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Some concerned issues regarding Deposit Insurance law implementation
In order to strengthen the legal framework for deposit insurance in Vietnam, the Law on Deposit Insurance (DI) was ratified by the National Assembly in June 2012 and took effect from 1st January 2013 with many changes as compared to the previous by-laws. Public concerns are now drawn into guidance on the implementation of the Law, especially those provisions regarding depositors and insured institutions including the adjustment of DI coverage limit and premium.
Since the global financial crisis in 2008, many countries have had prompt and flexible DI policy responses such as granting more powers and tasks to deposit insurers, particularly in restructuring the banking system and resolving bad debts without using state budgets; raising DI coverage limit, enhancing regional and global integration, dealing with cross-border issues…. All aim to reinforce public confidence in the financial and banking system.
In Vietnam, the Government is restructuring the whole economy in general, and the banking system in particular. Therefore, raising public confidence through DI policy plays an important role. The master plan approved by the Prime Minister on restructuring the whole economy stresses that the restructure of credit institutions must ensure interests of depositors. This reflects special concern of the Government as well as the task of relevant agencies to protect legal rights and interests of depositors.
The enactment of the Law on Deposit Insurance (DI Law) aims at protecting the legal rights and interests of depositors, contributing to ensuring the banking system safety. Thus, DI Law really works only if it can well protect depositors, ensures a healthy and fair competition ground for DI members and encourage them to minimize risks. Meanwhile, DI law should create a proper legal framework for the Deposit Insurer to promote its role in stabilizing the financial system and raising public confidence. For that purpose, relevant agencies should swiftly promulgate necessary guiding documents for DI law implementation with special attention paid to the following issues:
DI coverage limit
The DIV coverage limit has a direct impact on depositors’ behaviors. Low coverage limit can not help maintain depositors’ confidence and in case of a bank problem, a bank run is likely to occur.
According to DI Law, the coverage limit is no longer fixed at a specific amount as previously but determined by the Prime Minister for each period. This change is important and enables flexible adjustments. The rationale is that the coverage limit should be considered upon such factors as macro-economic condition, situation of credit institutions system and deposit insurance scheme, namely: GDP per capita, risks of the banking system, public confidence in financial system, the ratio of fully insured depositors to total depositors, the ratio of fully insured deposits to total deposits, the ratio of coverage limit to the GDP per capita. Therefore, a fixed coverage limit could not be flexible enough to promptly respond to the changes of these factors and to depositors’ expectation. The current 50 million dong coverage limit is outdated, thus should be raised soon to adapt to the already changed determinant factors, so that it would help maintain public confidence in credit institutions and contribute to the Government’s efforts in restructuring the credit institutions system. Raising the coverage limit also serves to avoid bank runs which often lead to bank failures. This means the higher coverage limit is, the less likely DI payout is to be made.
Besides, there should be measures to enhance the Deposit Insurance of Vietnam’s financial capacity to meet the goal of well protecting depositors.
Moreover, raising coverage limit should be based on studying international practice, market conditions and should comply with the principle that DI scheme is for the benefits of the majority of depositors.
DI premium assessment
In Vietnam, the current premium rate of 0.15% calculated on the total balance of insurable deposits is applied to all insured institutions. The flat-rate system is suitable only for early stage of DI scheme when the deposit insurer has not been well equipped and the flat rate premiums are easy to manage, assess and collect from credit institutions. However, the flat rate system does not ensure the fairness among institutions. It induces moral hazard and does not encourage institutions to improve quality for a lower rate. Given the advancement of the banking system over the past years, the flat rate premium is not appropriate anymore.
The DI Law stipulates that: “The Prime Minister shall determine a deposit insurance premium frame on the proposal of the State Bank of Vietnam. Based on that frame, the State Bank of Vietnam stipulates specific premium rates for credit institutions upon assessing and classifying these institutions”. So far, the DI law has inherited the advanced regulation on DI premium of the Decree No. 109/2005/NĐ-CP which lays out a foundation for risk-based premium system in the coming years. This also goes well with the international trend of shifting from flat rate into risk-based deposit insurance premium.
Premium rate is a very important issue for the DI system and the banking system because it helps create a fair playground for all insured institutions. Nevertheless, the application of risk-based premium is not easy. International experience shows that risk-based premium application needs a system of criteria to classify institutions based on the risks they are exposed to. Credit institutions also need time to get ready. Normally the preparation takes 2 years, or less (with good preparation process).
DI coverage limit and premium rate are two core issues which directly impact depositors and DI member institutions. Relevant agencies should promptly promulgate documents providing guidance on these for improving public confidence and ensuring the transparency and equality among DI members. The Deposit Insurance of Vietnam, the sole agency to implement DI policy, should be active in researching and making recommendations to the relevant authorities on the guiding documents in accordance with actual condition of DI scheme in Vietnam and international practices.
