Trang Chủ
Insurance coverage limit represents the Government's commitment through Deposit Insurance of Vietnam to protect depositors at insured institutions. This factor can directly influence the depositors’ confidence either positively or negatively, or helps restrict the adverse reactions leading to massive bank runs which cause big losses to the banking system. This article outlines some of the benefits when insurance limit is raised.
Firstly, there are about 4 million Vietnamese people living and working abroad, mostly in the United States (2.2 million), France (300,000), Australia (300,000), Canada (250,000) [1]. Annually, oversea Vietnamese send billions of USD as remittances to Vietnam. In 2011, remittances totalled 9 billion USD. The figure reached 10 billion USD in 2012, and then increased by 1 billion USD to 11 billion USD in 2013 [3]. However, in order to keep attractring these abundant remittance flows, prompt adjustments of deposit insurance policy are required, especially raising the insurance limit which helps reinforce the confidence of depositors. Since overseas Vietnamese are familiar with bank failures, their confidence has been eroded. In addition, overseas Vietnamese are accustomed to high insurance coverage limits in the countries they live, for example: the United States (250,000 USD), France (100,000 Euro), the United Kingdom (85,000 GBP), Australia (250,000 AUD), and Canada (100,000 CAD) [4]. Therefore, a low deposit insurance coverage limit will make difficulties in attracting remittances from abroad to Vietnam. In Vietnam, the current coverage limit remains at 50 million VND, approximately 2,000 USD, which is very low compared to that of the nations above.
Secondly, since the 2008 global economic crisis, Vietnam's banking system has exposed weaknesses such as liquidity constraints, increasing bad debts, limitation in the quality of governance and management, poor products and services, some weak credit institutions have undergone restructuring, and people are more concerned about risks when choosing banks to deposit money with. Previously, depositors were only concerned about interest rates, but now they have to take other factors into consideration such as bank’s prestige, asset size, etc. This shows the confidence of depositors in the banking system has changed. Recently, the Prime Minister has once again directed the State Bank of Vietnam (SBV) to actively implement Circular 02, which regulates asset classifications, the levels and methods of risk provisioning and the use of provisioning to handle risks of credit institutions and branches of foreign banks. This confirms the Government's commitment to improve banks’ risk management in accordance to assessment criteria approaching international standards. According to experts, since the implementation of Circular 02, bad debts have increased sharply, resulting in rising risk provisions, which has affected the financial status and the performance of banks. In the short term, banks may face lots of difficulties, and declining business performance, which, in turn, has impacts on public faith in the banking system.
International experience shows that in case a country is restructuring its banking system or the central bank is preparing to apply new standards, the deposit insurance coverage limit should be maintained high in order to consolidate public confidence in the stability of the financial system and the "health" of the banking sector. This method has worked well by effectively stopping psychological changes of depositors and protecting financial consumers in a better way as the high deposit insurance coverage limit help protect the majority of depositors. According to a survey conducted jointly by the International Association of Deposit Insurers (IADI) and the International Monetary Fund (IMF) in 2010, the global economic crisis has made 48 countries increase their coverage limits. United States raised the coverage limit from 100,000 USD to 250,000 USD, EU from 50,000 Euro to 100,000 Euro. 19 countries even provided blanket guarantee (Germany, Austria, Thailand, Singapore...). Besides, the United Kingdom’s Financial Services Compensation Scheme (FSCS) has reformed the deposit insurance scheme after the collapse of Northern Rock bank, raising the coverage limit for all bank deposits from 35,000£ to 50,000£ since October 7, 2008, which helps protect depositors in the country and prevent deposit outflows to neighbor countries which committed to have full coverage.
From the above benefits, it can be seen that raising the deposit insurance coverage limit in the current period does not only have direct impacts on public’s confidence and better protect the interests of depositors, but also helps stabilize the development of the banking system in Vietnam and attracts idle money from people both at home and abroad. Also, in the context of integration and globalization, raising insurance limit helps avoid the risk of deposit outflows to countries having higher coverage limits.
Ha Viet Thang – Division of operation
(Deposit Insurance of Vietnam_North Central Regional Branch)
References
1. http://www.tgvn.com.vn/Item/VN/KieuBao/2012/8/AC00DE8998409F1F/
2. http://data.worldbank.org/indicator/BX.TRF.PWKR.CD.DT
3. http://www.tapchitaichinh.vn/Vang-Tien-te/Ngan-hang-don-kieu-hoi/39138.tctc
4. http://en.wikipedia.org/wiki/Deposit_insurance
