Deposit Insurance in Vietnam

Group 10 Presenter
Giap Thi Mai Van Xuan Mai Pham Duy Minh Le Anh Minh Nguyen Thuy Ngan Le Thi Kim Ngan Part I Part III.1 Part III.2 Part II

Outline
I. Introduction to Deposit Insurance
1.
2.

The beginning and the development of Deposit Insurance in the world Concepts, purposes and roles of Deposit Insurance

II. Real situation of Deposit Insurance in Vietnam

1. 2. Deposit Insurance of Vietnam (DIV) Achievements and limitations of DIV Case: FDICs role in 2008 financial crisis Solutions recommended for DIV

III. Solutions recommended for DIV

1. 2.

I. Introduction to Deposit Insurance

1. The beginning and the development of Deposit Insurance in the world Concepts, typical characteristics and roles of Deposit Insurance a. Concepts b. Typical characteristics c. Roles

2.

I. 1. The beginning and the development of Deposit Insurance in the world

FINANCIAL CRISIS 1929 1933 in THE U.S

During the 1930s, in the U.S, FDIC was born as the first deposit insurance institution in the world.

Until today, more than 90 countries in the world have officially used Deposit insurance to protect their depositors.

I. 2. Concepts, typical characteristics and roles of Deposit Insurance

a. Concepts

Deposit insurance is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due.
Deposit insurance institutions are for the most part government run or established, and may or may not be a part of a countrys central banks, while some are private entities with government banking or completely private entities.

I. 2. Concepts, typical characteristics and roles of Deposit Insurance

b. Typical characteristics

Deposit insurance is a type of public service (which serve the public), that means deposit insurance is also a tool to regulate the public policy in some countries.
The activities of deposit insurance is not for profit, Its main purpose is to ensure that the financial system could work effectively.

I. 2. Concepts, typical characteristics and roles of Deposit Insurance

c. Main roles
Protect the depositors

Encourage depositors to deposit more, also strengthen the discipline in deposit activities

Deposit Insurance
Create a balance and healthy banking system

Used as a tool to resolve credit risk, or even financial crisis

I. 2. Concepts, typical characteristics and roles of Deposit Insurance

c. Main roles

A tool to regulate public policy

Ensure the financial system can work effectively Help the government to create a healthy environment for credit institution to develop Help to create the feeling of secure , to build up the confident among depositors

II. Real situation of Deposit Insurance in Vietnam

1. Deposit Insurance of Vietnam (DIV)
a. b. Establishment of DIV Highlights of Mechanism and Operation of DIV

2. Achievements and limitations of DIV

a. b. Achievements Limitations

II. 1. Deposit Insurance of Vietnam (DIV)

a. Establishment of Deposit Insurance of Vietnam (DIV)

A State-run financial institution

Set up under the Prime Minister's Decision No.218/1999/QD-TTg dated Nov 9, 1999

Came into operation on 7 Jul 2000

Non profit organization, operating under Governments Decree (under Ordinance 89/CP, Amendment 109/CP) Head office: Vincom City Tower, 191 Ba Trieu, Hanoi, Vietnam

II. 1. Deposit Insurance of Vietnam (DIV)

b. Highlights of mechanism and operation of DIV
Mechanism: compulsory for banking and nonbanking institutions which perform banking activities
Collect deposit insurance premiums from insured institutions (fixed at 0.15% p.a per depositor) Supervise, monitor and support the operation of insured institutions Maximum coverage: adjusted from 30 million VND to 50 million VND (stipulated in Decree No. 109/2005/ND-CP, August 24th, 2005)

II. 2. Achievements and limitations of DIV

a. Achievements

Because of compulsory mechanism, 1053 organizations mandatorily participating in DIV

Apply the method of payment with limits (50 million VND) so as to prevent moral hazard By supervising the insured members, DIV found some violations and implemented appropriate adjustments. Coordinate with SBV to rescue ACB and Phuong Nam Bank in 2006, 2007

II. 2. Achievements and limitations of DIV

b. Limitations

DIV does only perform insurance for deposits in VND (domestic currency)
Maximum coverage is (50 million VND) however quite low and not safe enough to attract depositors. Reserve fund of DIV is not abundant (0.9 % of total deposits) compared with recommended figure (1.15 1.5%).

