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Early intervention in problematic banks - Recommendations of the International Association of Deposit Insurers
According to the International Association of Deposit Insurers (IADI), early detection and timely intervention of weak banks is very important for the effective and stable operation of the deposit insurance system. This process helps the deposit insurance carefully prepare for a bank failure through accumulating and allocating financial, human resources and other necessary resources to reimburse depositors, or agree to transfer the deposit as part of the acquisition and receivership transaction in the event of an incident. Timely intervention at an early stage can reduce the likelihood of bank resolutions, contribute to maintaining system stability and public confidence, better protect depositors and minimize losses to the deposit insurance fund.
Normally, the Central Bank will be the agency responsible for early detection and timely intervention of weak banks. At the same time, the role of the deposit insurance in this process depends on the operating model of the deposit insurance organization and the characteristics of each country. Assigning the task of early detection to deposit insurance organizations will create a cross-comparison mechanism between agencies in the financial safety net, thereby improving the effectiveness of system supervision and minimizing ethical risks in implementing deposit insurance policies.
In some countries, the deposit insurance is also empowered to provide quick redress or other forms of intervention. The goal of intervention is to require banks to fix problems, manage risks and minimize losses to depositors, the banking system and the economy caused by bank failures. For the deposit insurance organization to effectively participate in early detection and intervention, the deposit insurance organization needs to have timely and accurate access to relevant information. There is an effective mechanism for sharing information and coordinating actions with relevant agencies. At the same time, information sharing should be specified by law or formal agreements between the parties.
Practical implementation in Vietnam
In Vietnam, the State Bank of Vietnam (SBV) is the main agency responsible for early detection and timely intervention of weak credit institutions. DIV supports the SBV in the process of early detection and timely intervention through remote supervision, on-site examination and participation in special control process.
In recent years, DIV has actively and effectively deployed two key operations - supervision and examination, especially in-depth examination under the direction of the SBV to detect and recommend the SBV to promptly resolve violations of legal regulations on deposit insurance, contributing to limiting fraud and profiteering from insurance proceeds to better protect the legal rights of depositors; early warning of risks threatening safety in the banking system.
Regarding participation in special control, in the amended Law on credit institutions (2017), in addition to participating in special control, the role of DIV is raised one step when it is assigned additional tasks in the process of restructuring credit institutions. Such as: participate in assessing the considerations of recovery plans, merger, consolidation, and transfer of all shares and capital contributions; participate in developing bankruptcy plans; special loans; buy long-term bonds from supporting credit institutions; free deposit insurance fee.
At the ongoing XV National Assembly forum, the issue of early intervention in the draft Law amending the Law on credit institutions is an issue of interest to many National Assembly delegates. One of the notable points is that this drafts the early intervention process for credit institutions and the support measures at the early intervention stage, based on the support measures during the special control stage. In particular, the draft Law adds support measures from supporting credit institutions, and at the same time includes the participation of DIV and Cooperative Bank of Vietnam. These are all resources mobilized from within the credit institution system, enhancing the responsibility of credit institutions for maintaining and ensuring system safety, while reducing pressure and costs for management agencies in the process of resolving weak credit institutions.
Specifically, for participation in the early intervention process of DIV, to promptly protect the interests of depositors and ensure the safety of the credit institution system, the SBV has documents applying for early intervention that at least include the following contents: situation and reasons why credit institutions need support from DIV. Depending on the current situation, nature, and level of risk of the situation requiring early intervention of credit institutions and foreign bank branches, DIV can participate in one or more of the following early intervention measures: develop a deposit reimbursement plan; special loans to support liquidity when credit institutions are at risk of insolvency or falling into a state of insolvency, threatening the stability of the system; and to support the implementation of remedial plans, support plans before special control, forced transfer plans...
Synchronize the legal foundation on early intervention for deposit insurance
Overall, the addition of DIV's participation in the early intervention process shows the role of the DIV in ensuring system safety, as well as participating in restructuring credit institutions and protecting the legal rights of depositors are increasingly appreciated.
