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Deposit insurance activities - Experience from some countries in the world
Posted date 13/06/2016
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Posted date 13/06/2016
2.290 view
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Throughout the development of the modern financial system, policy makers have viewed deposit insurance as an important tool to protect depositors and contribute to maintaining financial system stability.
MSc. Nguyen Thi Thu Trang - K.TCNH
Throughout the development of the modern financial system, policy makers have considered deposit insurance an important tool to protect depositors and contribute to maintaining the stability of the financial system. During the financial crisis, the role of deposit insurance organizations becomes particularly important in handling failed banks, preventing panic, mass withdrawals and system collapse. Learning from the experiences of other countries in developing deposit insurance activities is of great significance to the deposit insurance system in Vietnam. Within the limited scope of the article, only the experiences of some typical countries in terms of application models, fee collection methods and handling failed banks are mentioned.
1. Social insurance and social insurance content
In principle, deposit insurance is understood as a public commitment of the deposit insurance organization to the deposit insurance participating organization that the deposit insurance organization will pay deposits to depositors when the deposit insurance participating organization is terminated and is unable to pay depositors.
In the deposit insurance relationship, there is always a three-party relationship: Deposit insurance subject (Depositor); Deposit insurance participant; Deposit insurance payee (Deposit insurance organization). In which, deposit insurance participants are credit institutions such as commercial banks, non-bank credit institutions, People's Credit Funds, microfinance organizations... that receive customer deposits and must pay fees to the deposit insurance organization. In case a credit institution encounters risks leading to collapse or bankruptcy, the deposit insurance organization will compensate the deposit recipient at the deposit insurance participating organization according to the provisions of the Law.
Deposit insurance activities have many important roles such as: Protecting depositors, enhancing public confidence in the financial-banking system; Promoting stable growth of deposit mobilization at credit institutions; Contributing to ensuring the safe and healthy development of the banking system; Contributing to handling the banking financial crisis.
Content of BHTG activities
* Group of contents on deposit insurance policy: Regulations on conditions for participating in deposit insurance (mandatory or voluntary); Regulations on subjects related to deposit insurance (deposit insurance organizations; deposit insurance participating organizations, depositors); Regulations on subjects entitled to insurance benefits; Regulations on deposit insurance fees (form of flat premium payment or fee according to risk level); Regulations related to deposit insurance payment (payment conditions, limits)
* Content group on Organizational Model (Payment Model; Payment Model with expanded authority; Risk reduction model) and Operational Model ( functions, tasks)
* Group of contents on deposit insurance operations: Issuance and revocation of insurance certificates; Deposit insurance premium collection operations; Inspection and supervision operations; Receiving and processing operations; Deposit insurance payment operations; Information and propaganda activities.
2. Experience of some countries in the world in developing social insurance activities
2.1 Experience in applying the risk mitigation model of the US Deposit Insurance Corporation (FDIC)
The United States is the first country in the world to establish a deposit insurance system. The Federal Deposit Insurance Corporation (FDIC) was established on June 16, 1993. To date, the number of credit institutions currently operating and guaranteed by the FDIC is 6,656.
The US is adopting a risk mitigation model in which supervision and resolution functions are considered the core functions of the risk mitigation deposit insurance organization. In the US, there are four financial supervisory agencies. The FDIC has the function of supervising a certain group of organizations in the financial supervision system (state banks that are not members of the FED).
During the 2007-2010 crisis, the FDIC was given greater authority to handle failed banks. The FDIC's bank resolution activities are completely independent of court decisions, FDIC's receivership activities are exempt from all taxes and are not subject to supervision by any other agency.
2.2 Experience from the characteristics of the differentiated fee system in Taiwan (CDIC)
On September 27, 1985, the Central Deposit Insurance Corporation of Taiwan (CDIC) was inaugurated. CDIC was one of the first deposit insurance organizations in Asia to apply risk-based deposit insurance premium calculation with a membership of approximately 400.
CDIC's deposit insurance premium is calculated using a combination method: a risk-based premium is calculated on the deposit balance within the deposit insurance limit and a flat premium is calculated on the deposit balance exceeding the deposit insurance limit. Since 1999, CDIC has collected a risk-based premium and since 2007, both a risk premium and a flat premium have been applied simultaneously.
To serve the purpose of applying risk premiums, CDIC conducts an assessment and classification of organizations based on two criteria: (i) Minimum Capital Adequacy Ratio (CAR) and (ii) Composite Score of the Examination Data Rating System (CSEDRS) . Based on the results of the CAR and CSEDRS composite assessment, organizations will be classified into 5 categories A, B, C, D, E. From this ranking result, CDIC applies different risk premiums to each group of subjects.
