NATIONAL ECONOMICS UNIVERSITY School of Advanced Education Programs -------------------- GROUP ASSIGNMENT COMMERCIAL BANKING 1 Research Topic: Deposit insurance in Vietnam: Rationale, Regulations and Reforms Students: Phan Văn Trường – 11234054 Trần Hương Giang – 11236620 Trịnh Nam Khánh – 11232682 Đinh Khánh Linh – 11233086 Nguyễn Hà Thu – 11231746 Nguyễn Khánh Chi – 11235342 Trần Lê Minh Phương – 11234461 Phạm Duy Hoàng Nguyên – 11236678 Lê Ngọc Anh – 11234245 Phạm Thị Loan - 11234400 Phạm Thanh Hiền – 11236816 Class: Tài chính doanh nghiệp CLC 65E Professor: TS. Khúc Thế Anh Hanoi, 2025 TABLE OF CONTENT I. INTRODUCTION ................................................................................................................................ 4 II. CONTENT ....................................................................................................................................... 5 I. Rationale ................................................................................................................................................ 5 1. The origin of deposit insurance ......................................................................................................... 5 1.1. Economic and financial conditions before Deposit Insurance ................................................... 5 1.2. Major banking crises leading to the establishment of Deposit Insurance .................................. 5 2. Macroeconomic Rationale ................................................................................................................ 6 2.1. SBV’s Limited Role Pre-DIV .................................................................................................... 6 2.2. Transition to a Market Economy ................................................................................................ 7 2.3. Aftermath of the Asian Financial Crisis (1997–1998) ............................................................... 7 3. Systemic Stability Rationale ............................................................................................................ 7 3.1. Prevent bank runs and preserve public credibility ..................................................................... 8 3.2. Support financial sector reform.................................................................................................. 8 4. Legal and Policy Rationale ............................................................................................................... 9 5. Socio Economic Rationale ................................................................................................................ 9 II. Regulations and Reforms ................................................................................................................... 10 1. Legal Foundation and Institutional Structure of Deposit Insurance in Vietnam ............................. 10 1.1. Legal Foundation ..................................................................................................................... 10 1.2. Organizational Structure and Governance of the DIV ............................................................. 11 1.2.1. Organizational Structure ................................................................................................... 11 1.2.2. The Regulatory Role of the State and the Central Bank (SBV) ........................................ 11 2. Phase 1: Initial Formation (1999–2012) ......................................................................................... 12 2.1. Regulations .............................................................................................................................. 12 2.1.1 Coverage Scope and Participation Requirements .............................................................. 12 2.1.2 Premium System and Financial Management: ................................................................... 14 2.1.3 Enforcement Mechanisms .................................................................................................. 16 2.1.4 Payout Process ................................................................................................................... 16 2.2. Challenges and Shortcomings .................................................................................................. 17 2.2.1. The Foreign Currency Exclusion ...................................................................................... 17 2.2.2. Inadequacies in determining the types of deposits subject to insurance ........................... 18 2.2.3. A Marginal Role of Deposit Insurance of Vietnam in the Financial Safety Net ............... 18 2.2.4. Process of handling bank failures is still insufficient ........................................................ 18 2.2.5. Provisions on deposit insurance rates ............................................................................... 19 2 2.2.6. Limitations of the deposit insurance payment .................................................................. 19 2.2.5. Moral hazard of deposit insurance in Vietnam.................................................................. 19 2.3. Reforms .................................................................................................................................... 19 3. Phase 2: Legal Codification (2012–2016)....................................................................................... 20 3.1. Regulations .............................................................................................................................. 20 3.1.1 Coverage Scope and Participation Requirements .............................................................. 20 3.1.2 Premium System and Financial Management .................................................................... 22 3.1.3 Enforcement Mechanisms .................................................................................................. 23 3.1.4 Payout Process ................................................................................................................... 24 3.2. Challenges & Shortcomings..................................................................................................... 24 3.3. Reforms .................................................................................................................................... 25 4. Phase 3: System Enhancement (2017–2020) .................................................................................. 26 4.1. Regulations .............................................................................................................................. 26 4.1.1 Coverage Scope and Participation Requirements .............................................................. 26 4.1.2 Premium System and Financial Management .................................................................... 27 4.1.3 Enforcement Mechanisms .................................................................................................. 27 4.1.4 Payout Process ................................................................................................................... 28 4.2. Challenges & Shortcomings..................................................................................................... 28 4.3. Reforms .................................................................................................................................... 29 5. Phase 4: Modernization (2021–2025) ............................................................................................. 29 5.1. Regulation ................................................................................................................................ 29 5.1.1. Coverage Scope and Participation Requirements ............................................................. 29 5.1.2. Deposit Insurance Premium System and Financial Management ..................................... 30 5.1.3. Payout Process .................................................................................................................. 31 5.2. Challenges & Shortcomings..................................................................................................... 32 5.3. Reforms .................................................................................................................................... 32 C. CONCLUSION ...................................................................................................................................... 33 D. REFERENCE ......................................................................................................................................... 