit insurance
system on the stability of banks. The majority of scientists think that
a clearly defined system is optimal policy which maintains the stability
of banks during depositor panic. However, insurance system financial
potential in the case of possible system failure is rarely analyzed.
The specifics of the countries analyzed--The Baltic States,
diverges rapid banking system and at the same time countries economic
growth and sharp downfall over global economic recession. It defines
limited readiness of countries government and banking system for economy
stagnation period, what forms additional issues supplementing earlier
theoretical studies.
The research target 1 analysis of the ability of the Baltic States
to compensate deposits in banks showed that the deposit insurance funds
of all three Baltic States would not be able to pay compensations to
depositors in the case of bankruptcy of a larger bank. The amount of
deposits with large banks significantly exceeds the means in the deposit
insurance funds. In case of bankruptcy of the smallest banks of the
country, deposit insurance funds would be able to pay compensations to
depositors, but after such payments there would be no money left in the
deposit insurance funds.
The analysis of possibilities of accepting bigger risks by banks
and depositors (target 2 of the research) showed that increase of the
limit of coverage of deposits for an indefinite period to 100.000 EUR in
Lithuania, to 50.000 EUR in Latvia and Estonia reduces the guard of
depositors and enables banks to accept higher risks. Though larger banks
with the highest reliability ratings attract most of the deposits, a
growing share of deposits goes to banks with lower ratings, which offer
higher interest rates for deposits. This shows reduced guard of the
depositors in choosing the bank.
Not all banks operating in the country participate in the deposit
insurance system, as the branches of foreign banks are not under
obligation to participate in the national deposit insurance system but
have to insure the deposits at conditions not worse than the ones
applied in the country of operation. However if a EU country has a
higher deposit coverage amount, a branch of a bank from another EU state
is not obligated to additionally insure the deposits, if the deposit
insurance amount satisfies the requirements set by EU. The research also
shows that the majority of branches of foreign banks do not announce any
information about the applied deposit coverage limit and it may mislead
the depositor in choosing the bank (concluding research target 3).
Though larger banks with the highest reliability ratings attract most of
the deposits, a growing share of deposits goes to banks with lower
ratings, which offer higher interest rates for deposits. This shows
reduced guard of the depositors in choosing the bank.
The analysis of possible moral risks, corresponding to research
target 4, showed that while the tendency of change of the size of
deposits in the banks of the Baltic States is adequate to the economic
situation of the countries, the risk of moral damage due to increased
limit of coverage of deposits still remains. When the economic situation
in the country stabilizes and the size of deposits in banks no longer
decrease, banks may accept growing activity risks due to particularly
high limit of coverage of deposits and the depositors may lose their
guard. During a economic downfall residents should not experience moral
threats, therefore the main task of deposit insurance is to restore the
confidence of residents in the bank sector, guarantees can only serve as
additional instruments of stabilization of the situation.
doi: 10.3846/16111699.2011.599413
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Ausrine Lakstutiene (1), Rytis Krusinskas (2), Dalia Rumsaite (3)
Kaunas University of Technology, K. Donelaicio g. 73, LT-44029
Kaunas, Lithuania E-mails: (1) ausrine.lakstutiene@ktu.lt (corresponding
author); (2) rytis.krusinskas@ktu.lt; (3) dalia.rumsaite@ktu.lt
Received 11 February 2011; accepted 28 June 2011
Ausrine LAKSTUTIENE. Assoc. Prof. Dr of social sciences
(economics), Kaunas University of Technology, Faculty of Economics and
Management, Department of Finance.
Rytis KRUSINSKAS. Assoc. Prof. Dr of social sciences (business
management and administration), Kaunas University of Technology, Faculty
of Economics and Management, Department of Finance.
Dalia RUMSAITE. Dr of social sciences (business management and
administration), Kaunas University of Technology, Faculty of Economics
and Management, Department of Finance.
Table 1. Supporters of research on the influence of insurance
of deposits on the stability of the banking system
Authors of View on deposit Analyzed system
the research insurance of deposit insurance
method as a tool for and the scientific
and research supporting importance of
type stability of the the model
bank system
1 2 3
Demirguc- A clearly defined A clearly defined deposit
Kunt, deposit insurance insurance system, state
Detragiache system has with different development
(2002); a negative effect levels.