2.3 Japan's experience in handling failed banks (DICJ)
The Deposit Insurance Corporation of Japan (DICJ) was established in 1971 as a deposit insurance payout scheme with expanded powers and a current membership of nearly 500. The DICJ plays an important role in resolving bank failures in Japan.
When a financial institution fails, DICJ will receive information from depositors at that financial institution within 24 hours. Then, DICJ will quickly recover bad debts by measures to minimize the use of the deposit insurance fund such as establishing a debt handling and recovery company (RCC - a subsidiary of DICJ) or establishing a bridge bank with 100% capital of DICJ to manage and support the operations of the failed financial institution. For each failure case, DICJ will analyze whether it is a systemic failure or not to determine the appropriate handling method including the Normal Method (Accepting to buy back P&A or paying) and the Special Method (Capital injection , Financial support in case of lack of payment capital and Nationalization).
3. Lessons learned for Vietnam on developing social insurance activities
First: Build a flexible fee system
Building a premium system requires flexibility and there is no common model that applies to all countries. Choosing a premium system that differentiates based on risk is the right general trend of deposit insurance systems, however, when put into practice, the experience of CDIC shows that flexibility is needed. This is a lesson for Vietnam in the process of building its premium system, so that it can both apply the advantages of a premium system based on risk and ensure harmony with the characteristics and legal system of its country.
Second: Close coordination mechanism between relevant agencies
The BHTG needs to take a proactive role in implementing coordination mechanisms for information exchange between relevant agencies to maximize the reception of opinions and information from many sides to make reasonable amendments.
Third: Handling bank failures
Bank failure resolution is a special activity. It requires the intervention of many functional agencies such as the State Bank, the Ministry of Finance, the Deposit Insurance Organization and the courts. The law also needs to clearly define the functions and tasks of each agency so that the resolution of failure is carried out on the principle of minimizing costs and ensuring the rights of depositors. Special attention is paid to the functions of the Deposit Insurance Organization such as the function of buying and selling credit institutions. The payment operation is only the final link in the chain of credit failure resolution.
Fourth: Choose the appropriate social insurance model
The selection of an appropriate deposit insurance model depends on the characteristics of socio-economic development, the level of development, the structure of the financial system, and the need to protect depositors. The effectiveness of the deposit insurance model is viewed from the perspective of the nature of insurance activities as "taking the majority to compensate for the minority" but must be specific in implementing public policy goals, in which the most important goal is to protect depositors, maintain confidence in the banking system and contribute to ensuring the safety of banking operations.
--------------------------
References
1. National Assembly (2012), Law on Social Insurance No. 06/2012/QH13 , issued on June 18, 2012
2. CDIC- 20 years in retrospect 1985-2005
3. DICJ, Annual Report 2006 April 2006 – March 2007,
4. FDIC (1997), History of the Eighties- Lessons for the future.
Website
1. www.fdic.gov
2. www.iadi.org
3. www.div.gov.com
5. www.wordbank.org
1. Social insurance and social insurance content
In principle, deposit insurance is understood as a public commitment of the deposit insurance organization to the deposit insurance participating organization that the deposit insurance organization will pay deposits to depositors when the deposit insurance participating organization is terminated and is unable to pay depositors.
In the deposit insurance relationship, there is always a three-party relationship: Deposit insurance subject (Depositor); Deposit insurance participant; Deposit insurance payee (Deposit insurance organization). In which, deposit insurance participants are credit institutions such as commercial banks, non-bank credit institutions, People's Credit Funds, microfinance organizations... that receive customer deposits and must pay fees to the deposit insurance organization. In case a credit institution encounters risks leading to collapse or bankruptcy, the deposit insurance organization will compensate the deposit recipient at the deposit insurance participating organization according to the provisions of the Law.
Deposit insurance activities have many important roles such as: Protecting depositors, enhancing public confidence in the financial-banking system; Promoting stable growth of deposit mobilization at credit institutions; Contributing to ensuring the safe and healthy development of the banking system; Contributing to handling the banking financial crisis.
Content of BHTG activities
* Group of contents on deposit insurance policy: Regulations on conditions for participating in deposit insurance (mandatory or voluntary); Regulations on subjects related to deposit insurance (deposit insurance organizations; deposit insurance participating organizations, depositors); Regulations on subjects entitled to insurance benefits; Regulations on deposit insurance fees (form of flat premium payment or fee according to risk level); Regulations related to deposit insurance payment (payment conditions, limits)
* Content group on Organizational Model (Payment Model; Payment Model with expanded authority; Risk reduction model) and Operational Model ( functions, tasks)
* Group of contents on deposit insurance operations: Issuance and revocation of insurance certificates; Deposit insurance premium collection operations; Inspection and supervision operations; Receiving and processing operations; Deposit insurance payment operations; Information and propaganda activities.
