Trang Chủ
Currently, the Deposit Insurance of Vietnam (DIV) – a State-owned financial institution operating for non-profit purposes, implementing DI policy, helps to maintain the stability of the credit institution system, and ensures the safe and sound development of banking activities, is the sole deposit insurance in Vietnam. The DIV is tasked to realize the DI policy objectives, which help to enhance its roles in the national financial safety net.
According to the first principle of the Core Principles for effective deposit insurance systems issued by the International Association of Deposit Insurance (IADI), the most important public policy objective of DI is to protect depositors and contribute to maintaining the stability of the national financial market.
The public policy objectives of the deposit insurer must be clearly, publicly identified, officially stipulated and periodically evaluated in terms of the level of fulfillment. The public policy objectives are important reference for defining tasks and powers of the DI system. One of the prerequisites for the deposit insurance system achieving its public policy goals is that the DI system must be assigned with commensurate tasks and powers, which are clearly and specifically defined and stipulated in legal regulations and must be tailored to the public policy objectives of the system.
Conditions for fulfilling public policy objectives of the DI system
Firstly, financial capacity is a key factor leading to the operational quality of the DI system, ensuring its realization of the public policy objectives. Adequate operational funds help deposit insurers to well control capital requirements and make effective investment plans; providing available funds for timely reimbursement and ensuring the safety of depositor’s deposits, strengthening public confidence. International experience shows that the DI system alone is not capable of resolving a large-scale financial crisis. Even in a non-systemic crisis, the DI system may not have enough capital reserves to meet DI claims. Therefore, the deposit insurer needs to set up mechanisms for accessing additional financial capital or contingent financing from either the Government or the market (emergency funding mechanisms) such as Government funding, or additional premiums, loans from the Central Bank or other institutions.
Secondly, the deposit insurer must be assigned suitable tasks and powers, which contribute to the achievement of public policy objectives of the system. Lessons from international experience show that the deposit insurer plays increasingly important roles in maintaining national financial stability. First of all, the existence of the deposit insurer plays an important role in reducing financial distress through enhancing public confidence in the financial system and preventing bank runs. This preserves trust in the financial system and provides more time for competent authorities to resolve and restructure the system. Acknowledging this important role, countries tends to grant more important functions, powers to deposit insurers in national financial safety nets, like participating in supervising the banking system and especially, supporting, resolving, restructuring troubled banks, credit institutions… instead of solely making pay-outs.
According to a research report by IADI in August, 2019, over 60% of deposit insurers in the world were empowered to use DI funds for supporting, resolving weak credit institutions. Practical experience in some countries like the United States, Japan, Korea, Indonesia, Malaysia…shows that the deposit insurer can only be fully effective in the roles of restructuring and maintaining the stability of the financial system once it is given powers over insured institutions and a mechanism is set up to coordinate activities of the deposit insurer and other financial supervision agencies. The roles of the deposit insurer in resolving weak credit institutions through tools such as financial support, acquisition, merger, bridge banks…help to prevent bankruptcy of insured credit institutions, contributing to protecting depositors, ensuring the safety and soundness of financial-banking operations.
Another trend is to allow deposit insurers to participate in supervision of financial-banking system. Supervision helps the deposit insurer timely detect, early warn of and prevent risks that can lead to bank failures, systemic instability, thereby protecting the interests of depositors and at the same time preserving the DI fund as well as financial capacity of the deposit insurer. Deposit insurers, with their contingency funding, tend to choose the least-cost option of resolution to ensure the safety and soundness of credit institutions in the medium-term and at the same time, limit burdens on the DI reserve fund.
Reality in Vietnam
In the current period, during the implementation of the Scheme on “Restructuring the system of credit institutions associated with bad debt handling in the 2016-2020 period” approved by the Decision No. 1058/QD-TTg dated July 19, 2017 of the Prime Minister, special attention has been paid to enhancing the role of the DIV in order to fulfill the deposit insurer's public policy goals. The 2017 amended, supplemented Law on Credit institutions has given more tasks to the DIV so that it can actively participate in restructuring credit institutions. The development strategy of banking sector to 2025 with orientations until 2030 (promulgated together with the Decision No 986/QD-TTg dated August 8, 2018 of the Prime Minister) also sets out the task of amending the DI Law in the period 2021-2025 to enhance the roles of the DIV and facilitate its further participation in restructuring credit institutions.