However, to make use of the resources of the deposit insurance organization, many opinions believe that it is necessary to amend the Law on deposit insurance soon to ensure synchronization and consistency with the provisions of the Law on credit institutions. In particular, clearly orient the use of deposit insurance tools in the early intervention process through clear regulations on the rights and obligations of deposit insurance organizations; added authority for DIV to participate in restructuring and resolving weak People's Credit Funds (PCFs)... in a more specific way.
On the DIV side, it is known that amending the Law on deposit insurance is also one of the important tasks set out in the Development Strategy of Deposit Insurance to 2025, with a vision to 2030 approved by the Prime Minister. It is determined that amendments and supplements to the Law on Deposit Insurance will include improving the effectiveness of examination, supervision and early warning activities; regulations on the rights and obligations of the deposit insurance organization in supporting the inspection and supervision functions of the SBV for PCFs in the period 2022 - 2025.
DIV will improve the effectiveness of coordination and information provision with the SBV and relevant agencies; build a complete and synchronous information and data system to ensure a complete and reliable source of information. Regularly evaluate the current situation of organizations participating in deposit insurance to predict the ability to reimburse deposit insurance and have a plan to build revenue sources if the institution falls into a state of inability to reimburse depositor or bankruptcy.
At the same time, improve the effectiveness of examination, supervision, and early warning activities through conducted in-depth examination of insured deposits at 100% of weak insures institutions according to supervision results; complete risk supervising methods and sets of supervising indicators, focusing on detecting and early warning of potential risks for organizations participating in deposit insurance, to suit market developments and requirements of SBV in each period for the 2025-2030 period.
Applying advanced monitoring models to ensure that insured institutions comply with legal regulations on insured deposits, detecting and early warning of potential risks to insured institutions aims to promptly protect the rights and interests of depositors.
Participate and closely coordinate with the SBV in the process of special control over weak public institutions, to ensure the rights of depositors. Implement articles and tasks specified in the Law amending and supplementing several of the Law on credit Institutions; develop a project to apply additional measures and forms of handling announced institutions in accordance with international practices and actual conditions in Vietnam.
Along with that, increase the efficiency of reimbursement process and asset liquidation to ensure the prevention of deposit insurance profiteering, and improve the responsibility of coordination between the deposit insurance organization and relevant agencies; create a legal corridor for deposit organizations insurance to participate in liquidating assets of insured institutions to maximize recovery value.
Develop backup plans and pilot compensation for each type of public institutions; develop a reimbursement notebook for each type of accredited institutions to standardize the reimbursement process, diversify reimbursement forms, and apply technology to the reimbursement process to shorten the actual reimbursement time to depositors.
Strengthening the role of the deposit insurance organization in early detection and timely intervention is an issue that has received a lot of domestic and international attention recently, in the context of the need to strengthen the foundation for credit institutions, Ensuring system safety as well as protecting depositors' interests is increasingly emphasized. This is also the topic of the international conference that the DIV will host on November 9-10, 2023 with experiences sharing on promoting the role of the DIV in the process of early intervention from advanced deposit insurance model under the Asia-Pacific Commission ( APRC), as well as opinions of representatives of the State management agency - SBV - orientation and application of international practices in implementing deposit insurance policy in Vietnam in the near future.
It is expected that with the information obtained from the workshop will strengthen the role of the deposit insurance organization in early detection and timely intervention, it will help the DIV draw practical lessons to carefully prepare finance and human resources, applying modern technology to improve the quality and efficiency of professional activities... When the legal basis for early intervention of weak credit institutions is synchronized - specifically the Bill on the revised credit institutions approved by the National Assembly, followed by Insurance Law on deposit insurance, will be a push to help the DIV prepare to participate in the early intervention process to protect depositors, ensure the system safety of credit institutions becomes more active and effective.
Communication Department
