Saudi faces deposit insurance challenge
DUBAI, November 13, 2015
Saudi Arabia's government faces a challenge in creating a system to insure bank deposits without shaking the confidence of depositors, an international banking watchdog warned.
The government's Supreme Economic Council declared during the global financial crisis in 2008 that authorities would ensure the safety of local banks and deposits.
The kingdom is now preparing to introduce a formal system to insure deposits on January 1 next year; a Depositor Protection Fund (DPF) will be set up in the central bank, obtaining its money from premiums paid by banks and reimbursing depositors if banks fail.
The system is being introduced as the world's top oil exporting country faces economic pressure because of low energy prices; Riyadh is running a big budget deficit and many analysts expect the economy to slow next year because of austerity steps.
In a study published this month, the Basel-based Financial Stability Board said the DPF had been well designed in some ways and would strengthen Saudi Arabia's financial safety net.
But it also warned there was a contradiction between the DPF, which would provide limited protection of deposits subject to market discipline, and the Economic Council's pledge, which Saudis saw as offering full coverage to all depositors.
"The authorities need to decide how best to withdraw this implicit guarantee without any adverse impact on depositor confidence," the FSB said.
It suggested that one way to solve the problem might be an initial transition period of higher deposit coverage levels that would be reduced over time.
The central bank, which has not publicly discussed its plan for the DPF in line with the secrecy that surrounds much policy-making in the kingdom, did not respond to telephone calls seeking comment.
The central bank plans to build the DPF up gradually. Analysts at Dubai-based Arqaam Capital estimated it would take eight to 10 years before the fund would be large enough to reimburse depositors of small to medium-sized banks.
The FSB urged Saudi authorities to ensure the DPF was big enough to handle a crisis by specifying a target fund size and establishing a back-up line of credit for it.
Saudi Arabia is also creating a formal bank resolution framework to rescue or wind up failing banks, the FSB said. This would broaden and clarify powers which the central bank already claims in crises.
The central bank is expected to submit a revised draft of a law for the framework to the cabinet's Bureau of Experts, but there is no clear time frame for the law to be finalised and approved, the FSB said. - Reuters