34 3 A. INTRODUCTION Deposit insurance (deposit protection) 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 systems are one component of a financial system safety net that promotes financial stability. Deposit insurance institutions are predominantly established or administered by governmental entities and may or may not be a part of a country's central bank, while some are private entities with government backing or completely private entities. There are a number of countries with more than one deposit insurance system in operation, including Austria, Canada (Ontario and Quebec), Germany, Italy, and the United States. The deposit insurance premium is the amount that a deposit insurance participating institution is required to pay to the deposit insurance organization to insure the deposits of depositors at the participating institution. As of 31 January 2014, according to the International Association of Deposit Insurers (IADI), 113 countries have instituted some form of explicit deposit insurance, up from 12 in 1974. Another 41 countries are considering the implementation of an explicit deposit insurance system. Several countries have established deposit insurance institutions, such as the Federal Deposit Insurance Corporation (FDIC) in the United States, serving as a global model for deposit insurance, the Canada Deposit Insurance Corporation (CDIC), and the Korea Deposit Insurance Corporation (KDIC). In Vietnam, the Deposit Insurance of Vietnam (DIV) is the sole deposit insurance entity, functioning as a one-member limited liability company with 100% of its charter capital owned by the State. The organizational core values are Unity, Capacity, Dedication, Sense of responsibility, and Professionalism. The Deposit Insurance of Vietnam (DIV) is committed to fulfilling its mission of protecting depositors, maintaining the stability of credit institutions, and ensuring the safe and sustainable development of banking activities. By safeguarding depositors’ interests, the DIV plays a crucial role in strengthening public confidence in the financial system. With a vision to operate under an effective deposit insurance model, DIV aims to become a key policy tool that contributes to the successful implementation of the banking sector’s common objectives. By enhancing its operational efficiency, the organization seeks to support the overall stability and development of Vietnam’s financial system. To achieve these goals, DIV focuses on several strategic targets. It continuously improves its monitoring, analysis, and early warning systems to detect and prevent risks within the credit institution system. Additionally, DIV actively participates in restructuring the people’s credit fund system and the microfinance sector, contributing to the broader reform of the credit institution system. Furthermore, the organization ensures accurate, full, and timely compensation for depositors in case of risks affecting deposit insurance participants. To support these efforts, DIV strengthens its financial capacity in alignment with the evolving development of the credit institution system. From the initial capital of 1,000 billion dong, by the end of September 2022, the total assets of the deposit insurer reached more than 92 trillion dong, of which the professional reserve fund reached nearly 86 trillion dong. DIV has built a deposit insurance network with its head office in Hanoi and 8 branches in key economic regions of the country to closely follow the development of credit institutions. Currently, the DIV is protecting deposits of depositors at 1,283 participating institutions, including 97 banks and foreign bank branches, 1,181 people's credit funds, 1 cooperative bank, and 4 microfinance institutions. On November 9, 1999, the Prime Minister promulgated Decision No. 218/1999/QD-TTg, which facilitated the establishment of the Deposit Insurance of Vietnam (DIV). Over the preceding 23 years of development and expansion, DIV has progressively evolved, effectively fulfilling its mandate to safeguard the interests of depositors, thereby affirming the validity of a significant economic and financial 4 policy that aligns with the demands of an increasingly dynamic market economy and the intensifying trend of international integration. This analysis delves into the multifaceted aspects of deposit insurance in Vietnam, with a specific focus on its underlying rationale, the regulations governing its operation, and the reforms shaping its future. It will investigate the economic and systemic reasons for its establishment, the legal and institutional structures that define its scope and enforcement, and the progressive changes implemented to address emerging challenges and align with international standards. By examining these dimensions, this study aims to provide a comprehensive understanding of deposit insurance’s development and impact in Vietnam, offering a clear summary of its evolution and concluding with insights into its future direction and recommendations for enhancement. B. CONTENT I. Rationale 1. The origin of deposit insurance Deposit insurance was established as a financial instrument aimed at protecting depositors, maintaining financial stability, and promoting economic advancement. Therefore, it is essential to examine the economic and financial conditions that existed before the implementation of deposit insurance, the crises that led to its creation, and the subsequent evolution of deposit insurance systems worldwide. 1.1. Economic and financial conditions before Deposit Insurance Before the establishment of deposit insurance, global financial systems were exceptionally vulnerable to banking crises. The absence of a safety net for depositors resulted in widespread instability and economic disruptions. There are several key characteristics of the financial landscape prior to the introduction of deposit insurance. Firstly, the economic and financial conditions at that time lacked adequate depositor protection. Depositors had no assurance of recovering their funds in the event of a bank failure, leading to considerable financial losses. Secondly, frequent bank runs were a prominent feature of the financial environment before deposit insurance was implemented. During times of financial uncertainty, widespread public anxiety often triggered mass withdrawals from banks, resulting in severe liquidity shortages and institutional collapses. These bank runs not only undermined the stability of individual financial institutions but also intensified broader economic downturns by disrupting credit flows and financial intermediation. Lastly, limited government intervention characterized this period. Governments and central banks did not possess the necessary mechanisms to effectively rescue failing banks or protect depositors, which exacerbated the severity of financial crises. 1.2. Major banking crises leading to the establishment of Deposit Insurance Several historical financial crises underscored the need for deposit insurance, highlighting the consequences of systemic banking failures. One of the most significant events that led to the establishment of deposit insurance was the Great Depression in the United States. Between 1929 and 1933, thousands of banks in the U.S. collapsed, erasing the life savings of millions of depositors. The loss of confidence in the banking system resulted in a severe economic contraction. In response, the U.S. government enacted the Banking Act of 1933, which created the Federal Deposit Insurance Corporation (FDIC). The FDIC introduced a formal deposit 5 insurance system, restoring public confidence in financial institutions and setting a precedent for other countries. In addition, during the late 20th century, Japan faced a major financial crisis following the burst of its asset price bubble. Numerous banks became insolvent, and the government had to intervene to prevent a total banking system collapse. This crisis reinforced the necessity of deposit insurance as a measure to safeguard depositors and stabilize financial institutions Moreover, the 1997 Asian Financial Crisis severely impacted banking systems across Thailand, South Korea, and Indonesia. Many financial institutions collapsed due to high levels of non-performing loans and speculative investments. Governments in the region implemented or strengthened deposit insurance mechanisms to restore depositor confidence and prevent further economic deterioration. The establishment of deposit insurance was driven by the need to protect depositors, prevent financial instability, and maintain economic growth. Historical financial crises, particularly the Great Depression, Japan’s financial turmoil, and the Asian Financial Crisis, played a crucial role in shaping modern deposit insurance systems. Today, most countries recognize deposit insurance as a fundamental component of financial stability, ensuring public confidence in banking institutions and mitigating the risks associated with economic downturns. 2. Macroeconomic Rationale Deposit insurance plays a vital role in ensuring financial stability, fostering economic confidence, and supporting sustainable economic growth. The rationale behind its implementation can be analyzed through several macroeconomic perspectives, particularly in the context of economies transitioning to market-based systems and recovering from financial crises. 