To resolve weak credit institutions, the current legal framework offers a lot of specific options, like recovery, merger, acquisition, transfer, dissolution, compulsory transfer; bankruptcy and capital support in the form of special lending, purchase of long-term bonds issued by assisting credit institutions. Among the above-mentioned options and measures, the DIV directly participates in assessing options of recovery, special lending, purchase of long-term bonds issued by assisting credit institutions, exempting insured institution from paying insurance premiums, developing bankruptcy options. The DIV also coordinates with and counsel related agencies, if required, when the merger, acquisition, transfer, and dissolution options are used.
According to the legal regulations on special control, the DIV not only assigns its staff to Special Control Boards but also coordinates with the Banking Supervision Agency, the State Bank of Vietnam and Special Control Boards to take special control over credit institutions placed under special control.
Therefore, many entities, agencies participate in resolving weak credit institutions at different levels and the DIV has a certain role, and can mobilize resources for restructuring weak credit institutions.
However, today, the role of the DIV in restructuring weak credit institutions is still limited. Over the past years, the DIV has just participated in resolving those People’s credit funds that are required to be dissolved only.
In addition, the DIV has still faced difficulties in its task implementation. Firstly, it is very difficult to resolve weak People’s credit funds as special control has been often prolonged, and measures such as: recovery, merger, transfer of all shares, equity investments have not been implemented as effectively as expected, affecting the rights of depositors. Thus, it is necessary to figure out measures to radically resolve weak People’s credit funds and to find solutions for the DIV to participate in resolving those People’s credit funds that suffer from prolonged special control.
Besides, in accordance with the current regulations, the DIV’s role of supervision has yet to be clearly stipulated in the national financial safety system.
As for examination, according to Clause 9, Article 13 of the DI Law, the DIV is empowered to monitor, examine compliance with legal regulations on DI. Meanwhile, the DIV does not examine the safety of weak credit institutions. This can lead to certain delays/differences in assessing the whole risk profiles of the insured institutions.
As for supervision, according to Clause 10 Article 13 of the DI Law, the DIV is entitled to collect process and analyze information about insured institutions to detect violations of banking safety regulations, risks causing non-safety in the banking system and recommend the State Bank of Vietnam to timely deal with those violations and risks. According to Clause 1, Article 34 of the DI Law, the DIV is permitted to access data of the State Bank of Vietnam on insured institutions to carry out its functions, tasks as regulated in the DI Law. The degree of accessing information (in width and in depth) depends on the coordination mechanism between the DIV and related agencies under the State Bank in particular and related agencies in general.
Proposals and recommendations
It can be said that the DIV can only be effective in implementing DI policy when it has adequate financial capability and powers, which are clearly stipulated in the law and is assigned specific roles in the national financial safety net. Therefore, in the coming time, it is necessary to study and make recommendations to help the DIV better achieve its public policy objectives, such as:
Firstly, it is essential to study and propose additional forms of emergency back-up fundìng for the DIV, especially to study and add the form of borrowing from the State Bank. This form has been applied by many deposit insurers in the world and has proved effective in urgent time.
Secondly, it is needed to complete, enhance the DI legal framework toward international practices to enhance the position and roles of the DIV so that the DIV can participate further in restructuring the system of credit institutions to meet the public policy objectives of the system, better protect the legitimate rights and interests of depositors, contribute to maintaining financial stability by setting more specific regulations on the establishment of a fund for special lending, purchase of long-term bonds issued by assisting credit institutions besides the fund for making payouts.
Thirdly, the roles of supervision, examination of the DIV in the national financial safety net need to be stipulated more clearly. In addition, in order for the DIV to fully evaluate risks and provide early warnings by supervision, it is necessary to allow the DIV to have further access to information, especially information on the health of the financial institutions.
In fact, the operational effectiveness of the deposit insurer is closely related to that of other members of the national financial safety net and the effective coordination between them with the deposit insurer. Therefore, in order for the DIV to well achieve the public policy objectives, it requires information sharing between the DIV with other members in the financial safety net like the Ministry of Finance, the State Bank of Vietnam, the National Financial Supervision Commission.
Thus, it is necessary to propose to establish a coordination and information sharing mechanism among agencies in the national financial safety net, where the coordination, functions, powers of agencies in restructuring credit institutions in particular as well as ensuring the stability of the banking and financial system in general are clearly defined ;the Law on DI and related laws should be simultaneously amended, documents guiding the implementation of these amendments should be promulgated so that the DIV can participate more deeply in restructuring weak credit institutions…
Ms. Duong Thu Phuong – Head of Cooperation in supervising financial market Dept., Research and Policy Coordination Unit, the National Financial Supervisory Commission.
