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The principles of safety and effectiveness need to be expressed from two angles. Firstly, the economic perspective: the fund must be used for the right purposes, ensuring the principle of safety and development through the investment channels regulated by the law. Secondly, it is vital to ensure financial capacity for the deposit insurer to protect the rights and interests of depositors and contribute to ensuring the safety of the financial system with the lowest costs and the highest achieved results.
Current situation of using the funds of DIV
According to Circular No.312/2016/TTBTC of the Ministry of Finance, the DIV has the following types of funds: professional reserve fund, investment and development fund, and welfare fund. These types of funds are formed from annual deposit insurance premiums, temporarily idle capital investment activities after a partial deduction to cover operating expenses of DIV; unclaimed insurance sums under Clause 6, Article 26 of the Law on Deposit Insurance; the remaining amount from the liquidation of the assets of the insured institutions; annual financial revenue and expenditure difference after setting aside the development investment fund and the bonus and welfare fund. The income from the annual deposit insurance premium is quite large. DIV has collected deposit insurance premiums exceeding 5.75% compared to the plan for the first 6 months of 2023 and reached 52.2% of the plan assigned by the SBV in 2023, of which the deposit insurance premium has been exempted for 34 specially controlled insured institutions.
From an economic perspective, the investment activities of temporarily idle capital of DIV have been implemented since its establishment. The DIV invests in the portfolios as prescribed from time to time. Before 2013, the investment portfolio of the DIV included: Government bonds; bills of the SBV; deposit at the State Treasury and the SBV; deposits, bonds, bills of state commercial banks and joint stock commercial banks classified as A by the SBV. Since 2013, when the Law on Deposit Insurance took effect, the investment portfolio of the DIV includes: Government bonds, SBV bills and deposits at the SBV. Currently, government bonds are the only safe and effective investment channel for DIV. Investment in government bonds is carried out on both primary and secondary markets according to orientation and regulation.
Over the past 24 years of operation, the investment activities of the DIV have made positive contributions to the accumulation and increase of the capital: From the initial charter capital of VND 1,000 billion, it has increased up to 5,000 billion dong. Total capital of DIV as of June 30, 2023 reached VND 102.4 trillion, and the professional reserve fund reached VND 95.76 trillion. In particular, the annual income from temporarily idle capital investment also grew positively, effectively supporting the turnover of capital for reinvestment. Basically, temporarily idle capital is carefully invested in both the primary and secondary markets to generate profits and increase the size of the deposit insurance fund, ensuring the well-being of capital adequacy and development goals from the fund
Effective deposit insurance not only helps preserve and maintain the true value of capital, but also helps improve financial capacity to ensure liquidity provision for payment, processing and support for the restructuring of credit institutions. As required by law, deposit insurance fund is invested in low-risk assets to ensure capital safety, maintain liquidity and control risks.
Difficulties and problems in using the temporarily idle capital of deposit insurance
The basic difficulty in using the temporarily idle capital of DIV is the decrease in profitability compared to the period before the Law on Deposit Insurance took effect:
Narrowed investment portfolio: As mentioned above, before 2013 (there was no Law on Deposit Insurance), DIV’s investment portfolio was more diversified including Government bonds; bills of the SBV; deposit at the State Treasury and the SBV; deposits, bonds and bills of state-owned commercial banks and joint-stock commercial banks rated A by the SBV. From 2013 up to now, (the Law on Deposit Insurance took effect), the investment portfolio includes: Government bonds, SBV bills and deposits at the SBV.
Meanwhile, there are still shortcomings with respect to the types of investments that the DIV is allowed to make. In buying government bonds, the DIV is allowed to buy government bonds on both primary and secondary markets. The proportion of investment in the primary market is main, although it is safe, it depends entirely on the issuance schedule of the State Treasury; term and volume of bids; interest rate movements in the market and investment needs of commercial banks. In the secondary market, prices in the market are not uniform; goods are scarce, depending on the seller, the market's demand and expectations, especially the strict regulations and conditions for making investments with the DIV, have lost many opportunities and reduced investment efficiency.