2.1. SBV’s Limited Role Pre-DIV Before the Vietnam Deposit Insurance (DIV) was established in 1999, the State Bank of Vietnam (SBV) was responsible for regulating and supervising the banking system but lacked a specific mechanism to protect depositors in the event of bank insolvency. At that time, the financial system primarily operated under an implicit government guarantee, meaning that if a bank encountered difficulties, the government might have to intervene by using public funds for a bailout. However, this approach was unsustainable and exposed several limitations. Firstly, due to the absence of an official deposit guarantee, the public lacked confidence in the banking system, especially in smaller financial institutions or newly established joint-stock commercial banks. Although Vietnam was not directly affected by the global financial crisis, its weak economy and inefficient state-owned enterprises led to instability in the domestic financial and banking sector. For instance, during the 1980s and 1990s, a series of people's credit funds went bankrupt, and many banks faced financial difficulties, seeking government support or even ceasing operations. As a result, public trust in the financial and banking system was severely undermined. Secondly, the absence of a clear crisis resolution mechanism meant that when a financial institution collapsed, contagion risks could arise, threatening the stability of the entire financial system. Ultimately, although the SBV had a supervisory role, there was no independent deposit insurance fund to effectively support banks or protect depositors. These limitations underscored the urgent need for a formal deposit insurance mechanism. The establishment of the DIV helped address these weaknesses by providing a financial safety net, strengthening public confidence in the banking system, and mitigating systemic risk. 6 2.2. Transition to a Market Economy In the 1990s, Vietnam underwent a significant transition from a centrally planned economy to a socialistoriented market economy, in which the banking system played a crucial role in mobilizing capital, supporting businesses, and driving economic growth. However, this transition also introduced various risks, as the number of private banks and financial institutions grew rapidly while financial stability remained uncertain. Before the Đổi Mới reforms, the financial system was primarily controlled by stateowned banks. However, as the economy opened up, a wave of joint-stock commercial banks and people's credit funds emerged, often with limited financial management capacity, increasing the risk of liquidity shortages or bankruptcy. Additionally, the public was still unfamiliar with the modern banking system and tended to hold cash rather than deposit money in banks due to concerns over financial risks. In this situation, the establishment of the Vietnam Deposit Insurance (DIV) played a crucial role in strengthening public confidence, promoting financial inclusion, and supporting the development of a more modern and secure banking system. Deposit insurance was not merely a mechanism to protect depositors; it also had a broader macroeconomic significance in maintaining financial stability, particularly given the limitations of the State Bank of Vietnam (SBV) in safeguarding depositors before the creation of DIV. Following the 1997–1998 Asian financial crisis, the necessity of a deposit insurance system became even more apparent, enabling Vietnam to build a more resilient financial framework, facilitate the transition to a market economy, and ensure the sustainable development of the national economy. 2.3. Aftermath of the Asian Financial Crisis (1997–1998) The Asian financial crisis (1997–1998) had severe repercussions on many economies in the region, including Thailand, Indonesia, and South Korea, as a wave of financial institutions collapsed due to high levels of bad debt and massive capital outflows. After the severe aftermath of the Asian financial crisis that heavily impacted the regional financial system in 1997–1998, nations across Asia recognized the urgent need for financial reforms and the establishment of deposit insurance (DI) institutions. Although Vietnam was not directly affected due to its relatively closed financial system at the time, the crisis exposed several weaknesses in the country's banking sector. The poor economic conditions and inefficient state-owned enterprises, particularly in the financial and banking sector, had already led to a crisis in which a series of credit cooperatives failed during the 1980s and 1990s. Many banks faced severe difficulties, sought financial assistance, or even ceased operations. Public confidence in the banking and financial system had significantly deteriorated, as reflected in the tendency for mass withdrawals at the first signs of instability, increasing the risk of systemic collapse. Given this reality, the Vietnamese government recognized the necessity of an official protection mechanism to prevent systemic risk contagion and maintain financial stability. Following the crisis, many countries in the region implemented extensive financial reforms, including the establishment of deposit insurance institutions to safeguard depositors' rights and mitigate systemic risks. Vietnam was no exception to this trend, establishing the Vietnam Deposit Insurance (DIV) in 1999 as a crucial policy tool to strengthen public confidence in the banking system and enhance the overall safety of the national financial sector. 3. Systemic Stability Rationale The Systemic Stability Rationale explains why protective measures, such as Deposit Insurance, are essential for maintaining the stability of the financial system. A stable banking system not only safeguards depositors' rights but also plays a crucial role in preserving public confidence and promoting the sustainable development of the economy. 7 3.1. Prevent bank runs and preserve public credibility The banking system plays a vital role in the economy but is also exposed to significant risks, particularly the threat of bank runs. When depositors lose confidence in a bank, they tend to withdraw all their funds immediately, triggering a domino effect that can lead to liquidity shortages, bank insolvencies, and even a full-scale financial crisis. Therefore, Deposit Insurance (DI) is implemented to ensure that even if a bank faces financial difficulties, depositors remain protected up to a certain limit. This mechanism reassures the public, mitigates panic, and helps curb mass withdrawals. When confidence in the banking system is maintained, credit and investment activities can develop more stably, serving as a catalyst for economic growth. The primary objective of DI is to safeguard the interests of depositors, particularly small depositors who often lack financial literacy and in-depth knowledge about banking risks. By providing security for depositors, DI encourages people to entrust their savings to banks, thereby facilitating capital mobilization and strengthening the banking system. As a result, DI not only protects individual rights but also contributes to the overall stability of the financial system by ensuring the sustainable operation of banks and minimizing the risk of crises. DI is widely adopted worldwide as a tool to protect depositors and maintain the safety of the banking system. Vietnam’s adoption of DI aligns with global trends and enhances the credibility of its banking sector. 3.2. Support financial sector reform Deposit Insurance (DI) not only plays a crucial role in protecting depositors' rights but also supports financial reforms and promotes the sustainable development of the financial system. During financial restructuring, particularly in the process of banking system reform, weaker financial institutions may need to merge, be dissolved, or exit the market. Without a mechanism to protect depositors, widespread uncertainty could arise, eroding confidence in the financial system and triggering large-scale liquidity crises. DI serves as a stabilizing force, ensuring that depositors remain assured even when financial institutions undergo restructuring, thereby maintaining trust and preventing disruptions in the banking sector. Deposit insurance helps mitigate this risk by providing a safety net for depositors, ensuring that even if a bank encounters difficulties, their rights are protected up to a certain limit. This mechanism helps maintain public confidence in the banking system, facilitating the implementation of financial reforms without causing major disruptions to the economy. Moreover, deposit insurance also contributes to enhancing transparency and discipline within the financial system. Knowing that banks must comply with strict safety standards to participate in the deposit insurance program, financial institutions are incentivized to improve risk management, maintain adequate liquidity levels, and limit high-risk speculative activities. This fosters a healthier competitive environment where banks operate based on principles of safety and sustainability rather than pursuing short-term profits at all costs. Additionally, deposit insurance supports the integration of Vietnam's financial system with international standards. In the context of global economic integration, international investors and financial institutions often assess the safety of a country's banking system before making investment decisions. An effective deposit insurance mechanism not only protects the rights of domestic customers but also builds confidence among foreign partners, encouraging capital inflows into the economy. 8 Thus, deposit insurance is not merely a tool for protecting depositors; it also plays a crucial role in maintaining financial system stability, supporting banking reforms, and fostering a more transparent and competitive financial environment. This, in turn, helps establish a solid foundation for the long-term development of both the financial system and the overall economy. 