The objectives of pubic policy on DI
One of core principles for effective DI systems developed by the Basel Committee on Banking Supervision (BCBS) and the International Association of Deposit Insurers (IADI) highlights the appropriate objectives which are expected to achieve by a deposit insurer. These objectives should be formally specified, comply with the operational model of the deposit insurer and well integrated into the design of the DI system. The principal objective for DI systems is to contribute to the stability of the financial system and to protect depositors. The objectives can be categorized into the following groups:
First, to protect uninformed depositors who are unable to assess the risk of bank failure and can hardly withstand capital losses by providing a reimbursement scheme; encourage depositors to take part in financial assessment and bank supervision and to exercise market discipline;
Second, to establish a mechanism whereby a bank must bear costs when it fails, thus ease the burden to the economy; boost competition in the banking sector by reducing hindrances for competition; create favorable conditions for transitioning from a blanket guarantee to a limited coverage deposit insurance system;
Third, to prevent crises and promote financial stability; encourage savings and support economic growth; contribute to an orderly payment system; contribute to minimizing the impacts of economic downturns.
Public policy under different DI models
In each country, choosing a DI model is closely connected with contents of the country’s DI policy. Presently, in the world, there are 3 available models, namely Pay-box, extended Pay-box and Risk Minimizer. Each country depending on its political regime, socio-economic conditions, structure of the financial-banking system and level of depositor protection uses a proper model to meet the country’s public policy objectives.
Under the Pay-box model:
The main task of the deposit insurer is to make deposit insurance payment to insured depositors when an insured bank becomes bankrupt. Therefore, DI policy aims at 2 main objectives: protecting small depositors by providing a pay-out scheme; reducing burden to the government and requiring banks to share costs for bank resolution.
Under the extended Pay-box model:
Objectives of DI policy are to minimize risks, avoid systemic failures or financial crisis, and enhance public confidence. Accordingly, the deposit insurer is granted more responsibilities and powers such as: providing financial assistance for DI members facing liquidity problems, supervising and warning DI members against risks, taking part in dealing with bad debts and collecting reimbursed amount from failed DI members.
Under the Risk Minimizer model:
DI policy can best protect depositors, contribute to the safety of the financial system and participate in reforming the banking system. The deposit insurer is empowered to: cooperate with government agencies to supervise banks and other financial institutions, calculate DI premiums based on risks that each bank is exposed to, receive and resolve failed DI members, invest idle capital in order to preserve and develop DI Fund and enhance financial capability.
The US’s DI policy
Around the world, over the last years, most DI schemes have effectively carried out DI policy, thereby contributing to nations’ goal of sustainable socio-economic development. Among deposit insurers, The Federal Deposit Insurance Corporation (FDIC) has best implemented DI policy and established itself as an important player in the financial safety net in the US.
FDIC has made prompt pay-out to depositors, thus protected their interests and reduced losses to the banking system and the economy. In addition, FDIC has raised the coverage limit gradually to match conditions of each period in order to strengthen public confidence, boost capital mobilization as well as keep up with inflation. In the recent global financial crisis, in order to rescue the financial market as well as enhance depositors’ confidence, FDIC increased the deposit insurance limit from $100,000 to $250,000, which was effective from October 3, 2008, through December 31, 2010.
FDIC operates under the Risk Minimizer model and is considered as a typical deposit insurer in terms of examining, supervising and resolving failing and failed DI members. Through these operations, FDIC has contributed to restraining bank risks, assisting troubled banks to overcome difficulties.
Deposit Insurance of Vietnam (DIV) implementing DI policy
Deposit Insurance of Vietnam (DIV) has come into operation since July 7, 2000 with the aim of safeguarding interests of depositors, contributing to the stability of DI members and the safe and sound development of the banking system. DIV is the sole deposit insurer in Vietnam. Over the past 13 years, DIV has implemented DI policy effectively and has gradually asserted its role in the renewing and restructuring of the financial and banking system.
At the very beginning, DIV already had the legal framework for its operations consisting of government degrees, circulars, and regulations covering: insured credit institutions, insured deposits, DI coverage limit, DI premium, rights and obligations of the deposit insurer.