The Law amending and supplementing the Law on Credit Institutions allows DIV to participate more deeply in the process of restructuring credit institutions, specifically: Special lending to credit institutions placed under special control. specializing and buying long-term bonds from supporting credit institutions, participating in assessing the feasibility of credit institution recovery plans, and participating in formulating plans for bankruptcy of specially controlled credit institutions. However, at present, there are no guiding documents under the law; there is a lack of specific regulations on the use of the deposit insurance fund for restructuring, especially the lack of regulations on the limitation of the fund capital used for purposes other than payment, and on the role of the DUV in the decision to use funds other than reimbursement.
International experience in management and use of temporarily idle capital of deposit insurers
Regarding the function of participating in resolving credit institutions, contributing to ensuring system safety
Deposit insurance funds are, in principle, used to reimburse depositors in the event of bankruptcy of credit institutions. In addition, international experience also shows that this fund can also be used to resolve insured institutions to avoid the collapse of them. This can be considered as an alternative form of payment but must ensure minimal damage to the deposit insurance fund, maintain the confidence of depositors in particular and the public in general, and most importantly, ensure the core function of the deposit insurer as reimbursement.
Principle 9 of the Core Principles for èfective deposit insurance systems (IADI, 2014) as well as the Basic attributes of effective mechanisms of financial institutions (FSB, 2014) recommends that , the deposit insurer's funds may be used for the purpose of resolving the insured institution as an alternative to payment. However, the fund for resolution must not exceed the amount intended for payment to the same bank (minus the amount expected to be recovered after liquidation).
In fact, many countries have allowed deposit insurers to use funds for dealing with weak credit institutions as an alternative to payout, in order to minimize losses to the deposit insurance fund. The survey results in 2019 by the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) and the International Association of Deposit Insurers (IADI) showed that about 60% of deposit insurers responded to the survey. According to the survey, they can use the deposit insurance fund's capital to serve the settlement (32/53 organizations). Accordingly, deposit insurers can use deposit insurance funds to finance purchase and acquisition (P&A), bridge bank (BB), capital support and liquidity.
According to international experience, the forms of using the deposit insurance fund for resolution other than payout must always comply with the principle of causing less damage to the deposit insurance fund, helping to maintain public confidence, and most importantly, ensuring the proper functioning of the deposit insurance fund. The core function of the deposit insurer is payout. Therefore, all countries have built a strict control mechanism to limit the amount of funds used outside of payment, a mechanism by which multiple parties can decide on the use of the deposit insurance fund in addition to payment, and a mechanism to prevent emergency capital shortages and accumulate target funds. Specifically, 27/32 deposit insurers apply a limit on the financing used for disposal, only 5/32 institutions do not. The application of financial limits varies from country to country. The United States applies a mechanism to choose the minimum cost option, the countries of the European Union (EU) impose a maximum financial limit to be used for payment alternatives, as long as the cost of the alternative measure is applied. The potential does not exceed the cost of the payment after deducting the expected recoverable value. Participating in decision-making related to settlement activities using the deposit insurance fund as a form of loss protection for the deposit insurance fund.
Investing temporarily idle capital
International practice shows that the deposit insurer's fund is used to invest accordance with the principles of ensuring safety and capital development, ensuring the liquidity of the deposit insurer and in accordance with the law. The IADI recommends that deposit insurers be responsible for investing and safely managing the funds they manage, with specific investment policies to ensure the elements of capital preservation and maintaining liquidity, risk management policies and procedures, internal control, information disclosure - reporting system... on capital investment.
The member organizations of the Asia-Pacific region (APRC) all have legal regulations on capital sources, an important basis for ensuring investment activities when the capital is temporarily idle. To ensure safety and liquidity, most APRC members invest in safe and highly liquid financial instruments such as government bonds, bank bonds, bills, or deposit money at a healthy central bank or credit institution. Very few organization invest in high-risk financial instruments. 10/16 APRC member are allowed to deposit money at the central bank.