4. Legal and Policy Rationale The formalization of deposit insurance within Vietnam’s legal framework was the result of an ongoing process to refine and enhance financial management in alignment with international practices. The key legal foundation for deposit insurance in Vietnam was established through Decision 218/1999 and Decree 89/1999, which explicitly defined its primary objective as protecting the “lawful rights of depositors.” The establishment of the Vietnam Deposit Insurance (DIV) not only ensured the safety of the banking system but also played a crucial role in stabilizing public confidence in the financial system. One of the key factors in developing a deposit insurance policy is ensuring a balance between the independence of the Vietnam Deposit Insurance (DIV) and the supervisory role of the State Bank of Vietnam (SBV). This mechanism allows DIV to operate with a certain level of autonomy to maintain objectivity in policy implementation while remaining under SBV’s oversight to ensure transparency and efficiency. This balance enables deposit insurance to function not only as a tool for protecting depositors but also as a crucial instrument in maintaining the stability of the banking system. Moreover, the formalization of deposit insurance aligns with international standards set by the IMF, the World Bank, and ASEAN. These international financial institutions recommend that countries establish dedicated deposit insurance organizations to enhance financial stability and mitigate systemic risks. The establishment of the Vietnam Deposit Insurance (DIV) has brought Vietnam closer to global best practices, including clearly defined coverage limits, a swift payout mechanism in the event of bank failures, and a transparent legal framework for governing the deposit insurance system. In addition, the SBV has simultaneously implemented measures to modernize financial regulations and supervisory frameworks to enhance risk management capabilities and ensure that the financial system operates in accordance with international standards. This process not only helps protect depositors but also lays the foundation for a stable and reliable financial system, thereby attracting investment capital and promoting sustainable economic development. 5. Socio Economic Rationale Deposit insurance is not merely a financial instrument designed to protect depositors' rights; it also plays a crucial role in promoting financial inclusion and strengthening public confidence in the banking system. This is particularly important in the context of Vietnam, where financial literacy levels, especially in rural areas, remain limited. One of the major barriers to expanding Vietnam’s formal financial system is the reluctance to deposit money in banks, particularly among people living in remote and rural areas. In the past, many individuals preferred to hold cash or engage in informal financial channels due to a lack of trust in the security of the banking system. The establishment of the Vietnam Deposit Insurance (DIV) has played a crucial role in addressing this issue. By ensuring that deposits are protected even if a bank faces difficulties, DIV has strengthened public confidence in the formal financial system, thereby encouraging people to deposit their money in banks rather than hoarding cash or relying on less secure informal credit systems. Deposit insurance is particularly significant for vulnerable populations, including low-income individuals, those with limited financial options, and individuals reliant on informal credit systems. Before the 9 implementation of deposit insurance, small-scale depositors faced the risk of losing their entire savings if the financial institutions they entrusted collapsed. DIV has played a crucial role in protecting these groups by compensating small deposits and helping to stabilize local economies in the event of regional financial crises. Moreover, deposit insurance supports the long-term objectives of the State Bank of Vietnam (SBV) in expanding financial access to underserved areas. While SBV focuses on formulating macroeconomic policies to stabilize the financial system, DIV serves as a direct implementation tool at the grassroots level, enabling safer access to banking services. The coordination between SBV and DIV not only ensures financial system stability but also helps bridge the gap between urban and rural areas in accessing formal financial services. In summary, deposit insurance serves as a safeguard for depositors and is an essential instrument for fostering financial inclusion and ensuring economic stability for vulnerable populations. By strengthening public confidence in the banking system, protecting small depositors, and supporting financial expansion at the grassroots level, DIV has made significant contributions to Vietnam’s socioeconomic development. This, in turn, has helped build a more stable and reliable financial system for the entire economy. II. Regulations and Reforms 1. Legal Foundation and Institutional Structure of Deposit Insurance in Vietnam 1.1. Legal Foundation From the first foundation of Decree No. 89/1999/ND-CP in 1999 and Decree No. 109/2005/ND-CP in 2005 on Deposit Insurance, the legal basis for the Deposit Insurance policy in Vietnam has been upgraded to the Law on Deposit Insurance, effective from January 1, 2012. The Law on Deposit Insurance in 2012 has created a legal corridor for the Deposit Insurance of Vietnam (DIV) to perform Deposit Insurance operations such as: Remote monitoring, on-site inspection, inspection to report to the State Bank of Vietnam (SBV) to rectify and handle errors at organizations participating in Deposit Insurance; communicating the Deposit Insurance policy to raise awareness and strengthen public confidence, contributing to minimizing risks threatening the safety of the credit institution system; Paying Deposit Insurance to depositors when the participating organization becomes insolvent or bankrupt. However, during the implementation process, the Law on Deposit Insurance has also revealed a number of shortcomings and limitations, due to many changes in practice. Moreover, the Law has not yet regulated, has unclear regulations or has regulations but is inconsistent with other laws on: the time when the obligation to pay insurance premiums arises, exemption from Deposit Insurance fees; uninsured deposits; profiteering from Deposit Insurance... The amendment and supplementation of the Law on Deposit Insurance is a consistent policy of the National Assembly, the Government, and the State Bank; it is also an important task assigned to the Vietnam Deposit Insurance. The period of institutional consolidation from 2017-2020 marks a change in the Vietnam deposit insurance mechanism with many reforms and amendments. From there, the Vietnam Deposit Insurance can participate more deeply in the restructuring process to better protect the legitimate rights of depositors, contributing to ensuring the safety of the credit institution system. On December 30, 2022, the Prime Minister issued Decision No. 1660/QD-TTg approving the Deposit Insurance Development Strategy to 2025, with a vision to 2030. Accordingly, one of the main tasks and solutions to perfect the legal basis is to amend and supplement the Law on Deposit Insurance and the system of documents guiding the implementation of the Law on Deposit Insurance. 10 1.2. Organizational Structure and Governance of the DIV 1.2.1. Organizational Structure Deposit Insurance of Vietnam (DIV) has a complete three-level organizational structure, including: (1) Highest Governing Authority with Controller and Board of Directors; (2) Executive Management including General Director and Deputy General Director; (3) A system of 15 specialized departments at the headquarters consists of multiple specialized departments undertaking core operations from supervision, fee collection, compensation payment to financial management and training. In addition, DIV also established 8 regional branches spanning the North, Central and South to implement local policies with Committees and Supporting Units, creating a modern, multi-layered, complete and reliable governance model, meeting the requirements of protecting depositors and stabilizing the banking system. 1.2.2. The Regulatory Role of the State and the Central Bank (SBV) The Law No.06/2012/QH13 of the National Assembly: Law on Deposit Insurance marked Vietnam’s first definition of the role and functions of the government. Article 7. State policies on deposit insurance 1. The State has policies to protect the legitimate rights and interests of depositors 2. The State has policies to manage and use in order to preserve and grow the capital resources of the deposit insurance organization. The revenues of the deposit insurance organization are exempted from taxes. Article 8. State management agency on deposit insurance 1. The Government has unified the management on deposit insurance 2. The State Bank of Vietnam is responsible to the Government to carry out the state management on deposit insurance 3. The Ministries, ministerial-level agencies within the duties and powers shall coordinate with the State Bank of Vietnam to carry out the state management on deposit insurance. 