2. Experience of some countries in the world in developing social insurance activities
2.1 Experience in applying the risk mitigation model of the US Deposit Insurance Corporation (FDIC)
The United States is the first country in the world to establish a deposit insurance system. The Federal Deposit Insurance Corporation (FDIC) was established on June 16, 1993. To date, the number of credit institutions currently operating and guaranteed by the FDIC is 6,656.
The US is adopting a risk mitigation model in which supervision and resolution functions are considered the core functions of the risk mitigation deposit insurance organization. In the US, there are four financial supervisory agencies. The FDIC has the function of supervising a certain group of organizations in the financial supervision system (state banks that are not members of the FED).
During the 2007-2010 crisis, the FDIC was given greater authority to handle failed banks. The FDIC's bank resolution activities are completely independent of court decisions, FDIC's receivership activities are exempt from all taxes and are not subject to supervision by any other agency.
2.2 Experience from the characteristics of the differentiated fee system in Taiwan (CDIC)
On September 27, 1985, the Central Deposit Insurance Corporation of Taiwan (CDIC) was inaugurated. CDIC was one of the first deposit insurance organizations in Asia to apply risk-based deposit insurance premium calculation with a membership of approximately 400.
CDIC's deposit insurance premium is calculated using a combination method: a risk-based premium is calculated on the deposit balance within the deposit insurance limit and a flat premium is calculated on the deposit balance exceeding the deposit insurance limit. Since 1999, CDIC has collected a risk-based premium and since 2007, both a risk premium and a flat premium have been applied simultaneously.
To serve the purpose of applying risk premiums, CDIC conducts an assessment and classification of organizations based on two criteria: (i) Minimum Capital Adequacy Ratio (CAR) and (ii) Composite Score of the Examination Data Rating System (CSEDRS) . Based on the results of the CAR and CSEDRS composite assessment, organizations will be classified into 5 categories A, B, C, D, E. From this ranking result, CDIC applies different risk premiums to each group of subjects.
2.3 Japan's experience in handling failed banks (DICJ)
The Deposit Insurance Corporation of Japan (DICJ) was established in 1971 as a deposit insurance payout scheme with expanded powers and a current membership of nearly 500. The DICJ plays an important role in resolving bank failures in Japan.
When a financial institution fails, DICJ will receive information from depositors at that financial institution within 24 hours. Then, DICJ will quickly recover bad debts by measures to minimize the use of the deposit insurance fund such as establishing a debt handling and recovery company (RCC - a subsidiary of DICJ) or establishing a bridge bank with 100% capital of DICJ to manage and support the operations of the failed financial institution. For each failure case, DICJ will analyze whether it is a systemic failure or not to determine the appropriate handling method including the Normal Method (Accepting to buy back P&A or paying) and the Special Method (Capital injection , Financial support in case of lack of payment capital and Nationalization).
3. Lessons learned for Vietnam on developing social insurance activities
First: Build a flexible fee system
Building a premium system requires flexibility and there is no common model that applies to all countries. Choosing a premium system that differentiates based on risk is the right general trend of deposit insurance systems, however, when put into practice, the experience of CDIC shows that flexibility is needed. This is a lesson for Vietnam in the process of building its premium system, so that it can both apply the advantages of a premium system based on risk and ensure harmony with the characteristics and legal system of its country.
Second: Close coordination mechanism between relevant agencies
The BHTG needs to take a proactive role in implementing coordination mechanisms for information exchange between relevant agencies to maximize the reception of opinions and information from many sides to make reasonable amendments.
Third: Handling bank failures
Bank failure resolution is a special activity. It requires the intervention of many functional agencies such as the State Bank, the Ministry of Finance, the Deposit Insurance Organization and the courts. The law also needs to clearly define the functions and tasks of each agency so that the resolution of failure is carried out on the principle of minimizing costs and ensuring the rights of depositors. Special attention is paid to the functions of the Deposit Insurance Organization such as the function of buying and selling credit institutions. The payment operation is only the final link in the chain of credit failure resolution.
Fourth: Choose the appropriate social insurance model
The selection of an appropriate deposit insurance model depends on the characteristics of socio-economic development, the level of development, the structure of the financial system, and the need to protect depositors. The effectiveness of the deposit insurance model is viewed from the perspective of the nature of insurance activities as "taking the majority to compensate for the minority" but must be specific in implementing public policy goals, in which the most important goal is to protect depositors, maintain confidence in the banking system and contribute to ensuring the safety of banking operations.
--------------------------
References
1. National Assembly (2012), Law on Social Insurance No. 06/2012/QH13 , issued on June 18, 2012
2. CDIC- 20 years in retrospect 1985-2005
3. DICJ, Annual Report 2006 April 2006 – March 2007,
4. FDIC (1997), History of the Eighties- Lessons for the future.
Website
1. www.fdic.gov
2. www.iadi.org
3. www.div.gov.com
5. www.wordbank.org
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