New safety net laid out for financial system

In September’s monthly meeting, the government will take a good hard look at the new draft law on deposit insurance. Then the draft will go up for review at the 13th National Assembly’s second session in October 2011. Approval is slated for the third session, pencilled in for May, 2012.

Currently, deposit insurance activity is governed by Decree 89/1999/ND-CP dated September 1, 1999 which was amended and supplemented in 2005 with Decree 109/2005/ND-CP.

Deposit insurance exists in many countries and aims to protect bank depositors, either in full or in part, from losses caused by a bank’s inability to pay its debts on time. Deposit insurance systems are an important component of a financial system’s safety net and go a long way to promoting financial stability.

“It is critical to release a law on deposit insurance instead of [having it in] the form of decree as currently,” said Nguyen Am Hieu, deputy director of the Ministry of Justice’s Civil-Economic Law Department.

He said a law with stronger legal capacity would ensure compliance with international common practice. It would also comply with the Law on Promulgation of Legal Documents in 2008, which made provision for financial activities including deposit insurance be regulated by a law.

According to the draft law, deposit insurance organisations will be established by the State Bank of Vietnam in the form of state-owned one-member limited liability companies which are tax exempt and operate on a not-for-profit basis. At the moment, the Deposit Insurance of Vietnam (DIV) is the only state-run financial institution that aims to protect depositors and ensure the healthy operation of the banking system.

Dinh Dung Sy, deputy head of the Government Office’s Law Division, said in the short term, the deposit insurance company should be a specific not-for-profit financial institution. But in the long term, this institution should gradually become a profit making enterprise.

Meanwhile Drik Cupei, vice chairman of the European Forum of Deposit Insurance, said the new law should include deposit insurance for foreign currencies instead of just Vietnam dong only as regulated in the draft. Cupei said banks were holding large foreign currency reserves.

“Without foreign currency insurance, a fluctuating market would see people making a run on the banks, which could lead to a financial crisis. In addition, there is also another amount of foreign currencies which is yet to enter the banking system.

“If the law allows deposit insurance for foreign currencies, the state can take advantage of that inactive money to supply for the banking system,” he said.

When it comes to deposit insurance fees and deposit insurance limits, insured institutions are currently required to pay a flat rate annual deposit insurance premium of 0.15 per cent of total insured deposits at each insured institution. Following Decree 109/2005/ND-CP, the maximum deposit insurance coverage has now been increased to VND50 million ($2,415) per insured institution.

DIV’s general director Bui Khac Son said the flat rate should be scrapped and the new law should make provisions for a fee system based on risk levels instead.

“The maximum deposit insurance of VND50 million is no longer reasonable because the accumulated inflation rate from 2005 till now is 50 per cent and gross domestic product  per head is now 2.2 times higher than in 2005. Moreover, it is very unreasonable to regulate the maximum deposit insurance in law because it will be complicated in the event of any changes,” said Son.

“Therefore, the maximum deposit insurance should be regulated higher than the current level. Besides, the law should clarify who has the competence to adjust the limit in the case of high inflation over a long time, a sharp increase of GDP per head, or a financial crisis and other abnormal situations,” he added.