4. The People's Committees at all levels within the duties and powers shall coordinate with the State management agencies to carry out the state management on deposit insurance. The State Bank's functions were only fully legalized in Law No.06/2012/QH13 of the National Assembly: Law on Deposit Insurance, the SBV's responsibilities include: Article 9. State management responsibilities for the deposit insurance of the State Bank of Vietnam 1. Issuing or submitting to the competent agencies for the issuance of legal normative documents on deposit insurance 2. Presenting the Prime Minister for the approval of the development strategy of deposit insurance. 3. Examining, inspecting and handling violations and settling complaints and denunciation about deposit insurance. 4. Presenting the Prime Minister for making a decision on participating in international organizations on deposit insurance of the deposit insurance organization. 11 5. Signing international agreement or submitting to the competent agencies for signing and joining the international agreement on deposit insurance. 2. Phase 1: Initial Formation (1999–2012) 2.1. Regulations 2.1.1 Coverage Scope and Participation Requirements a. Insured deposits Vietnam’s deposit insurance mechanism is designed to protect deposits in the Vietnamese currency, VND, in various forms, including term deposits, demand deposits, savings accounts, deposit certificates, promissory notes, treasury bills, and other deposit types regulated by the Law on Credit Institutions. The Deposit Insurance Law has undergone multiple revisions regarding the insured currency between 1999 and 2012. According to Decree No. 89/1999/ND-CP of September 1st, 1999 on Deposit Insurance: Article 3 - The deposit money to be insured shall be Vietnam dong deposited by individuals at the deposit insured. This policy only applies to personal deposits and completely excludes all types of deposit certificates, which limits the types of deposit insurance that are not diverse, flexible and not yet widely available. In 2000, according to No.03/2000/TT-NHNN Circular Guiding The Implementation Of The Government's Decree No.89/1999/ND-CP OF September 1st, 1999 on Deposit Insurance, there was a law amendment: II. TYPES OF DEPOSIT TO BE INSURED The deposit money to be insured shall be Vietnam dong deposited by individuals (including residents and non-residents) at the deposit insured, including: - Demand and time savings; - Demand and time deposits, including those on personal accounts; - Money to purchase certificates of deposit and registered bonds, issued by the deposit insured with permission of the competent State body. Vietnam Deposit Insurance shall not insure those certificates of deposit and bearer bonds issued by the deposit insured. Therefore, the revised deposit insurance currency in 2000 has made new improvements, such as clearly distinguishing between residents and non residents, specifying the insured currency, not just personal deposits, and adding additional clauses allowing the use of valuable documents for insurance. These reforms have expanded the protection scope of more deposit products and provided transparency and clarity in distinguishing deposit types In 2005, according to No. 109/2005/ND-CP Decree On Deposit Insurance Amending And Adding To A Number Of Articles Of Decree 89/199/Nd-Cp Of The Government Dated 1 September 1999 To amend and add to article 3 as follows: "Deposits to be insured shall be Vietnamese dong deposited by depositors being individuals, family households, co-operative groups, private enterprises and partnerships with institutions which participate in deposit insurance, except for the following cases: 12 (a) Deposits of depositors who are shareholders owning more than ten (10) percent of the charter capital or holding more than ten (10) percent of the shares with voting rights of the institution which participates in insurance of such deposits; (b) Deposits of depositors who are members of the board of management, board of controllers, or who are the general director (director) or deputy general director (deputy director) of the institution which participates in insurance of such deposits; (c) Deposits used as security for the discharge of obligations of depositors; (d) Money used to purchase valuable papers, except a number of valuable papers pursuant to guidelines of the State Bank of Vietnam." In 2006, according to No. 03/2006/TT-NHNN Circular Guiding A Number Of Contents Of The Government's Decree No. 89/1999/ ND-CP of September 1, 1999, on Deposit Insurance, and Decree No. 109/2005/ND-CP of August 24, 2005, Amending And Supplementing A Number Of Articles Of Decree No. 89/1999/ND-CP: Deposits to be insured shall be those in Vietnam dong deposited at insured organizations by individuals, households, cooperative groups, private enterprises or partnerships, except the following cases: a/ Deposits of shareholders owning more than 10% of the charter capital or holding more than 10% of the voting share capital of such insured organizations; b/ Deposits of members of Managing Boards or Control Boards, general directors (directors), or deputy general directors (deputy directors) of such insured organizations; c/ Deposits used as security for the performance of depositors' obligations; d/ Deposits used for the purchase of non-bearer valuable papers issued by insured organizations. In general, the period 2005-2006 has seen significant improvements in the addition of insured subjects including individuals, family households, co-operative groups, private enterprises and partnerships. In particular, the policy on deposit exclusion has also been tightened, helping to eliminate moral hazard and increase transparency in banking management. b. Coverage limit The insurance payment limit refers to the maximum amount that a crypto insurance organization can pay for all insurance deposits of individuals participating in the crypto insurance organization when an insurance payment obligation occurs. With the improvement of the legal corridor, deposit insurance limits are also set by the government and prime minister, and adjusted according to the actual situation in Vietnam at each period. The deposit insurance limit and scope are periodically re-evaluated based on many macroeconomic factors such as: inflation, personal income, financial capacity of the deposit insurance organization, financial - banking system situation, systemic risk... to ensure that the public policy objectives of the deposit insurance system can be met. Therefore, from 1999 to 2005, the deposit insurance limit was VND 30 million. This limit was considered appropriate with international practices at the time of application, which was equivalent to 5.5 times of the GDP per capita and about 80% of total depositors could be fully insured if the bank went bankrupt, while the DI coverage limit in the world was about 3-12 times of the GDP per capita. From 2005, the deposit insurance limit increased to VND 50 million, about 3 times of GDP per capita and therefore about 81% of total depositors could be fully insured. Vietnamese law does not yet regulate the payment of deposits exceeding the deposit insurance 13 limit as many countries in the world have regulated (when financial crisis, bank bankruptcy...) to maintain public confidence, prevent mass withdrawals, causing system collapse. c. Participation Requirements According to Decree No. 89/1999/ND-CP of September 1st, 1999 on Deposit Insurance, Compulsory organization participation in deposit insurance is defined as follows: Article 2. 1. Credit institutions and organizations other than the credit institutions which are allowed to carry out a number of banking operations prescribed by the Law on Credit Institutions and take deposit money from individuals shall have to participate in the compulsory deposit insurance; 2. Organizations participating in the deposit insurance or the deposit insured shall have to post up their participation therein at their offices and transaction locations. As of the 8th year of implementing the deposit insurance policy, Vietnam has established deposit insurance relations with 1,077 deposit-taking organizations, including 5 state-owned commercial banks, 34 joint-stock commercial banks, 32 branches of foreign banks; 5 joint-venture banks, 10 non-bank credit organizations, the Central People's Credit Fund and 990 grassroots people's credit funds. (Source: Vietnam Deposit Insurance, as of December 31, 2007). These organizations have all been granted deposit insurance Certificates. Additionally, payment mechanism when credit institutions or banks go bankrupt is also specified in Decree No. 89/1999/ND-CP of September 1st, 1999 on Deposit Insurance Article 16. 1. When the deposit insured is ordered in writing to terminate its operation and that organization loses its payment capability, the deposit insurer shall have to pay the insured deposits of depositors at the deposit insured according to the principles defined in Article 4 of this Decree. 