DIV directly protects insured depositors by reimbursing insured depositors. From its establishment to March, 2013, DIV made deposit insurance payment of VND 21.8 billion to 1,623 depositors at 38 dissolved credit institutions. Pay-out was made in a timely manner, significantly contributed to avoiding bank runs and consequent domino failures, enhancing public confidence.
Besides, DIV safeguards insured depositors indirectly by examining, supervising DI members.
DIV supervises 100% of insured institutions. As of October, 2013, DIV had supervised 90 commercial banks, 01 cooperative bank, 1,144 People’s Credit Funds. In addition, DIV has conducted many on-site examinations at insured institutions. Through supervision and examination, DIV has helped the insured institutions take measures to deal with risks and stabilize their operations.
For those institutions which faced temporary liquidity problem, DIV has provided financial assistance to help them return to normal gradually, thus contributed to strengthening the systemic stability of the banking system.
The Law on DI and DI policy
In order to strengthen the legal framework for DI to meet the requirements of the socio-economic development and international integration of Vietnam, the National Assembly XIII’s 3rd session ratified the Law on DI (No. 06/2012/QH13) on June 18, 2012 which was effective from January 1, 2013. The new Law reiterates the objectives of DI policy, namely protecting legal rights and interests of depositors, contributing to maintaining to stable operation of credit institutions and ensuring the safe and sound development of banking activities. DI policy reflected in the Law on DI is elaborated as follows:
Insured depositors are individuals who have deposits in Vietnam Dong with DI members. Therefore, as compared to the previous stipulations, the Law excludes deposits of institutions. This can be explained that institutions’ deposits are mainly for payment, thus highly liquid. If these deposits were insured, much pressure would be put on the deposit insurer’s reimbursement ability given its current modest financial capability. This provision helps to meet the ultimate goal of deposit insurance, namely protection of the vast majority of depositors.
The Law on DI does not specify the coverage limit but entitle the Government to set a proper value for each period. This is expected to further strengthen public confidence in the banking system, thereby contributing to the stability of the financial and banking sector.
Instead of the current flat rate of 0.15% per annum, DI premiums will be risk-based and within the frame set by the Government. This will ensure fairness, enhance operational effectiveness of credit institutions, accelerate the accumulation of DI fund and contribute to constraining systemic risks.
The deposit insurer is entitled to take part in special control, management and liquidation of assets of failed DI members to make sure that the organization will well protect depositors and clearly determine the boundary of its role in ensuring the safety of the national financial system.
In order to further improve the effectiveness of DI policy, some following issues should be paid more attention:
- Setting a proper level of the coverage limit to protect the vast majority of depositors: there should be a flexible mechanism for prompt adjustment of the coverage limit in each period. During a crisis or an unusual situation, it should be possible to shift to a blanket guarantee system.
- Enhancing public awareness of DI policy: This task should involve DI members so that depositors can adequately get information on financial and banking activities as well as the coverage of DI policy.
- The role of the deposit insurer in supervising, warning of bank risks should be made clearer. A proper supervision model should be designed to ensure the effectiveness of the deposit insurer’s supervision.
- There should be a flexible mechanism for adjusting DI premium frame, DI premium rates in order to build the deposit insurer’s target fund which is large enough to resolve failures in case of a systemic crisis and to reduce or avoid the use of State budget.
In the time to come, in the context of faster development of the banking system, greater risks and challenges confronting the world economy, DI system in each country needs to further improve the effectiveness of DI policy in order to consolidate public confidence in the banking system. In Vietnam, hopefully, with the strengthened legal framework, DI activities will better meet the objectives of DI policy.
References:
- Core principles for effective deposit insurance systems
- The Law on Deposit Insurance passed at the National Assembly XIII’s 3rd session on June 19, 2012
- Decree No.89/1999/ND-CP of the Government on Deposit Insurance dated September 1, 1999 and Decree No.109/2005/Nd-CP of the government dated August 24, 2005 amending and supplementing a number of articles of the Government's Decree No.89/1999/ND-CP on deposit insurance
- DIV’s annual reports
- Some articles on websites.