Static on bank stability. The first to use the
interstate data base
supported by World Bank to
analyze the correlation
between insurance of
deposits by banks and
financial crises.
Tauraite A clearly defined A clearly defined deposit
(2003); deposit insurance insurance system.
Dynamic system influences That is probably the only
the stability of research found in official
the banking sources analyzing the
system. deposit insurance system
in the Baltic States.
Demirguc- In countries with A clearly defined deposit
Kunt, different level insurance system, all
Karacaoval, of development regions, all levels of
Laeven insurance of development.
(2005); deposits has a The authors view the
Static different influence influence of the system of
on the stability insurance of deposits from
of the banking the point of view of
system. different levels of
development of countries.
Insurance of deposits is
analyzed in the context of
the international deposit
insurance system,
distinguishing the factors
that have an objective
influence on it as proved
by empirical research.
Hoque A clearly defined A clearly defined deposit
(2007); deposit insurance insurance system, less
Static system increases developed states.
the probability of The performed research
a banking crisis, analyzes the correlation
when it interacts between different forms of
with less or the deposit insurance system
little developed and instability in the sphere
countries. of the banking system,
paying special attention to
less developed countries.
Schich Suitable use of A clearly defined and
(2008); the deposit undefined deposit insurance
Dynamic insurance system system.
provides stability The author analyzed
to the banking characteristics of the deposit
system. insurance system and the
influence on the stability of
the banking system in the
face of a financial crisis.
Authors of Characteristics of the analyzed
the research system, variables and control
method variables or the indicators
and research describing the
type deposit market
1 4
Demirguc- A clearly defined/undefined system;
Kunt, Limit of coverage; Sphere
Detragiache of application (foreign currency/
(2002); interbank deposits); Joint insurance;
Static Financing; Sources of
financing; Fees; Management;
Membership.
GDP; GDP per capita; Inflation;
Real interest rate; Credit growth
in the past; Foreign currency reserves;
Trade growth rate; Devaluation.
Annual insurance fee rate;
Tauraite Maximum amount of insurance
(2003); of deposits; Level of compensation;
Dynamic Obligation to participate;
manner of administration of the
deposit insurance system.
Number of banks; Size of deposits;
Share of demand deposits in
relation to all deposits; Share of
deposits from non-residents in
relation to all deposits; Annual
growth rate of deposits; Average
annual interest for short-term
deposits in the national currency
and foreign currencies.
Object of insurance; Currency
Demirguc- of insured deposits; A system
Kunt, with the principle of joint insurance.
Karacaoval, Compensation; Fee rate according
Laeven to risk; Obligation to participate;
(2005); Financing of the system;
Static Administration of the fund.
GDP; GDP per capita.
Deposits in local and foreign
currencies; Size of deposits
and interbank deposits; Total
amount compensated to one depositor.
Hoque A clearly defined/undefined
(2007); system; Limit of coverage of
Static deposits; The correlation of the
limit of coverage of deposits
with GDP per capita; Sphere of
application (foreign currencies/
interbank deposits); Joint insurance;
Financing; Sources of
financing; Fees; Management;
Membership.
GDP growth rates; GDP per
capita; Inflation; Real interest
rate; Credit growth in the
past; Foreign currency reserves;
Trade growth rates; Devaluation.
Schich Limit of coverage; Financing of
(2008); the system; Joint insurance.