2. The deposit amount (including principal and interest) in excess of the maximum amount to be paid by the deposit insurer shall be paid to the depositor in the process of liquidating the assets of the deposit insured in compliance with the provisions of the Law on Bankruptcy. Article 19. Where the operating capital of the deposit insurer is temporarily not enough to support the deposit insured meeting with difficulty in their payment capability or to pay the insured money to the depositors at the bankrupt deposit insured, the deposit insurer shall have to report it to the State Bank so that the State Bank shall report it to the Prime Minister for consideration and permitting the deposit insurer to borrow money from credit institution(s) or other organizations with the Government's guaranty. Although no bank in Vietnam has yet filed for bankruptcy, it is important for every depositor to understand the deposit insurance regulations. This not only helps them make informed financial decisions but also contributes to increasing transparency and confidence in Vietnam’s banking system. 2.1.2 Premium System and Financial Management a. Premium System 14 Deposit insurance premiums are fees that insured institutions must pay to ensure deposit protection. These premiums help maintain the deposit insurer’s financial capacity, ensuring depositor protection while promoting stability and competition in the banking system. Globally, two main premium structures exist. The Flat-Rate Premium applies a uniform rate to all insured institutions, making it suitable for a pay-box model where the insurer's primary role is reimbursement. However, this model does not encourage risk control. In contrast, the Risk-Based Premium varies premiums based on institutional risk levels, incentivizing safer practices and reducing state intervention costs. This approach aligns more closely with a risk-minimization framework. In Vietnam, since its establishment, the DIV has performed an ex-ante and flat-rate collection of premium and the rate is 0.15% of the total average deposit balance of insured deposits at insured institutions. This has helped the DIV to be very active in financial resources management in order to have quick response when there is a need for reimbursement, thus helping to protect depositors’ legitimate rights and interests and minimizing threats of social insecurity at locations where obligation of reimbursement arises. The application of Flat Rate makes it easy to implement, manage, and ensure transparency. At the same time, the Vietnamese financial system is still in its early stages. Therefore, Flat Rate is suitable for this phase and creates a level playing field for all credit institutions. However, Flat Rate does not accurately reflect the operational risk levels of each bank, leading to a lack of good risk management for organizations and potentially causing weaker banks to not incur higher costs despite their greater risks, a phenomenon known as "moral hazard." The deposit insurance premium collection mechanism in Vietnam is governed by the Law on Deposit Insurance (1999), Decree 89, which specifies that: - The Prime Minister has regulated the fee framework of deposit insurance at the request of the State Bank of Vietnam. - Based on the fee framework of the deposit insurance, the State Bank of Vietnam shall regulate the specific fee rate of the deposit insurance for the deposit insurance participating organizations on the basis of assessment and classification of these organizations - The deposit insurance fees are calculated on the basis of the average deposit balance of the insured deposit at the deposit insurance participating organizations. - The deposit insurance fees are calculated and paid quarterly in the fiscal year. The deposit insurance participating organizations have to pay the deposit insurance fees to the deposit insurance organizations on the 20th date of the first month of the succeeding quarter at the latest. - The deposit insurance fees are recorded into the operation expenses of the deposit insurance participating organizations. - The deposit insured which violate the regulation on the premium payment time limits shall, besides having to fully pay the outstanding premium amount, be subject to a fine of 0.1% (one per thousand) of the overdue amount for each day of late payment. - If after 30 days from the deposit insurance premium payment deadline, the deposit insured fail to pay the deposit insurance premium and the fine, the deposit insurer shall have the right to: 15 (1). Request the State Bank to make a deduction from the deposit account of the credit institution at the State Bank for payment of the deposit insurance premium and the fine if the deposit insured is a credit institution. (2). Request the credit institution and/or the State Treasury where the deposit insured opens account(s) to make deduction therefrom for payment of the deposit insurance premium and the fine if it is an organization other than a credit institution, which is allowed to conduct some banking operations. b. Financial Management For the last 20 years, the DIV has made its efforts to use its capital effectively with the direction of not wasting idle capital. Annual capital growth stood at 25-27%. On average after every 5 years, the fund of the DIV has increased by more than twice. Investment has been made as legally regulated, ensuring the objective of capital preservation and growth on the basis of reasonable investment decisions in each period toward harmonizing investment-liquidity-profit. In the period of 1999-2012, over 95% of the capital was invested mainly in term deposits at commercial banks due to high interest rates, bringing more than 99% of revenues. Investment activities have not resulted in overdue debts; mature principals and interest rates were fully paid, contributing to stable profit earning to timely supply idle capital for re-investment. However, profitability of invested capital (a financial indicator used to measure the ability to generate profit relative to investment), which is calculated by accrued interest divided by the total invested capital, has been on a decreasing trend. 2.1.3 Enforcement Mechanisms Insured depositors are individuals who have deposits in Vietnam Dong with DI members. Therefore, as compared to the previous stipulations, the Law excludes deposits of institutions. This can be explained that institutions’ deposits are mainly for payment, thus highly liquid. If these deposits were insured, much pressure would be put on the deposit insurer’s reimbursement ability given its current modest financial capability. This provision helps to meet the ultimate goal of deposit insurance, namely protection of the vast majority of depositors. The Law on DI does not specify the coverage limit but entitles the Government to set a proper value for each period. This is expected to further strengthen public confidence in the banking system, thereby contributing to the stability of the financial and banking sector. Instead of the current flat rate of 0.15% per annum, DI premiums will be risk-based and within the frame set by the Government. This will ensure fairness, enhance operational effectiveness of credit institutions, accelerate the accumulation of DI funds and contribute to constraining systemic risks. The deposit insurer is entitled to take part in special control, management and liquidation of assets of failed DI members to make sure that the organization will well protect depositors and clearly determine the boundary of its role in ensuring the safety of the national financial system. 2.1.4 Payout Process Between 1999 and 2012, Vietnam's deposit insurance system, managed by the Deposit Insurance of Vietnam (DIV), implemented structured processes to ensure timely reimbursement to depositors and maintain public confidence in the financial system. According to Law on Deposit Insurance 1999, the details of payout process was that: 16 Triggering Payout Payouts were initiated when a participating financial institution was declared insolvent or unable to meet its obligations to depositors. The obligation to pay insurance arises from the time: - The State Bank of Vietnam has a document terminating special control or a document terminating the application or a document not applying solvency restoration measures, but the credit institution is an organization participating in deposit insurance and still falls into bankruptcy - The State Bank of Vietnam has a document identifying foreign bank branches as deposit insurance participating organizations that are unable to pay deposits to depositors. Within 60 days from the date the obligation to pay insurance premiums arises, the deposit insurance organization shall be responsible for paying insurance premiums to the insured depositor. Payout Procedure: The dossier to request the payment of premium includes the written request of the premium payment, the list of insured persons of deposit, the deposit of each insured person and the premium to request the deposit insurance to make payment. Within 05 working days after receiving complete dossiers as prescribed in Clause 1 of this Article, the deposit insurance organization shall verify the documents and books to determine the amount to be paid. Within 10 working days after the end day of inspection specified in clause 2 of this Article, the deposit insurance organization must have a plan to pay a premium to the insured persons of deposit; publicly announce the location, time, mode of payment of premium on three consecutive issues of a central newspaper, a local newspaper where located the head office and the branches of the deposit insurance participating organization and on website of a Vietnamese newspaper; listing the list of insurance payees at the announced locations. Upon receipt of premium, the insured persons of deposit must produce the evidencing papers of the legal ownership with respect to the insured deposits at the deposit insurance participating organization.The deposit insurance organization shall directly make payment of premium to the insured persons of deposit or authorize another deposit insurance participating organization to make payment. After a period of 10 years from the date the deposit insurance organization has announced the first time the payment of premium, the unclaimed premium shall be established the state ownership and added to the operating capital of the deposit insurance organization. The person who has the ownership of the insured deposit shall not have the right to request the deposit insurance organization to return that premium. 