Some countries allow deposit insurers to invest in relatively riskier channels. In Azerbaijan, Korea, Hong Kong, Japan, deposit insurers are allowed to deposit money at sound credit institutions. The Government of the Philippines allows the deposit insurer to deposit funds at any depository bank and government financial intermediary. The Hong Kong Deposit Insurance Authority may invest in financial derivatives and government bonds issued by the Department of Treasury. In Kazakhstan, the Central Bank built a portfolio of financial instruments for the deposit insurer to reference idle capital investment, including intermediate debt securities, foreign government bonds, derivatives, and repos buying and selling. Russia is the only country that allows deposit insurers to invest in corporate shares.
Thus, an effective capital investment mechanism is an important content to ensure the financial stability of the deposit insurer. The investment structure of deposit insurers shows the diversity of laws and practices according to the conditions of each country, but must ensure the goal of preserving capital and avoiding investment in high-risk areas.
Recommendations and proposals to improve the efficiency of the use of the deposit insurance fund
Diversification of investment channels of the deposit insurance fund: it is necessary to propose amendments and supplements to the Law on Deposit Insurance and related documents allowing for additional investment portfolio, buy and sell government-guaranteed bonds; buy and sell government bonds to optimize investment portfolio; deposit money and buy bonds of State-owned commercial banks and joint stock commercial banks rated A by the SBV; buy local government bonds; buy corporate bonds...
Allowing the deposit insurer to deposit money at commercial banks: Before 2013, DIV was allowed to make deposits at designated commercial banks. Depositing money at a commercial bank brings the highest investment efficiency to DIV compared to other forms of investment. The advantage in choosing the investment term helps the DIV negotiate with partners to flexibly choose the term; agreement to withdraw before maturity and enjoy interest rate according to the corresponding term or agreement to implement floating interest rate, adjusted according to term (every 3, 6 or 12 months) in order to limit the risk of market fluctuations. Practices show that, during the period of 2000-2012, deposit insurance investments at commercial banks of were performed safely, correctly and fully collected principal and interest, without any insecurity, capital deficit - contributing to the revenue and high profit, helping supplement and turn around idle capital for investment, promoting stable development of capital.
Loosening investment conditions in the secondary government bond market: in order to create a more flexible and reasonable legal framework for the investment activities of the DIV, it is recommended to amend the regulations to allow the deposit insurer to make flexible investment choices between primary and secondary markets to maximize profits.
Strengthening the examination and supervision of temporarily idle capital investment activities: The investment process of the DIV therefore must ensure the objectives of preserving, developing capital and growing high revenue. Therefore, the DIV needs to complete regulations and investment management processes, develop specific and detailed plans, ensure closeness to reality; simultaneously manage and monitor costs effectively and economically. The monitoring and management of post-investment capital (from interest income to matured investments) must be carried out closely, ensuring the correct, sufficient and timely collection of principal and interest on investment capital - an important additional financial resources.
Strengthen the role of deposit insurance in participating in the prevention, containment and resolution of failures of credit institutions. International experience in dealing with problematic banks shows that in order to promote the effective use of deposit insurance funds both in terms of financial system safety as well as in economic efficiency, the deposit insurer should have a role to be more independent in risk control of credit institutions, participate extensively in the process of restructuring weak credit institutions, and deal with bad debts.
Therefore, it is necessary to study and propose amendments to the Law on Deposit Insurance in the direction of expanding functions and tasks so that the DIV can actively participate in both resources and tools in the process of restructuring the banking system to ensure the principle of minimum cost and system safety.
With the issues allowed by the law, it is necessary to issue guiding documents as soon as possible so that the DIV has a basis to perform its functions and tasks. For example, the issue of using the deposit insurance fund for restructuring credit institutions, the regulation on the limit of capital used for purposes other than payment, the role of the deposit insurer in deciding the use of capital other than payment.
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