Dynamic
Table 2. 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 345 thousand LTL--100 thousand EUR)
2005 26.347 550 2.09 97.91
2006 32.109 688 2.14 97.86
2007 38.829 868 2.24 97.76
2008 37.117 1.072 2.89 97.11
2009 39.818 1.274 3.20 96.80
Latvia (covers up to 172.5 thousand LTL--50 thousand EUR)
2005 44.067 712 1.62 98.38
2006 62.990 1.014 1.61 98.39
2007 74.606 1.230 1.65 98.35
2008 74.245 1.251 1.68 98.32
2009 72.958 1.339 1.84 98.16
Estonia (covers up to 172.5 thousand LTL--50 thousand EUR)
2005 20.957 227 1.08 98.92
2006 27.079 289 1.07 98.93
2007 31.461 401 1.27 98.73
2008 32.856 477 1.45 98.55
2009 34.696 587 1.69 98.31
Table 3. The ratings and perspectives of the largest Baltic
States banks in 2009 according to Fitch Ratings rating agency
Interest rate
for 1 year
term Share of Fitch Ratings rating
deposits, deposit agency rating
national market,
currency, per Long-term
per cent. * cent. credit rating Perspective
AB SEB bank
Lithuania 1.7 27 A Negative
Latvia 1.2 13.5 A+ Negative
Estonia 1.5 23.8 A Negative
AB DnB Nord bank
Lithuania 1 9 A Negative
Latvia 1 8.5 A Negative
Estonia 1 A Negative
AB Swedbank
Lithuania 1 29 A- Negative
Estonia 1.2 42.6 A- Negative
Other banks
AB Parex bank 4.8 <1 RD -
(Latvia)
AB Baltic 4.7 <1 B3 Negative
International Bank
(Latvia) ***
AB Hipoteku 4.9 <1 Baa3 Negative
un zemes bank?
(Latvia) **
BIGBANK 4.6 <1 Caa1 Stable
(Estonia) ***
AB Bank Snoras 4.7 12 B+ Negative
(Lithuania)
AB Ukio bank 4.5 8 B+ Negative
(Lithuania) **
Notes: *--10.04.2010, **--rating agency S&P
ratings, ***--rating agency Moody's ratings
Table 4. Banks and branches of foreign
banks operating in the Baltic States
Country Banks, participating in Foreign banks branches, not
Lithuania's, Latvia's and participating in deposit
Estonia's deposit insurance insurance system
system
Lithuania 1. AB "Swedbank", 2. AB Ukio 1. Danske Bank A/S
bankas, 3. AB bankas Snoras, Lithuania's branch, 2.
4. AB DnB NORD a bankas, 5. Nordea Bank Finland Plc
AB Parex bankas, 6. AB SEB Lithuania's branch, 3.
ni bankas, 7. UAB Medicinos Allied Irich Banks, p.l.c.
bankas, 8. AB bankas Lithuania's branch, 4. AS
"Finasta", 9. AB "Siauliu "UniCredit Bank" Lithuania's
bankas". branch, 5. BIGBANK AS
branch, 6. MP Investment
Bank hf. Branch in the
Baltic states, 7.
Skandinaviska Enskilda
Banken AB, Vilnius branch,
8. Svenska Handelsbanken AB
Lithuania's branch.
Latvia 1. AB "Aizkraukles banka", 1. Nordea Bank Finland Plc
2. AB "Akciju komercbanka Latvia branch, 2.
"Baltikums", 3. AB "Baltic SKANDINAVISKA ENSKILDA
International Bank", 4. AB BANKEN AB Rigas branch, 3.
"GE Money Bank", 5. AB DnB Svenska Handels/banken
NORD Banka, 6. "Swedbank" Latvia branch, 4. Allied
AS", 7. AB "Latvijas Biznesa Irich Banks, p.l.c. Latvia
banka", 8. AS "NORVIK branch, 5. Danske Bank A/S
BANKA", 9. AB ia "latvijas Latvia branch, 6. BIGBANK
Hipoteku un zemes banka", p.l.c. Latvia branch, 7.
10. AB atv " Latvijas Pohjola bank p.l.c Latvia
Krajbanka", 11. AB LTB Bank, branch, 8. AB bank SNORAS
12. AB "SEB banka", 13. AB Latvia branch.
"SMP banka", 14. AB "Parex
banka", 15. AB AS
"Privatbank", 16. AB
"Regionala investiciju
banka", 17. AB "Rietumu
Banka", 18. AB "TRASTA
KOMERCBANKA", 19. AB "VEF
Banka", 20. AB "UniCredit
Bank", 21. AB "Latvijas
pasta banka".