2.2. Challenges and Shortcomings 2.2.1. The Foreign Currency Exclusion According to the estimation of the International Monetary Fund (IMF), before 2006, Vietnam's foreign exchange reserves increased by more than 10% every year, reaching 6. In 2006, it was USD 341 million, almost double that of 2001. Foreign exchange deposits account for a large proportion of the total financing. According to the national open policy, the investment flow of foreign individuals and export workers has increased, making foreign exchange deposits more and more popular. 17 As of 2010, individuals have deposited foreign currency in banks with foreign exchange business licenses, but the current deposit insurance policy in Vietnam does not stipulate whether these deposits are insured, which is unfair, because people's remittance demand is increasing, but the interests of deposit insurance cannot be guaranteed. On the other hand, the lack of foreign exchange deposit insurance mechanism leads Vietnam to deviate from international practice, and many developed countries adopt multi-currency insurance policies within a reasonable range. 2.2.2. Inadequacies in determining the types of deposits subject to insurance The definition of "insured deposits" in the Law on Credit Institutions and Circular 03/2000/TT-NHNN is not consistent, leading to different handling methods among credit institutions (credit organizations). Some typical cases are: Deposits of private enterprises and partnerships: Some credit institutions classify them as individual deposits (insured), others consider them as organizational deposits (not insured). Private enterprises and partnerships operate as organizations, so their deposits are not subject to insurance. Individual deposits: Currently not insured because they are considered civil relations. However, in essence, these are still personal deposits and need to be insured. Joint account deposits (with individuals participating): If there is an individual in the joint account, that individual's portion of the money must be insured. Deposits of organizations and households but in the name of individuals: If there is no evidence to confirm that they are organizational deposits, this amount should be insured as individual deposits. 2.2.3. A Marginal Role of Deposit Insurance of Vietnam in the Financial Safety Net The national financial safety net has not been clearly defined in legal documents especially regarding the role, responsibilities of institutions in charge of exercising financial supervision. “The role of DIV in the financial supervision has not been clearly defined”, said Dr. Duong Thu Huong – Secretary General of the Vietnam Banks Association. In accordance with the current law in force, DIV supervises, inspects the observance of deposit insurance regulations and safety regulations in the operation of the insured institutions. The insured institutions are required to provide documents, information, reports and statements on business activities regularly or irregularly; implement measures to amend violations of safety regulations on banking activities and the risk of losing affordability. However, the current law does not stipulate penalties for the violations of the insured institutions. Therefore, it will reduce the efficiency and effectiveness of supervision. 2.2.4. Process of handling bank failures is still insufficient It is widely defined that DIV plays important roles in the process of handling credit institution bankruptcy and achieving goals through professional activities for example bridge banks, financial assistance, reimbursement for depositors... However, in accordance with the current law of Vietnam, the process of handling credit institution failures still reveals shortcomings, especially there has been no rules or regulations on credit institutions’ failures. For instance, it has not clearly defined bank failures and dissolution. The roles performed by DIV in handling bank failures through professional activities such as financial assistance (the process, procedures, initiatives) and asset liquidation (council’s liquidation activities) are still limited. Especially, some professional activities undertaken by DIV to handle failures have not been enshrined in the law, for example regulations on debt purchasing, bridge bank, etc… 18 2.2.5. Provisions on deposit insurance rates International practice stipulates that deposit insurance premiums are based on banking operational risks: the higher the risk, the higher the premium and vice versa. However, in Vietnam, all organizations participating in deposit insurance pay a common premium, regardless of the level of risk. According to Decree 89/1999/ND-CP and guiding documents, the deposit insurance premium in Vietnam is currently 0.15%/year, calculated on the total average deposit balance subject to insurance. This premium is decided by the Prime Minister based on the proposal of the deposit insurance organization and the opinions of the State Bank and the Ministry of Finance. This leads to a number of limitations: - Not encouraging banks to improve operational efficiency and risk management. - Lack of fairness between safe banks and banks with high risk levels. - Not creating incentives for depositors to consider choosing safer credit institutions. 2.2.6. Limitations of the deposit insurance payment During most of the 1999–2011 period, the deposit insurance coverage in Vietnam was capped at VND 30 million per depositor. While this amount was above the GDP per capita at the time, it increasingly fell short of protecting the actual savings of many depositors as incomes rose and the financial system expanded. The cap did not keep pace with inflation or the growth in household and small business deposits, leading to limited protection for a large share of depositors. This gap in coverage risked undermining public trust in the safety net and may have discouraged greater use of the formal banking system. 2.2.5. Moral hazard of deposit insurance in Vietnam After the 2008 crisis, the period of 2010-2011 witnessed the phenomenon of banks competing to increase deposit interest rates, even applying "hidden" interest rates. When the State Bank committed to not allowing any bank to fail, depositors relying on deposit insurance flocked to banks that paid the highest interest rates, regardless of the risks. This disrupted cash flow, breaking the market supply-demand balance. On the other hand, many banks were forced to make risky investments in high-risk areas to meet deposit interest rates, leading to an increase in bad debt. Notably, some people's credit fund officials violated safety regulations, causing these funds to go bankrupt and forcing deposit insurance to pay compensation. 2.3. Reforms After five years of operation, in 2005, the Government issued Decree No. 109/2005/ND-CP, amending Decree No. 89/1999/ND-CP, raising the deposit insurance coverage limit to VND 50,000,000 to align with economic and social developments. This adjustment aimed to enhance depositor protection in response to economic changes, ensuring better financial security for depositors. Additionally, the payout process was improved by introducing a maximum payout time frame of 60 days and requiring transparent public disclosure of payout information. DIV was also authorized to delegate the payment process to eligible credit institutions. Regarding the scope of insurance, it was clarified that only personal deposits were covered, while corporate deposits, organizational funds, and investment products were excluded. To enhance operational effectiveness, DIV 19 focused on staff training, modernizing its technological infrastructure, and strengthening international cooperation to align with global standards. Notably, by the end of this period, Vietnam began exploring a shift from a flat-rate premium system to a risk-based premium system—an important direction in its journey toward international financial integration. 