How to endanger a bank

 

                                    This and two dollars might get you a cup of coffee.

Last week’s coup attempt in Russia showed that the dollar rules Central Asia.  Prigozhin’s jaunt raised questions for the public about whether the Kremlin could survive, and whether the Russian economy would crash. This would have been curtains temporarily for Central Asia, because it prospers partly by selling to Russians under the table, defying Western sanctions. It was no shock to see the tenge weaken sharply relative to the dollar. Over the weekend, the exchange rate of tenge per dollar jumped from 445 to 450.

The commercial banks in Kazakhstan, at the behest of the central bank, try to shore up enough dollars to defend the tenge. They limit the flow of dollars out of the country. But there is a right way to do this and a wrong way. The banks do it the wrong way. They impose a daily limit on dollar withdrawals on the owner of the bank account, not on the account itself. 

For example, I have two checking accounts at Bank CenterCredit. As far as I know, the bank does not publish its withdrawal limits. But with a little experimenting, I find that it has a daily limit of about $500 on the two accounts put together.

This doesn’t rock.  Deposit insurance should be calculated on each account. (A word of explanation for the financially innocent. With deposit insurance, the National Bank of Kazakhstan reimburses the deposit owner for losses up to the limit of the insurance.  Suppose that you lose 2 million tenge in your account because your bank burns down; and suppose that you have insurance for 1.5 million  tenge.  Then the government will pay you 1.5 million tenge.  You’ll have to swallow the remaining loss of 500,000 tenge.)

 

Withdrawal symptoms

 

Why limit dollar withdrawals?  Well, someone whose account is mainly uninsured is likely to panic at any sign of trouble and withdraw all of his funds.  This is because he knows that insurance can’t cover his huge loss. When a lot of such depositors withdraw their money at the same time, the bank will collapse, because it has few dollars on hand. It has lent most of them out, to profit from the interest payments. The bank relies on the natural inflow and outflow of dollars to ensure that it has enough cash on hand at any time to satisfy demands for withdrawal. But a bank run can overwhelm the usual inflow of dollars.  That's what happened in March to Silicon Valley Bank in California—triggering bank runs, or at least bank jogs, around the world.

So, the government insures a certain number of dollars per account. This encourages you to spread your money across several accounts so that you can insure more of it.  The government likes this, because it reduces the risk that you will lose all of your eggs by putting them in one basket. And for the same reason, diversifying your accounts is good for the bank.

In Kazakhstan, the insurance limit is 10 million tenge for tenge-denominated accounts and 5 million tenge for dollar-denominated accounts. These limits are for all accounts of a particular depositor at a particular bank. The limit across all banks for a particular depositor is 20 million tenge.

 

Dollar discrimination

 

Kazakhstan pays less insurance for a dollar account than for a tenge account. Probably this is meant to encourage people to hold tenge rather than dollars. This boosts the demand for the tenge at the expense of the dollar, thus reducing the exchange rate of tenge per dollar and thwarting the long-run trend of the tenge towards depreciation. But perversely, for someone who has already decided to hold dollars, it insures a small share of the dollar account, which can encourage runs on such accounts.

In the US, the limit is $250,000 per bank for a particular depositor. This encourages her to set up deposits at several banks, further diversifying risk. The Kazakhstani limits do the same thing. Intriguingly, Kazakhstan won’t insure deposits in Islamic banks.

Kazakhstan’s restriction on the total amount drawn by the account owner, not on the amount drawn from a particular account, mystifies me, since it encourages bank runs. But Kazakhstani finance is always a mystery. Not a who-dun-it but a who-lost-it…. –Leon Taylor, Baltimore, tayloralmaty@gmail.com

 

References

 

Deposit Insurance System in Kazakhstan | Electronic government of the Republic of Kazakhstan (egov.kz)