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The Role of the Deposit Insurance Organization in the Resolution and Restructuring of Weak Credit Institutions
The resolution and restructuring of weak credit institutions (CIs) is a difficult and complex issue, posing major challenges for governments and agencies within the financial safety net across countries. International experience demonstrates that the successful resolution and restructuring of weak CIs requires the combination of several key elements, including a comprehensive, coherent, and consistent legal framework; clear allocation of functions and responsibilities along with effective coordination among financial safety net participants — including deposit insurance organizations; thoroughly prepared contingency plans and scenarios with flexibility in applying appropriate solutions based on real-time developments; sufficient resources to support the resolution process; and effective communication.
In many countries around the world—including several in Asia, such as Indonesia, Taiwan, South Korea, and Japan—deposit insurance organizations' roles and responsibilities in the resolution and restructuring of weak CIs are clearly and comprehensively stipulated in legislation, enabling these organizations to participate effectively in the resolution process.
In Indonesia, three laws define the roles of the Indonesia Deposit Insurance Corporation (IDIC) in the restructuring of weak CIs: the Deposit Insurance Law, the Law on the Prevention and Resolution of Financial System Crises, and the Financial Sector Development and Strengthening Law. The Deposit Insurance Law and the Crisis Management Law assign IDIC responsibilities during financial crises, including early intervention in troubled banks and management of bank restructuring programs. The Financial Sector Development and Strengthening Law establishes a unified framework for the restructuring of credit institutions and the roles of financial safety net members, including IDIC.
The Taiwan Deposit Insurance Act, amended in 2007 and 2010, introduced provisions allowing the Central Deposit Insurance Corporation (CDIC) of Taiwan to participate in the restructuring of weak credit institutions with responsibilities including financial assistance, establishment of bridge banks, advance payments, and payouts.
The Korea Depositor Protection Act specifies various forms of financial assistance provided by the Korea Deposit Insurance Corporation (KDIC) to troubled credit institutions. KDIC also serves as an intermediary in the merger, transfer, or takeover of insolvent institutions. Furthermore, South Korea has established a legal framework for resolving insolvent credit institutions under the Act on the Structural Improvement of the Financial Industry.
Japan’s Deposit Insurance Act also stipulates specific provisions enabling the Deposit Insurance Corporation of Japan (DICJ) to participate in the resolution and restructuring of both non-systemically important and systemically important credit institutions.
In Vietnam, shortly after its establishment under Decision No.218/1999/QD-TTg dated November 9, 1999, by the Prime Minister, the DIV began its role by reimbursing insured deposits to thousands of depositors at dissolved People's Credit Funds (PCFs) and participating in the liquidation of such institutions. DIV also provided financial support loans to help several PCFs overcome difficulties, thereby reinforcing public confidence during a period when the banking system was under severe stress due to the aftermath of the 1997 Asian financial crisis.
In recent years, under the provisions of the 2012 Law on Deposit Insurance and the 2017 Law on Credit Institutions, DIV has actively participated in the restructuring of weak credit institutions placed under special control by the State Bank of Vietnam (SBV), with tasks including:
(i) Granting deposit insurance fee exemptions to insured institutions placed under special control, following SBV's decision;
(ii) Assigning personnel to Special Control Boards at such institutions upon request from SBV (since 2013, 80 staff assignments have been made to Special Control Boards at PCFs under special control);
(iii) Participating in the assessment of recovery plan feasibility for certain PCFs under special control;
(iv) Nominating personnel to assume the position of Director at one PCF under special control as designated by SBV, and continuing to coordinate with regional SBV branches to appoint managers and executives at other PCFs under special control.
Regarding the mandate of special lending, in accordance with the provisions of the 2017 Law on Credit Institutions, the DIV has received applications for special loans from several People's Credit Funds (PCFs). However, since these institutions have not yet met the stipulated conditions, DIV has not proceeded with the disbursement of such loans.
New Mandates and Requirements for the DIV
The project "Restructuring the system of credit institutions in association with the settlement of non-performing loans for the 2021–2025 period", issued under Decision No.689/QĐ-TTg dated August 6, 2022, by the Prime Minister, identifies among its key tasks and solutions the need to study and supplement the functions and duties of DIV, enabling its participation in the restructuring of weak CIs; and to mobilize and utilize all resources in support of such restructuring, including resources from DIV's operational risk reserve fund.
The Deposit Insurance Development Strategy to 2025, with an orientation toward 2030, approved by the Prime Minister under Decision No.1660/QĐ-TTg dated December 30, 2022, also specifies DIV's mandate to actively participate and closely coordinate with the SBV in the special control process of insured institutions in distress, with the aim of protecting depositors’ interests.
