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Law on Deposit Insurance is a product of market mechanism
This is the opinion of Mr. Nguyen Van Phuc- Vice Chairman of the Committee on Economy of the National Assembly. According to Mr. Phuc, a law rather than legal documents issued by the Government is required to regulate deposit insurance. The law has a higher legal status. The promulgation of the Law on deposit insurance stems from the protection of the legal rights and interests of depositors. The State should have a mechanism in place to protect them. Without a good mechanism, risks can not be dealt with given that in a market economy money from the state budget can not be used to resolve credit failures. Sharing the same view with Mr. Phuc, Mr. Dinh Xuan Thao – General Director of the Institute of Legislative Development Study under the National Assembly’s Standing Committee said the objective of enacting the Law on deposit insurance is to protect depositors by legal means. This naturally comes from objective needs complying with the Constitution and international practices. On this matter, a representative from Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) postulated that it is necessary to promulgate the Law on deposit insurance in order to contribute to the safe and sound development of the banking industry. In fact, the participation of Vietinbank in deposit insurance has positively affected its business activities, contributing to increasing the mobilization of idle or temporally idle funds for the bank. The Law on deposit insurance shall have a stronger influence on depositors’ confidence. A leader of Maritime Bank thought it is essential to enact the Law on deposit insurance because this is a requirement of life and the society. Agreeing on this, a leader of Hanoi Joint stock Commercial Bank said, in a market economy, the special feature of the banking system is reflected in the fact that it operates based on risk taking. Thus, the State needs a mechanism to ensure the stability of the financial market. Almost all countries have Laws on deposit insurance in place to regulate this sphere. Mr. Nguyen Am Hieu-Vice Director of the Department of Economic-Civil Legislation (Ministry of Justice) stressed that it is the common thought among the public that the Government stand behind banks to protect them from failures. This view goes against market economy’s laws and the Government can not use its budget (collected from tax payers) to resolve credit failures. Therefore, a mechanism of a deposit insurance institution operating based on a high level legal platform as the Law on deposit insurance is required to protect the legal interests of depositors.
Adjustment of types of insured deposits and maximum deposit insurance coverage is required
According to current legal provisions, insured deposits are deposits in VND with the maximum deposit insurance coverage for all deposits of an individual at an insured institution of 50 million VND. With respect to this issue, representatives of some commercial banks suggested the consideration of incorporating deposits in foreign currencies into insured ones. As per a representative of Maritime Bank, insured deposits in foreign currency are required because as long as the State permit banks to take foreign currency-denominated deposits, these deposits are legal and need to be protected. Some argued that this may adversely affect the anti-dolarization policy. However, this policy should be implemented through many measures other than excluding foreign currency- denominated deposits from insured ones. Having the same opinion with the representative of Maritime Bank, the representative of Hanoi Joint Stock Commercial Bank recommended that deposits in foreign currencies should be insured properly by, for example, conversion into VND in order to ensure that all depositors in any insured bank are protected. A leader of Vietcombank stated that deposits in foreign currencies are not insured only if the government does not permit banks to take deposits in foreign currencies.
Many opinions recommended that the Law on deposit insurance should expand types of insured depositors. As per these opinions, insuring deposits of individuals, households, cooperative teams, private enterprises and partnerships only is not suitable. Concerning this, Vietcombank’s representative said that when considering the insured depositors, classifying their deposits into investment-purpose and saving-purpose ones is needed in order to ensure market principles. He proposed the consideration of including deposits of political, social and economic institutions into insured ones.
With respect to the maximum deposit insurance coverage, most points of view agreed that the current one is too low and need to be raised to strengthen public confidence. The representative of Maritime bank suggested that the maximum limit should be set at 100 million VND and the Government should be responsible for revising it if necessary.
Risk-adjusted premium system should be applied
Currently, a flat-rate premium system is applied, according to which insured institutions pay a premium rate of 0.15% per annum calculated on the average balance of insured deposits in insured institutions. Representatives of many commercial banks argue that such a system is not suited and does not ensure market principles as both good and bad banks pay the same premium rate. The representative of Vietinbank voiced his opinion that the application of a risk-adjusted premium system may indirectly affect lending rates, thereby helping avoid distortions in mobilizing deposits.
Supervisory function of the Deposit Insurance Institution
Numerous opinions stressed that the Deposit Insurance Institution should exercise supervision over insured institutions. The supervision of the Deposit Insurance Institution is different from that of the State Bank, said Mr. Dinh Xuan Thao. The Deposit Insurance Institution’s supervision is aimed to grasp the operational situation of insured institutions for ensuring safety; the Deposit Insurance of Vietnam is a professional organization to represent depositors in supervising insured institutions. This contributes to raising depositors’ confidence in the banking industry. Mr. Nguyen Am Hieu said assessment of deposit insurance activities should be based not only on economic indicators but depositors’ confidence level for the sake of commercial banks as well. The notion of supervision should be understood in a broad sense. The supervision of the Deposit Insurance of Vietnam is implemented for risk-warning purpose and contribution to ensure systemic safety, thus dissimilar to that of the State Bank. Mr. Vu Viet Ngoan-Vice Chairman of the Committee on Economy of the National Assembly said, unlike the supervision of the State Bank, the supervision of the Deposit Insurance of Vietnam is to provide information for depositors. Currently, Financial Supervisory Committee has also performed supervision. It is important that the Law should create a coordinating mechanism to avoid causing troubles to credit institutions.
Mr. Nguyen Van Phuc-Vice Chairman of the Committee on Economy of the National Assembly asserted that the supervision of the Deposit Insurance of Vietnam would lessen burdens for the State Bank. The State Bank could focus on monetary supervision.
Legal status of the Deposit Insurance Institution
According to the representative of Vietinbank, as currently stipulated, the legal status of the Deposit Insurance of Vietnam is unclear, thus reducing its powers. Therefore, it is necessary to clearly identify the institution’s legal status. Concerning this, Mr. Dinh Xuan Thao and Mr. Nguyen Am Hieu both stated that because of its role and operational objectives, the Deposit Insurance of Vietnam should be relatively independent from the State Bank in order to effectively execute deposit insurance policy.
