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On the trigger of the deposit insurance payout
In the submission dossier for the draft Law on Deposit Insurance (DI) (amended), according to the State Bank of Vietnam (SBV), the current regulations on the trigger of insurance payment do not ensure timeliness and do not provide a basis for the Deposit Insurance of Vietnam (DIV) to make early payouts, particularly in a situation where a CI experiences an event that risks causing system insecurity. The fact that the DIV can only begin reimbursement progress after a CI is decided to go bankrupt will not ensure the DIV's role in stabilizing depositor sentiment, preventing a failure, and best protecting their interests. On the other hand, the deposit insurance trigger is inconsistent with the provisions of the Law on Credit Institutions and does not reflect practical realities, thereby limiting the DIV's role in making insurance payments to depositors.
According to the draft Law on DI (amended), the deposit insurance payout shall be triggered upon the occurrence of any of the following events:
(1) The bankruptcy plan of the credit institution is approved, or the SBV issues a written determination that a foreign bank branch is unable to repay deposits to depositors.
It is proposed to supplement this provision to synchronize with the provisions of the Law on CIs.
(2) The SBV issues a written decision suspending the deposit-taking activities of a CI under special control that has accumulated losses exceeding 100% of its charter capital and reserve funds, according to the most recent audited financial statements.
According to the Law on CIs, the DIV can only reimburse depositors after the CI's bankruptcy plan is approved. However, in practice, the approval of CI bankruptcy plans often takes a long time and is very difficult to implement. Therefore, an earlier triggering event is necessary to enable DIV to reimburse depositors in a timely manner.
The deposit insurance payout trigger under the Law on CIs is associated with three simultaneous conditions:
i)The CI must be placed under special control; ii) The CI has accumulated losses greater than 100% of the value of its charter capital and reserve funds according to the most recent audited financial report; iii) The SBV issues a written decision suspending deposit-taking activities. Technically, when the above three conditions occur simultaneously, the CI will not be able to continue operating. Therefore, the DIV's reimbursement at this time is appropriate and necessary, enabling the DIV to fulfill its core mandate of protecting depositors.
According to the SBV, the regulation on early payout in the draft Law on DI (amended) helps depositors quickly access insured deposits, strengthens trust, thereby limiting the risk of bank runs. This is also a measure to quickly and decisively handle weak CIs, provided that people's deposits have been paid in accordance with regulations.
(3) To ensure system safety and public order as prescribed in Clause 4, Article 162 of the Law on CIs, SBV shall report to the Government for decision on requesting the DIV to reimburse in case a specially-controlled CI loses or is at risk of losing its payment capacity according to the Law on CIs.
This regulation addresses situations involving large CIs under special control. Accordingly, bankruptcy or suspension of deposit-taking activities of large-scale CIs may affect the safety of the system and social order and safety. This regulation is necessary to create additional payout channels of the DIV when a large-scale CI encounters problems (limiting the need to use the special lending channels of the SBV or the DIV).
On the deposit insurance coverage limit
According to the draft Law on DI (amended), the Governor of the SBV shall prescribe the deposit insurance coverage limit in each period. In special cases, when the deposit insurance payout is triggered, the Governor of SBV shall decide on a coverage exceeding the prescribed limit, up to the total amount of insured deposits of depositors at the insured institution. The deposit insurance coverage limit in the case of implementing the bankruptcy plan of a CI under special control shall be determined in accordance with the provisions of the Law on CIs.
Thus, in the draft Law on DI (amended), the authority to set the limit of insurance payments for each period is transferred from the Prime Minister, as provided under the current law, to the Governor of the SBV. According to experts, it is consistent with the Party and State's policy of promoting decentralization and the delegation of power, and it aligns with the SBV's authority, functions, and tasks. This approach also ensures flexibility and reduces the number of procedures required to change the deposit insurance coverage limit.
Many also believe that the regulation on special cases, allowing the Governor of SBV to set the maximum coverage limit based on all insured deposits of depositors, is necessary. The reason is that this is a crisis management tool that ensures the State can protect all legitimate rights of depositors when serious incidents occur, thereby preventing the risk of mass withdrawals and maintaining the stability of the financial and banking system.
On the other hand, the current deposit insurance coverage limit has been in place since 2021 and has become increasingly inadequate. Adjusting the deposit insurance coverage limit is necessary, and the DIV will research and propose to the SBV an increase in the deposit insurance coverage limit after the Law on DI (amended) takes effect.
Communication Department (translation)
