The role of deposit insurance in early detection and timely intervention of weak credit institutions

First Deputy Governor of the State Bank-Mr.  Dao Minh Tu participated and gave instructions at the conference

The inevitable trend

At the conference, First Deputy Governor of the SBV Dao Minh Tu affirmed that strengthening the role of the deposit insurance organization in early detection and timely intervention is an inevitable trend, consistent with the context  in which it needs to enhance the role of the deposit insurance organization in particular and ensure the stability of the banking system in general as it is today.

Accordingly, after 24 years of operation, with the goal of becoming a financial institution that contributes to ensuring the safety of the banking system and protecting depositors, DIV has built good financial resources to reimburse  announced deposit to depositors when necessary and effectively participated in the process of restructuring the credit system recently.

First Deputy Governor - Mr.Dao Minh Tu said that up to now, the legal framework for deposit insurance activities is increasingly improved.  In addition to the Law on deposit insurance promulgated in 2012, the functions and tasks of the DIV are also stipulated in the Law on credit institutions.  "Currently, the draft revised Law on credit institutions is being actively discussed on the 15th National Assembly forum to improve regulations and resolve problems and inadequacies in the law on credit institutions" – the First Deputy Governor emphasized.

Also, according to SBV leaders, the development of the amended Law on credit institutions aims to enhance risk prevention;  build tools to manage credit institutions;  early detection and timely resolution of violations;  ensure openness and transparency in banking operations.  The amended Law on credit institutions also aims to ensure the safety of the system of credit institutions through management and control of credit activities, preventing manipulation, group interests, and cross-ownership;  resolve situations where depositors in mass withdrawal case  and have an effective mechanism to restructure specially controlled credit institutions.

"The draft revised Law on credit institutions is expected to assign the DIV a number of functions and tasks in early intervention and resolution of weak credit institutions" - the Deputy Governor further informed.  At the same time, the viewpoint of the SBV is to promote the application of international experience to the operations of the banking industry in general and deposit insurance activities in particular.

Overview of the conference

Deposit insurance - an important tool in early intervention

The workshop recognized the experience sharing of delegates from deposit insurance organizations in 13 countries, in which early detection and timely intervention of weak credit institutions play a very important role in improving efficiency and effectiveness of improving  the deposit insurance system, thereby helping the deposit insurance organizations prepare carefully when future situations arise.

Recently, failures occurring in a number of US and European banks have further affirmed the importance of early detection and timely intervention.  Mr.  Hidenori Mitsui – Chairperson of the APRC , Governor of the  Deposit Insurance Corporation of Japan affirmed that thanks to early detection and timely intervention with deposit insurance tool, risks will be minimized and is the key solution to ensure the financial system operates stably.

Delegates participate in discussions at the conference

Although DIV has professional operations with tasks prescribed by the Government, however, according to Mr.  JaeHoon Yoo - Chairman and General Director of Korea Deposit Insurance Corporation, if compared with deposit insurance in some other countries such as the US, Korea... there is still room for DIV to expand its capabilities, ensuring the stability of the financial market.  

According to the IADI 2022 annual survey, currently 25% of countries use the model of pay-box;  46% pay-box plus with extended authority through resolution methods;  17% use the model of cost minimization with the minimum cost resolution;  and the number of countries implementing the highest level of risk minimiser according to risk management and monitoring methods accounts for 13%.  Currently, Vietnam is in the 46% group - it has taken a new step but still has a long way to go to reach the modern group like Germany, Korea, America, Mexico...

Mr.  Hiroaki Kuwahara - representative of Deposit Insurance Corporation of Japan indicated that determine a bank's financial difficulties needs to be done early, based on clearly defined criteria.  The organizational mechanism must ensure that the duties, roles and responsibilities of relevant members of the financial safety net are clearly defined and ensure operational independence.

For timely intervention, when working with systemically important financial institutions, according to Mr.  Hiroaki Kuwahara, the deposit insurance organization and resolution agencies need to participate in policy decisions, as well as in formulating recovery and remediation plans, with timely access to monitoring information on a consolidated basis.  The deposit insurance organization needs to have direct access to information from member banks in a timely, accurate and appropriate manner.  At the same time, the banking examination and supervision agency and the deposit insurance organization need to have close coordination.

Actively apply international practices on early detection and timely intervention

Sharing about the role and significance of the process of early detection and timely intervention in the operations of deposit insurance organizations, Mr.  Pham Bao Lam - Chairman of the Board of Directors of DIV said that currently the above deposit insurance organizations.  The world tends to expand the task of participating in the early intervention process and the process of resolving weak credit institutions.  This issue is receiving increasing attention with many discussions, research and the participation of many international organizations.

Chairman of the Board of Directors of DIV - Mr.Pham Bao Lam said that early detection of risks and timely and effective intervention in the early stages when credit institutions begin to show signs of weakness  can contribute to overcoming risk factors and improving performance of that organization.  At the same time, timely intervention can reduce the likelihood of bank resolution;  contributing to maintaining system stability, better protecting depositors' interests and minimizing losses to the deposit insurance fund.

According to Mr.  Pham Bao Lam, in Vietnam, the Deposit Insurance Development Strategy to 2025, with orientation to 2030, is built in accordance with international principles and practices on an effective deposit insurance model.  Among them, one of the important goals set by the Strategy is to improve the quality and efficiency of deposit insurance operations;  which includes detecting and early warning of potential risks for public institutions and participating in the effective restructuring of weak credit institutions.

Besides, 2023 is also the year that the Law on deposit insurance undergoes 10 years of implementation.  In addition to research and applying international practices in general and the Core Principles for Effective Deposit Insurance Systems in particular, DIV will also continue to research and propose amendments and supplements to the Law on deposit insurance to ensure uniformity, consistent 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... in a more specific way.

Also, according to the head of DIV, the IADI APRC 2023 Workshop received sharing from speakers about the role of DIV in early detection and timely intervention;  as well as coordination between supervisory agencies and deposit insurance organizations in early detection and timely intervention.  The differences in the operating models of deposit insurance organizations at the forum have brought about rich sharing about the role of deposit insurance organizations according to each country's model, thereby providing valuable lessons to help complete the process.  Improve the legal framework for deposit insurance activities in particular and banking activities in Vietnam in general.

“During its operation, DIV will selectively absorb and apply international practices to deploy deposit insurance operations effectively.  DIV's solutions will be specific and highly practical to ensure the legitimate rights and interests of depositors, contributing to the safe and healthy development of the banking system" - Mr. Lam affirmed.