Deposit insurance – an essential tool of national finance

Financial “safety valve”

Dr Bui Khac Son, General Director of the Deposit Insurance of Vietnam, member of the National Financial and Monetary Advisory Board, said in an interview that the Deposit Insurance of Vietnam (DIV) was founded in 1999 in the context that many countries in Asia were establishing or reforming their deposit insurance (DI) system with the belief that the DI system would serve as a safety valve for financial system in post- Asian crisis.

By that time, transition economies also started DI schemes in accordance with their market economy orientation. The establishment of the DIV was a right decision of the Party and the Government in the stage of transition from a centrally-planned to a market-oriented economy.

DIV is a state non-profit financial institution, which was allocated with an initial charter capital of 1.000 billion dongs. By January 2008, the capital was raised to 5.000 billion dongs.

DI premium is a regular source for the DI fund. Currently, a flat rate is applied to all insured institutions at 0.15 % of the total insured deposits.

Main operations of the DIV are examination, supervision (over insured institutions as commercial banks, people’s credit funds, financial companies). These operations help strengthen public confidence in the financial and banking system, prevent bank runs – one of the causes of bank failure contagion. 

Since its foundation, DIV has conducted off-site supervision over all insured institutions including 88 commercial banks, 12 non-bank credit institutions and 1,072 central and local people’s credit funds.    

DIV has the ultimate mandate of protecting depositors and contributing to the safe and sound development of the financial system.

Specifically, whenever an individual deposits his or her money in VND - denominated account(s) with an insured institution, this money is automatically insured. The insurance premium is paid by the insured institution.

In case of bankruptcy or closure for any reason, the depositors will be paid insurance for their deposits by DIV as regulated by legal documents. 

By 2010, DIV had made insurance payment of more than 18 billion dongs and recovered nearly 8 billion dongs to make up for resolution cost. 

The need for reinforcing the “valve system”

Together with the constant development of the economy generally and the financial system particularly in recent years, many shortcomings of the current DI policy have been exposed such as low insurance coverage, financial capacity, risk supervision and evaluation, financial assistance, receivership and resolution, …

At present, the DIV’s financial capacity remains limited. According to international practices, the ratio of DI fund to the total insured deposit (reserve ratio) ranges between 2.5 - 3 %. In Vietnam, this ratio stays at 1%, rather low compared with other countries.

Moreover, the current insurance coverage, though raised up to 50 million dongs per depositor in 2005, is still low.

Low insurance limit prevents full effectiveness of DI policy. At the time of setting insurance coverage, it was roughly as much as 5 times Vietnam’s GDP per capita covering roughly 90 per cent of depositors. However, the coverage now is not suitable any longer due to fast economic growth. The current GDP per capita stands at about 1,100 USD.

The existing DI policy does not cover foreign currency-dominated deposits. This means a considerable part of depositors are not protected if bank failures happen.

The above-mentioned shortcomings affect the effectiveness of DI policy and lower puplic confidence in the banking and financial system.

Given the importance of DI system in the era of global integration, especially in post-crisis time tagged by valueable lessons for the world economy, these shortcomings should be settled for enhancing the role of DI system in the time to come.

In fact, legal framework for DI system in Vietnam is going under improvement for resolving the shortcomings and futher increasing the effectiveness of the DIV. Especialy, the Law on Deposit Insurance has been put in to the 2011 agenda for building law and ordinance of the National Assembly.