Conditions such as natural disasters, war, economic-financial crises... mean that depositors' deposits are also at risk. Therefore, to stabilize the operation of the banking system, of credit institutions, to create trust for depositors and stabilize the economy and society, there must be insurance activities for customers' deposits. That activity is to limit and overcome risks for depositors when banking activities are unstable. From there, the need for deposit insurance activities (BHTG) arises.
Depending on each country, there are different regulations on the entity that is responsible for performing the task of deposit insurance. However, according to a survey from the world deposit insurance system, it is usually a state organization that is responsible for deposit insurance (called a deposit insurance organization) and this is a non-profit organization. Deposits that are insured by a deposit insurance organization are called insured deposits.
However, not all types of deposits are insured by the Deposit Insurance Organization, but only limited to certain types of deposits and this depends on the regulations of each country.
The deposit insurance commitment is expressed in the form of a contract binding the rights and obligations of three partners: the deposit insurance organization, the deposit insurance participating organization and the depositor. Deposits subject to insurance are the basis for determining the responsibility of the deposit insurance organization towards the depositor and the deposit insurance participating organization.
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A clearly defined "insured deposit" will avoid potential litigation and moral hazard arising when a participating institution becomes insolvent and is closed. At the same time, it will facilitate the participating institution to calculate and pay the correct and sufficient amount of fees as well as the inspection activities of the deposit insurance organization regarding the calculation and payment of fees of the participating institution. Therefore, most countries often stipulate types of insured deposits and/or types of uninsured deposits such as Taiwan or the United States.
Although the regulations on which deposits are insured depend on each country's policy, according to a study by the International Monetary Fund [20], the types of deposits that are commonly insured by most deposit insurance systems include:
- Individual domestic currency deposits include demand deposits, term deposits,
local currency savings deposits;
- Promissory notes issued by a participating deposit insurance organization and regulated by law or regulations of the deposit insurance organization as a type of deposit;
- Registered domestic currency deposit certificate because this is a type of interest-bearing receipt, confirming the capital deposited in a bank or at a savings institution with the main purpose of creating capital for the bank;
- Foreign currency deposits: The decision to choose foreign currency deposits as the subject of insurance depends largely on the foreign currency usage of each country. In countries where foreign currency deposits are widely used and especially in countries where the currency is dollarized, the deposit insurance system can insure foreign currency to promote financial stability. According to the latest research, as of 2010, there were over 60 deposit insurance systems that insured foreign currency [28].
Many countries have excluded from insurance the following types of deposits:
Interbank deposits;
Bearer Certificate of Deposit;
Deposits of government agencies at all levels and large economic organizations.
1.1.2. Deposit insurance activities
Deposit insurance activities are essentially activities providing deposit insurance services, a type of goods with high social value. According to the classification of economist Stiglitz, deposit insurance services are not purely public goods based on the absolute non-excludability of beneficiaries of this service. Originating from one of the basic purposes of deposit insurance activities is to contribute to ensuring stability.
According to the regulations of the national financial system, the beneficiaries of deposit insurance services are the whole society. Depositors who are insured will benefit directly from the deposit insurance policy through the payment of insurance money by the deposit insurance organization when the bank they deposit money in becomes insolvent and closes. Lenders will benefit from deposit insurance services thanks to the stability of the financial system, making their investments safer. In turn, a stable financial system will also help other economic sectors develop [1].
* Concept and nature of social insurance
Based on the risks of deposits as analyzed above, it is necessary to have deposit insurance activities. This is an insurance activity in which the deposit insurance organization commits to reimburse the part of the deposit that is at risk under the conditions prescribed by law, and the funding source is partly contributed by credit institutions.
Organization
BHTG
Commit
Participating organizations
Depositors of Social Insurance
Send money
Figure 1.1 Deposit insurance relationship
Thus, in principle, deposit insurance (DI) is understood as the deposit insurance organization's commitment to the organization authorized to receive deposits to pay part or all of the deposit (sometimes including interest) to the depositor when these organizations become insolvent or cease operations.
In the BHTG relationship, it is always a three-way relationship:
+ Insurance subject;
+ Subjects participating in social insurance;
+ Subjects paid social insurance.
According to the above relationship, the subjects participating in deposit insurance are credit institutions, and organizations that are not credit institutions but have activities of receiving deposits from customers. Subjects participating in deposit insurance must pay fees to the deposit insurance organization. When a bank/credit institution has a risk, the deposit insurance organization will compensate the subjects depositing money at the deposit insurance organization according to the provisions of law.
Like other types of insurance, deposit insurance operates on the principle of “the majority compensates the minority”, demonstrating the social nature and mutual support of each member against risks. However, deposit insurance also has fundamental differences compared to other types of commercial insurance. While commercial insurance is a for-profit insurance and only protects the assets of each individual, deposit insurance is a non-profit insurance that implements public policy goals to contribute to stabilizing the national financial system and protecting the rights and interests of depositors. In addition, deposit insurance is always proactive in dealing with risks that occur and uses all methods to encourage organizations participating in deposit insurance to operate safely and effectively, while closely monitoring the risks of these organizations.
Main content of BHTG
- Insurance fee collection:
In most countries that have implemented deposit insurance policies, deposit insurance premiums are an important source of finance, accumulating capital to ensure the purpose of deposit insurance activities.
Deposit insurance fee is the amount of money that deposit insurance participating organizations pay to the deposit insurance organization to insure customer deposits at the deposit insurance participating organization.
Currently in the world, the deposit insurance premium rate that each organization participating in deposit insurance applies to calculate the fee is divided into two types: the same-class deposit insurance premium rate and
Non-uniform deposit insurance premium rates [1]. Based on the development level of the banking and financial system and other related sectors such as auditing, business evaluation, the level of transparency of market participants, etc., the decision to apply uniform or non-uniform deposit insurance premiums is made.
