Core principles for effective deposit insurance systems: contribution to improving the national financial safety net

From the international core principles

Addressing at the workshop, Mr. Bui Khac Son, General Director of DIV said that: currently in the world there are more than 100 countries which have already built their deposit insurance systems to protect the interest of depositors as well as to contribute to maintaining financial stability. However, presently in Vietnam, the development of DIV has yet to overcome 2 big “hurdles”, namely incomplete legislation and unclear mechanism for resolving banks. The presentation by Mr. David Walker, Managing Director- Policy, Insurance and International Affairs- Canada Deposit Insurance Corporation (consultancy expert, who has experience in economics, deposit insurance and financial regulation within the private, government and academic sectors, being active in helping countries develop and enhance their financial safety-net arrangements) was aimed to bring to DIV a new set of effective principles, and based on this, to suggest choices for application that comply with both Vietnamese and international practices. According to Mr. David Walker’s assessment, principles for effective deposit insurance systems and the methodology for compliance assessment, which are now used by many countries, are guidelines for deposit insurance activities and Vietnam is in the process of adopting them. The objectives of the Core Principles are to: enhance the effectiveness of deposit insurance systems; be reflective of and adaptable to a broad range of country circumstances, settings and structures. These Core Principles draw heavily on the practical experience of deposit insurers.

The 18 Core Principles are broadly categorised into ten groups: Setting objectives  (principles 1 to 2); Mandates and powers (principles 3 to 4); Governance (principle 5); Relationships with other safety-net participants and cross-border issues (principles 6 to 7); Membership and coverage (principles 8 to 10); Funding (principle 11); Public awareness (principle 12); Selected legal issues (principles 13 to 14); Failure resolution (principles 15 to16); and Reimbursing depositors and recoveries (principles 17 to 18)

Out of the above 18 Core Principles, Mr. David Walker stressed some principles, which according to him are of particular importance, for example:
Principle 2 -mitigating Moral Hazard recommending: Moral Hazard should be mitigated by ensuring that the deposit insurance system contains appropriate design features and through other elements of the financial system safety net;
Principal 4- Powers stating that: a deposit insurer should have all powers necessary to fulfill its mandate and these powers should be formally specified.  All deposit insurers require the power to finance reimbursements, enter into contracts, set internal operating budgets and procedures, and access timely and accurate information to ensure that they can meet their obligations to depositors promptly;
Principal 5- Governance making it clear that: the deposit insurer should be operationally independent, transparent, accountable and insulated from undue political and industry influence. 
Principle 6 – Relationships with other safety-net participants suggesting: A framework should be in place for the close coordination and information sharing, on a routine basis as well as in relation to particular banks, among the deposit insurer and other financial system safety-net participants. Such information should be accurate and timely (subject to confidentiality when required). Information-sharing and coordination arrangements should be formalised.

To recommendations for the Deposit Insurance of Vietnam

In the Part of Introduction on the Deposit Insurance of Vietnam and comparison to 18 Core Principles for effective deposit insurance systems, Dr. Nguyen Manh Dung, Vice General Director of DIV made it known that: out of 18 Core Principles, currently, Vietnam has fully applied 6 principles. The remaining 12 principles have been applied partly or not been applied. Among these principles, Vietnam need to learn international experience to apply, such as: mitigating Moral Hazard (Principle 2); powers of DIV (Principal 4); governance (Principle 5); coverage (Principle 9); dealing with parties at fault in a bank failure (Principle 14) and especially, early detection and timely intervention and resolution; effective resolution processes (Principles 15, 16)… He went on to say that: in comparison with the above 18 Principles, in Vietnam, there are some Principles of DIV which have not been fully executed. Taking Principle 5 - governance as an example, the issues of independent operation and accountability are not identified clearly. Because the Law on State Bank stipulates: the State Bank of Vietnam exercises state administration of deposit insurance in accordance with law while, in practice, there is no Law on Deposit Insurance. Another example is Principle 6 - Relationships with other safety-net participants. Presently, in Vietnam, the financial safety-net consists of 4 members: National Financial Supervisory Commission, State Bank, Ministry of Finance and DIV. However, the concept of financial safety-net has not been formalised. Regulations on coordination with other supervisory agencies do not exist or exist without high validity. Therefore, it is necessary to clarify the notion of independence in terms of both profession and operation mechanism of DIV in this whole linkage. Thus, by doing this, each member will fully realizes its functions and powers. The principles which have been partly applied or not applied as compared with the set of Core Principles for effective deposit insurance systems need to be supplemented and improved in Law on Deposit Insurance to be submitted to National Assembly in upcoming time - Mr. Dung recommended.

This is of special significance in the context that the State Bank of Vietnam is preparing a draft regulation providing that by 2012 commercial banks must have charter capital of 5,000 billion VND, by 2015 they must raise their charter capital to 10,000 billion VND and in the upcoming time to 3,000 billion VND by September, 30, 2010. According to experts, raising banks’ charter capital is to meet requirements of international integration as well as to prevent risks. However, given the current financial and governance capacity of banks, some small banks can not avoid being put under great pressures. Facing this fact, according to General Director Bui Khac Son, in order to promote DIV to operate in accordance with the model of minimizing risks, protecting depositors’ interests and to contribute to safety in finance and banking sector, beside urgently formulating a legislative mechanism accompanying procedures on managing and supervising risks, constructing bad scenarios for deposit insurance activities, the immediate task is to apply 18 Core Principles for effective deposit insurance systems and to approve the methodology for compliance assessment as to help Vietnam to integrate further into international deposit insurance activities and through which, to reform Vietnam’s deposit insurance system toward professionalism and more effectiveness.