Prominent international deposit insurance policies 3rd Quarter, 2012

Meanwhile, the national austerity policies undermined public confidence and incited violent protests in many countries, especially Spain and Greece. Europe once again slid back into recession and is susceptible to the risk of bank runs and insolvency in a number of places. Big banks like Barclays, HSBC, Deutsche Bank, Bank of America, Citigroup, Royal, Standard Charter, moreover, were put under investigation and fined for the money laundry and interest rate manipulation. In this context, policy makers and deposit insurance institutions have to set out appropriate policies to protect the legitimate rights of depositors. Countries therefore have come up with decisions and recommendations to increase the coverage limit for the sake of depositors against the background of deteriorated economic, financial and banking situation.

Increase coverage limit

Against the doubtful economic indicators, the US keeps conducting stimulatory policy. Europe is on the brink of another crisis. A number of big banks are under investigation which translates into a risk of bank failures. Policy makers and deposit insurers tend to increase the coverage limit in order to protect the legitimate rights of depositors and prevent the bank run.

 Strengthen the legal framework for Deposit Insurance system.

Apart from increasing coverage limit to enhance the legitimate rights of depositors, the insurers also reinforce its legal system by launching or revising Deposit Insurance Law to strengthen the powers and functions of Deposit insurance institutions.

Bosnia and Herzegovina

Bosnia and Herzegovina recently decided to amend its Deposit Insurance Law. The Law governing the Deposit Insurance Agency (DIA) is being revised to strengthen the role of deposit insurance in safeguarding the financial stability and contributing to crisis resolution. The Law includes following amendments: (i) the DIA will cover those most in need of protection by extending coverage to small- and –medium size enterprises; (ii) all Bosnia and Herzegovina banks will be members of the DIA; and (iii) Article 18 related to governance of the DIA will be amended to ensure compliance with international standards. The authorities will submit the revised DIA law to Parliament by end-March 2013.

Ukraine Deposit Guarantee Fund approved the Law “On Households Deposit Guarantee System”

In the 3rd quarter, 2012, Ukraine President Viktor Yanukovich signed and ratified the Law “On Households Deposit Guarantee System”, Ref. number 4452-VI which extended the mandate of the Deposit Guarantee Fund in the field of bank resolution, including provisional administration and liquidation of insolvent banks. The Law provided provisional administration of banks for a term of up to three months, during which a decision on the least cost resolution method should be taken. The Law cancelled the right of extending the mature debt payment and reduced the reimbursement time limit from 2 months to 7 days since resolution. The amendment proved that DGF took initiative in fulfilling the commitment with European Forum on Deposit Insurance (EFDI) to cut down the payout period. Ukraine is the very first country to revise the regulation allowing the faster payout of 7 days – the goal that EDFI has been striving to achieve after 2012. In 1998, the President of Ukraine signed the Decree «On Measures to Protect the Rights of Physical Persons as Depositors of Commercial Banks in Ukraine» which approved the establishment of the Deposit Guarantee Fund and procedures regulating the use of the Fund’s resources

Other Deposit Insurance policies

Bangladesh: Establish another Deposit insurance institution

At the meeting in August, 2012 The Microcredit Regulatory Authority (MRA) of Bangladesh reportedly created a security fund for the benefit depositors of microfinance institutions (MFIs) in the country. Index Capital Group, acting as a consultant to MRA, recently made a presentation on the proposed fund, which would cover BDT 3,500 (USD 43) per depositor, which is enough to safeguard the interest of 80 percent of the depositors. MFIs will pay into the system at a rate based on their assigned level of risk: low, medium (upper tier), medium (lower tier) or high.

According to a statement attributed to Finance Minister Ama Muhith, there are over 3,000 MFIs operating in Bangladesh, but only 600 are registered with MRA. Atiru Rahman, Governor of the central Bangladesh Bank, reportedly said the registered MFIs have 10 million clients with BDT 300 billion (USD 360 million) in deposits. A survey conducted by the Index Capital Group on 517 MFIs showed that 49 of them would fall in the low-risk category, 202 in medium-risk (upper tier), 216 in medium-risk (lower tier) and 50 in the high-risk category. The establishment of deposit insurance fund is essential to protect the interests of depositors.

EU: European Commission proposed single cross-border Deposit Guarantee Scheme

European Commission proposed the establishment of a single EU-wide Deposit Guarantee Scheme (DGS) to prevent the imminent bank runs in times of the precarious prospect as well as the financial stress triggered from currency change. Although Member States have implemented the consistent deposit insurance policies under the amended Directive 2009/14/EC effective from late 2009 with the new coverage of 100,000 euro applied region-wide from December 2010, the cross-border issues leading to banking threats are still out of the question. The consistent application of the increased coverage helps prevent the withdrawal from the bank with lower coverage to deposit in the bank with higher coverage (the same incident happened in the UK and Ireland prior to the global crisis), EU still needs the supporting mechanism for all members.  

The optimum target level is calculated to have at least 1% of the eligible deposits at EU banks on hand in the form of ex-ante financing. International analysts said this mechanism is similar to the TARP’s recapitalized fund which was established by the US during the financial crisis. Also, the deposit insurance agencies need to be set up at national level with the assistance from EU and comply with the typical regional policies.

The explicit deposit insurance system or political commitments of full coverage in the EU are insufficient to deal with the limitation in scope and the insured depositors as well as the impacts on the confidence of depositors and investors. A single deposit insurance scheme is therefore appropriate and worth considering.

In the 3rd quarter, 2012, policy-makers and deposit insurers proposed and implemented important policies to reinforce and expand the functions and mandates of deposit insurers, simultaneously prepared prerequisites to handle the future difficulties and failures since the global economy has been experiencing weak recovery, so as to contribute to maintaining the stability of the insured institutions and the soundness of the banking and financial sector.

Implications for Viet Nam’s policy

On 18 June, 2012, Vietnam National Assembly approved the Law on Deposit Insurance which will be effective on January 1st, 2013. The arrival of Law on Deposit Insurance helps create solid legal framework for the performance of Deposit Insurer. The lesson learnt from the policies of international deposit insurance organizations and the domestic and global economic situation is that Vietnam should speed up making by-laws with full guidance to guarantee the effective operation of deposit insurer and avoid impeding the insured institutions. Vietnam also should consider increasing the coverage to 3-5 times higher than the GDP per head rather than the current limit which is 1.7 times higher than GDP per head to protect the rights of depositors and maintain better the soundness of the banking and financial sector as well as the macro economy.