Particularly, the 2024 Law on Credit Institutions and relevant circulars issued by the SBV have assigned a number of important duties to DIV in the process of restructuring weak CIs, including:
Nominating personnel to be appointed by SBV branches as Chairpersons and other members of the Board of Directors; Heads and members of the Supervisory Board; General Directors (CEOs), Deputy General Directors, and other equivalent titles in PCFs under special control, as required by the SBV;
Participating in the development of restructuring plans for CIs under special control, including evaluating the feasibility of recovery plans, merger, consolidation, or full transfer of shares and contributed capital in PCFs under special control; contributing to the development of bankruptcy plans for such CIs; cooperating with the special control Committee and the institution under special control to propose that the SBV submit to the Prime Minister a decision on the deposit insurance reimbursement limit; coordinating with the Special Control Committee, the PCF under special control, and the Cooperative Bank of Vietnam (CBV) to finalize the bankruptcy plan for the PCF after the reimbursement limit is approved by the Prime Minister;
Providing special loans to commercial banks (CBs), CBV, and microfinance institutions (MFIs) to support the implementation of recovery plans; granting special loans to commercial banks subject to mandatory transfer to facilitate such transfers; providing special loans to CBs, CBV, PCFs, and MFIs experiencing massive deposit withdrawals;
Purchasing long-term bonds issued by CIs subject to mandatory transfer;
Obtaining special loans from the SBV in cases where DIV's operational risk reserve fund is insufficient to reimburse depositors after a CI's bankruptcy plan is approved; developing plans to increase deposit insurance premiums to repay such special loans; and using funds recovered from loan repayments by CIs proceeds from the sale of securities held by DIV, liquidation of assets of CIs that received special loans, and deposit insurance premiums to prioritize repayment of special loans to the SBV.
Amending and Supplementing the Law on Deposit Insurance – An Urgent Necessity
The 2024 Law on Credit Institutions introduces many new provisions, forming a vital legal foundation for the DIV to engage more deeply in the restructuring of weak CIs. However, several functions and mandates assigned to the deposit insurance organization under this Law have not yet been incorporated into the current Law on Deposit Insurance, including:
- Provisions allowing DIV to nominate personnel to assume management and executive positions at People’s Credit Funds (PCFs) under special control as required by the State Bank of Vietnam (SBV);
- Provisions on participation in the development of restructuring plans for CIs under SC;
- Provisions on special lending activities by DIV;
- Provisions permitting DIV to borrow special loans from the SBV in cases where its operational risk reserve fund is insufficient to reimburse depositors after a CI’s bankruptcy plan is approved.
Thus, the Law on Deposit Insurance must be urgently revised and supplemented to ensure coherence and consistency among legal documents and to establish a clear and complete legal framework for DIV's expanded involvement in the restructuring of weak CIs.
Additionally, to enhance DIV's role in the restructuring process, amending the financial mechanism to strengthen the institution's financial capacity is essential. This is aligned with the objectives set out in the Deposit Insurance Development Strategy to 2025, with an orientation to 2030.
Currently, under the existing financial mechanism, strengthening DIV’s financial capacity remains challenging due to:
Limited annual allocations to the Development Investment Fund, leading to insufficient resources to increase DIV’s charter capital to VND 15 trillion by 2030, as required by the Development Strategy. Notably, the State will not provide additional capital, and increases must rely solely on DIV’s own retained earnings.
According to the 2012 Law on Deposit Insurance, DIV is only allowed to invest its temporarily idle capital in government bonds, SBV treasury bills, or deposits at the SBV. Currently, 99% of idle funds are invested in government bonds. However, in recent years, returns from government bonds have declined due to low interest rates, negatively impacting DIV’s income and the growth of its operational risk reserve fund.
Based on the issues outlined above, to ensure coherence within the legal framework and provide favorable legal conditions for DIV’s participation in restructuring weak CIs, it is necessary to promptly review, revise, and supplement the Law on Deposit Insurance, specifically in the following areas:
First, add provisions defining DIV's rights and responsibilities in nominating qualified individuals to assume roles such as Chairperson of the Board of Directors, General Director (CEO), and other managerial and executive positions at PCFs under SC as required by the SBV. Also, include provisions regarding participation in the development of restructuring plans for weak CIs.
Second, revise and supplement provisions on DIV's participation in the restructuring of weak CIs to align with the 2024 Law on Credit Institutions, enhancing DIV's role, especially in special lending, to mobilize resources for restructuring efforts.
Third, add provisions on the financial mechanism to enhance DIV’s financial strength, facilitating more effective involvement in restructuring processes. Specifically:
- Revise provisions on capital sources, financial regimes, accounting, and auditing for DIV to ensure alignment with the current legal framework, enabling the accumulation of funds to increase charter capital and enhance financial capability;
- Expand allowable investment forms (beyond those currently permitted by Law) to increase the scale of the professional reserve fund. Specifically, allow DIV to use idle capital to:
- Buy and sell government bonds, local government bonds, and SBV treasury bills;
- Buy and sell bonds and certificates of deposit issued by state-owned commercial banks and joint-stock commercial banks with over 50% state ownership;
- Deposit funds not only at the SBV but also at the above-mentioned commercial banks.
Expanding investment options must be accompanied by risk control provisions to ensure capital safety in DIV's investment activities.
Reports by the International Association of Deposit Insurers (IADI) show that deposit insurers are being entrusted with more tools and playing increasingly important roles in resolving weak CIs. Therefore, amending and supplementing the Law on Deposit Insurance is an urgent and essential step. It would help create a consistent legal framework that empowers DIV to play a more effective role in restructuring weak CIs, contributing to a stable and sound banking system, and better protecting depositors' legitimate rights and interests.
Mr. Dang Van Toi – Member of the Board of Directors, DIV
Communication Department (Translation)