+ Uniform deposit insurance premium: all organizations participating in deposit insurance, regardless of ownership type, scale of operation, business efficiency, etc., are subject to the same fixed premium (usually calculated as a percentage of total deposit balance). The outstanding advantage of uniform deposit insurance premium is its convenience in implementation. Because all organizations participating in deposit insurance are subject to the same deposit insurance premium rate, the need to accurately assess the operating situation of the organization participating in deposit insurance is not necessary when considering the financial responsibility of the organization participating in deposit insurance. This advantage has created great favorable conditions for deposit insurance organizations, especially in the early stages of implementing deposit insurance activities like Vietnam. However, the uniform deposit insurance fee also has some basic limitations, which is that it will create the possibility of manifestations of dependence in terms of risk management in the operations of organizations participating in deposit insurance (due to the application of the same fee rate), and will not have the effect of encouraging banks to compete to operate well and safely to be applied with a low deposit insurance fee rate.
+ Non-uniform deposit insurance premiums (risk-based deposit insurance premiums): participating deposit insurance organizations must pay premiums at levels corresponding to the level of risk that may occur to that organization. Thus, applying premiums according to risk levels helps to accurately assess the level of safety in operations, encouraging credit institutions to operate healthily.
- Insurance reimbursement/payment
Deposit insurance payment is the activity of implementing the commitment to pay insured deposits (including principal and interest at a certain level) of the deposit insurance organization to insured depositors, according to regulations.
regulations on the limit of deposit insurance payment of each deposit insurance system. Payment of insurance money will be made when the participating deposit insurance organization becomes insolvent and is terminated.
The basic purpose of deposit insurance payment is to ensure the rights of depositors in both value and form of implementation. In terms of value, the level of deposit insurance payment will depend on the country's deposit insurance policy, taking into account the average domestic income per capita, inflation factors, and compliance with market discipline.
Regarding the form of implementation, payment operations must be carried out promptly, conveniently and ensure the rights of depositors. Delays in payment, cumbersome payment procedures, unreasonable and unsafe payment methods will directly affect the peace of mind of the depositor community and the reputation of other banks in the area.
In addition, to achieve the set goals as well as control, promote, prevent risks in the operations of credit institutions and promptly support when organizations participating in the Deposit Insurance need it, there are also activities of inspection, supervision, propaganda and financial support.
- Capital
The operating capital of the deposit insurance organization must be fully guaranteed to allow the deposit insurance organization to maintain an effective operating apparatus, provide support to deposit insurance participants and make timely payments to insured depositors when the deposit insurance participating organization becomes insolvent and is closed.
The capital of the deposit insurance organization is mainly formed from two sources: the Government's funding and from collecting fees from organizations participating in the deposit insurance. There are also deposit insurance organizations whose operating capital comes from business investment activities.
The deposit insurance organization is not simply a tool in the hands of the Government to perform the task of compensating depositors when a credit institution fails. In modern economic conditions, the deposit insurance organization is also an independent financial institution, managed and operated as a business and uses existing capital to invest to seek profits. The financial capacity of the deposit insurance organization does not only depend on the state budget but it must strengthen its financial capacity from its own operations. The more a deposit insurance organization with strong financial potential is free from budget capital and dependence on government funding, the better. Therefore, the deposit insurance organization must have and must do well in investment activities, first of all to preserve and develop the capital allocated by the State, then to strengthen its own financial capacity to ensure the ability to handle risks, provide financial support to organizations participating in the deposit insurance to reduce the burden on the state budget. However, this activity depends on the social insurance policy of each country and each period.
* The role of deposit insurance
The role of deposit insurance for the country is shown from many perspectives, originating from the nature of deposit insurance as insurance of deposit risks at banks, the prominent role of deposit insurance is to promote the harmonious combination between efforts to improve the quality of banking operations towards attracting maximum temporarily idle capital in the community and the active cooperation of members in society on the basis of mutual benefit, thereby creating conditions to promote sustainable economic development. With that meaning, deposit insurance has the following roles:
a. Deposit insurance contributes to strengthening public confidence in
banking system
To achieve the goal of protecting the interests of depositors, the organization
BHTG focuses on activities: providing more complete information to the public
information about banks to a certain extent; Support deposit insurance participating organizations in difficulty, including financial support to help banks resolve difficulties in order to maintain effective operations; Timely payment of insurance money to depositors in case the bank receiving their deposits is closed and becomes insolvent; Participate in the process of liquidating assets after payment of deposit insurance to continue to protect the interests of depositors who have not yet fully paid their deposits at the bank with the deposit insurance event and maintain the deposit insurance fund to protect depositors at other deposit insurance participating organizations.
Thus, the deposit insurer has enabled the troubled bank to continue to perform the basic part of its payment function, that is, to pay its depositors. Although maintaining public confidence in the bank is no longer important for the bank that is closed and has to make a claim for insurance payouts, it is very important for the reputation of other banks that are operating well and, more broadly, for the rest of the national banking system. This is ensured by the timely and effective intervention of the deposit insurer.
b. Deposit insurance facilitates the development of a country's banking system .
The role of deposit insurance activities in the development of the banking system is shown in three aspects: (i) Deposit insurance activities have the effect of creating favorable conditions for newly established banks or banks with limited scale of operation to have better conditions for development. Normally, depositors often feel secure when depositing money in banks with large scale of operation and long history of development because they believe that if large banks have problems, they will have support from the state to avoid closure. Deposit insurance activities were born with the provisions of the policy on mandatory deposit insurance, all