II. 2. Achievements and limitations of DIV

b. Limitations
Fee (0.15% anually of balance of deposits in the participant of DIV) is applied for every organization in DIV lose competitiveness between those organizations
The communication of information between DIV and other supervising authorities is infrequent and sluggish drawback for DIV to monitor the activities of its participants Lack of legal bases, legal documents difficulties for DIV to perform its functions

III. Solutions recommended for DIV

1. Case: FDICs role in 2008 financial crisis
a. b. c. Introduction to FDIC The impact of the crisis to the banking system and the financial institutions FDICs role in 2008 financial crisis

2. Solutions for Vietnam

III.1. Case: FDICs role in 2008 financial crisis

a. Introduction to FDIC
Federal Deposit Insurance Corporation
United States government corporation Guarantees the safety of deposits in member banks, up to $250,000 per depositor per bank as of January 2012

III.1. Case: FDICs role in 2008 financial crisis

b. The impact of the crisis to the banking system and the financial institutions

III.1. Case: FDICs role in 2008 financial crisis

b. The impact of the crisis to the banking system and the financial institutions

III.1. Case: FDICs role in 2008 financial crisis

c. Role of FDIC
Solve efficiently collapsed banks
Increase the maximum coverage Buy bad debts from financial institutions

III.1. Case: FDICs role in 2008 financial crisis

c. Role of FDIC
Solve efficiently collapsed banks
2 ways to solve collapsed banks:
Make payment Set up a bank to take over the collapsed bank

Base on principle of minimum cost

Eg: Indy Mac rank 7th on the savings and loan collapsed
Make payment: $29.3bil Set up Indy Mac Federal Bank with set-up fee: $9.1bil. In 2009, sold MFB to IMB Hold Co: $13,9bil

III.1. Case: FDICs role in 2008 financial crisis

c. Role of FDIC
Buy bad debts from financial institutions
Legacy Loans Program LLP Encourage investors to take part in the program:
Guarantee 85.7% total investment Financial leverage: 12/1

III.1. Case: FDICs role in 2008 financial crisis

c. Role of FDIC
Increase the maximum coverage
Maximum coverage increased from $100.000 to $250.000 Stabilize the system

III.2. Solutions recommended for DIV

Raise more capital to increase DIVs financial capability Enhance the capability to handle bankruptcy

Reform DIVs fee system

Increase DIVs maximum coverage

Create more legal documents as legal bases

III.2. Solutions recommended for DIV

Raise more capital to increase DIVs financial capability
Increase chartered capital of DIV Circular 109/2005/ND-CP, Article 19: the ways DIV can raise funds DIV should be active in raising its capital

III.2. Solutions recommended for DIV

Enhance the capability to handle bankruptcy
Make a public announcement when a bankruptcy occurs In handling bankruptcy of a bank, DIV should:
Pay off all the insured deposits Transfer all or partial insured deposits and assets of that bank to a healthy institution Consolidate that bank with a large bank to gain financial support Perform any possible financial support to the bank which is on the edge of disruption to prevent bankruptcy

III.2. Solutions recommended for DIV

Reform DIVs fee system
Current fee: apply the same fee of 0.15% to all institutions
Unfair between a healthy bank and a bank with high credit risk Should change to apply a different range of fees on deposit insurance subject to the degree of risk of each institution

III.2. Solutions recommended for DIV

Increase DIVs maximum coverage
Current maximum coverage: 50 mil VND/depositor
No longer suitable with current economic situation Calculating payment limit should base on the principle of protecting the majority of depositors and thus should increase with GDP: Formula: Maximum coverage = 5.5 x GDP

III.2. Solutions recommended for DIV

Create more legal documents as legal bases
Vietnamese government is considering building a Code of Deposit insurance to gain more consistency and legality in settling disputes related to DI.

Q&A
Thanks for your listening! Group 10