Estonia 1. AB Eesti Krediidipank, 2. 1. Nordea Bank Finland PLC
AB SEB Pank, 3. AS SBM Pank, Estonia Branch, 2. AB Sampo
4. AB Hansapank (Swedbank), Pank (Danske Bank), 3. AB
5. MARFIN PANK ESTI AB, 6. Parex banka Estonia Branch,
Tallinna Aripanga AB, 7. 4. AS UniCredit Bank Estonia
Baltic Investment Group Bank Branch, 5. Svenska
AB (BIG), 8. LHV Bank. Handelsbanken AB Estonia
branch, 6. Siemens Financial
Services AB Estonia branch,
7. Scania Finans AB Estonia
branch, 8. DnB NORD Banka
Estonia branch, 9. Allied
Irich Banks, p.l.c. Estonia
Branch (AM Credit), 10. AB
Bankas SNORAS Estonia
branch.
Table 5. Comparison of terms of deposit insurance of
Baltic States banks and foreign country bank branches
Characteristics Terms of Terms of Terms of
of deposit deposit deposit deposit
insurance insurance insurance insurance
system in Lithuania in Latvia in Estonia
Form of the Clearly Clearly Clearly
system defined defined defined
Limit of 100.000 EUR 50.000 EUR 50.000 EUR
compensation
Administrator State Enterprise Finance and Estonian
of deposit of the Republic capital market guarantee
insurance of Lithuania commission fund
Deposit and of Latvia
investment
insurance
Covers deposits Yes Yes Yes
in foreign
currencies
Joint insurance None None None
Sources of Bank and Bank and Bank and
financing government government government
Management Official Official Official
Membership Mandatory Mandatory Mandatory
Characteristics Terms of deposit insurance
of deposit of the branches of foreign
insurance banks
system
Danske Nordea
bank bank
Form of the Clearly Clearly
system defined defined
Limit of 50.000 EUR 50.000 EUR
compensation
Administrator Guarantee fund Deposit
of deposit of depositors insurance
insurance and investors fund of the
of the Kingdom Republic
of Denmark of Finland
Covers deposits Yes Yes
in foreign
currencies
Joint insurance None None
Sources of Bank and Bank and
financing government government
Management Private Joint
Membership Mandatory Mandatory
Table 6. The values of the correlation coefficient for the sizes
of deposits in the Baltic States and the macroeconomic factors
and the values of the Student's test
Correlation coefficient
Parameters Lithuania Latvia Estonia
GDP growth rates -0.35 -0.51 -0.33
GDP per capita 0.96 0.98 0.96
Inflation 0.53 0.11 0.25
Foreign currency reserves 0.97 0.98 --
Trade growth rates 0.01 0.18 0.18
Real interest rate 0.53 0.58 0.60
Credit growth -0.11 -- --
Stjudent criterion
Parameters Lithuania Latvia Estonia
GDP growth rates 0.04 0.01 0.39
GDP per capita 0.00 0.00 0.00
Inflation 0.00 0.54 0.52
Foreign currency reserves 0.00 0.00 --
Trade growth rates 0.93 0.30 0.64
Real interest rate 0.00 0.02 0.09
Credit growth 0.51 -- --
Table 7. Reliability indicators for the parameters obtained by
multiple regression models for the size of deposits in the Baltic
States and macroeconomic factors
Reliability indicators for the obtained parameters
Indicators Lithuania Latvia Estonia
Determination coefficient (R) 0.965466 0.978782 0.967932
Corrected determination 0.962228 0.977635 0.967819
coefficient ([R.sup.2])
Fig. 3. Division of deposit market shares among the Baltic States
banks in 2009 **--"Others"--banks or branches that hold a deposit
market share of less than 5 per cent
Lithuania
Snoras 12%
SEB 27%
Swedbank 29%
DnB NORD 9%
Ukio bankas 8%
Others 15%
Latvia
Nordea 11%
SEB 14%
Swedbank 23%
DnB NORD 9%
Others 43%
Estonia
Nordea 15%
SEB 24%
Swedbank 43%
Danske 13%
Others 5%
Note: Table made from pie chart.