3. Phase 2: Legal Codification (2012–2016) "The codification phase" marked a big turning point in perfecting the legal framework for deposit insurance in Vietnam. With the promulgation of "The Law on Deposit Insurance 2012" and its guiding documents, the deposit insurance system has been significantly strengthened in terms of coverage, premium management system, and enforcement mechanisms. These reforms aim to enhance depositors’ confidence, protect depositors’ rights, and contribute to ensuring the stability of Vietnam’s banking and financial system. 3.1. Regulations “The Law on Deposit Insurance 2012”clearly defines the principles of deposit insurance in Clause 1, Article 5, emphasizing two basic principles. Firstly, deposit insurance is a compulsory type of insurance as prescribed by law, not voluntary. Second, deposit insurance activities must ensure publicity and transparency, ensuring the rights and legitimate interests of relevant parties, including insured depositors, participating deposit insurance organizations, and deposit insurance organizations. This principle ensures the stability and effectiveness of the deposit insurance system, which means creating confidence for depositors. 3.1.1 Coverage Scope and Participation Requirements a. Insured Deposits During the period from 2012 to 2016, the coverage limit for insured deposits was fixed at VND 50 million per depositor per institution. This limit was initially set prior to the implementation of the Law on Deposit Insurance in 2013 and remained unchanged until 2017. The enactment of Law No. 06/2012/QH13 by the National Assembly marked the first time that the definition and framework for insured institutions and insured deposits were clearly established under Vietnamese law. This law and its guiding documents formally clarified the scope of deposit insurance, including detailed lists of eligible deposits as well as specific exclusions. The structure of the law reflected a principle of selective protection, aiming to safeguard the most vulnerable participants in the financial system—namely, individual depositors. Article 18 of the Law on Deposit Insurance 2012 specifies that insured deposits include Vietnamese Dong deposits held by individuals at institutions participating in the deposit insurance system. These deposits may take various forms, including term and non-term deposits, savings accounts, certificates of deposit, promissory notes, treasury bills, and other similar instruments as defined by the Law on Credit Institutions. However, deposits denominated in foreign currencies, as well as deposits made by organizations and enterprises, are excluded from this coverage. While this provision plays a crucial role in protecting individual depositors and maintaining systemic stability, its limited scope has increasingly become a point of concern in light of financial market development. Exclusions are also stipulated in Article 19 of “the Law on Deposit Insurance 2012”: 1. Deposits of individuals owning more than 5% of charter capital 20 Article 19, Clause 1, stipulates the exclusion of deposits from individuals who own more than 5% of the charter capital of the credit institution where they deposit money. The main reason for this provision comes from the fact that large shareholders often have the ability to directly influence the operations and management decisions of the credit institution. If insured, they can accept higher risks in business, leading to the risk of system collapse. For example, a shareholder who owns 10% of the bank's capital can promote risky loans, knowing that his deposits are insured. This reduces the incentive to monitor risks, destabilizing the whole system. 2. Deposits of members of the Board of Directors and Executive Board Article 19.2 excludes deposits of members of the Board of Directors, Board of Supervisors, General Directors, and Deputy General Directors of the credit institution or foreign bank branch where they work. These groups of people hold inside information and are responsible for establishing risk management policies. Insuring their deposits may create conflicts of interest, making them less responsible in preventing decisions that pose risks to the institution. For example, a bank director may prioritize highyield but high-risk investments, despite the risk of bankruptcy, if he knows that personal deposits are still insured. 3. Money to buy unknown valuable papers Article 19.3 excludes money for purchasing anonymous securities issued by deposit insurance participating organizations. Anonymous securities (such as bearer bonds) are often used in anonymous transactions, posing risks of fraud and money laundering. Not insuring these instruments helps limit the exploitation of the insurance system to conceal illegal activities. At the same time, this provision encourages investors to be more cautious when choosing financial products, instead of relying on state protection. These exclusions are also consistent with international practice, demonstrating the principle of "not insuring risk creators" (moral hazard prevention). The Scope of coverage based on “The Law on Deposit Insurance 2012” stipulated that deposit insurance aims to ensure the repayment of deposits (including principal and interest) to depositors when a credit institution becomes insolvent or bankrupt. Within the legal framework of this period, there are two main subjects related to deposit insurance. b. Participation Requirements Firstly, according to Article 4, “the insured depositor” is an individual who has insured deposits at a deposit insurance participating institution. This shows that the scope of deposit insurance is limited to individual deposits, not including deposits of organizations. According to Law No.06/2012/QH13 of the National Assembly: Law on Deposit Insurance, Rights and obligations of the insured: Article 11. Rights and obligations of the insured persons of deposit 1. Being insured their deposits at deposit insurance participating organizations under the provisions of this Law. 2. Receiving the premium fully and on time as prescribed by this Law. 3. Requiring the deposit insurance participating organizations and deposit insurance organizations to provide complete and accurate information and regulations on deposit insurance. 4. Making complaints and denunciations and initiating a suit against the agencies, organizations, and individuals related to deposit insurance as prescribed by the law. 21 5. Having the obligations to provide complete and honest information on the deposit on the requirement of deposit insurance participating organizations and deposit insurance organizations upon performing the procedures for the premium payment. Second, "insurance participating organizations" are credit institutions and foreign bank branches established and operating under the Law on Credit Institutions that can receive individual deposits (Article 4). Limiting the scope of deposit insurance to individuals reflects the main objective of the deposit insurance system, which is to protect small depositors. A participating insured institution refers to a credit institution or a foreign bank branch established and operating under the Law on Credit Institutions, which is authorized to accept deposits from individuals. These include commercial banks, cooperative banks, people’s credit funds, foreign bank branches established and operating under the Law on Credit Institutions. Furthermore, Non-Bank Financial Intermediaries are not included. According to Article 4 of “the Law on Deposit Insurance 2012”, "insured deposits" are defined as deposits in Vietnamese Dong of individuals at deposit insurance participating organizations, including term deposits, non-term deposits, savings deposits, and other forms of mobilization as prescribed by law. This provision affirms that only deposits in domestic currency (VND) are covered by insurance, reflecting the policy of prioritizing the stability of the national monetary system and reducing exchange rate risks for the insurance fund. At the same time, the exclusion of deposits in foreign currencies (USD, EUR, etc.) comes from the goal of managing exchange risks and encouraging the use of domestic currencies in the economy. In addition, deposits of organizations and enterprises are completely excluded from the scope of insurance as stipulated in Clause 2, Article 4 of “the Law on Deposit Insurance 2012”. This distinction is based on the assumption that organizations have the financial capacity and expertise to assess risks better than individuals while helping to reduce the financial burden on the deposit insurance fund. However, the regulation also creates challenges when many small and micro enterprises – which are equivalent in size to households – are not covered by this insurance regime. Decree 68/2013/ND-CP (effective August 19, 2013) has detailed regulations on the issuance of certificates of participation in deposit insurance in Article 6. This regulation demonstrates the mandatory and official nature of the involvement in deposit insurance for credit institutions. It aims to ensure that all credit institutions participate in the deposit insurance system, creating a synchronous safety net for depositors. 3.1.2 Premium System and Financial Management a. Premium System “The Law on Deposit Insurance 2012” has established a mandatory insurance premium system for all deposit insurance participating organizations. Article 10 of the Law clearly identifies "Deposit insurance participating organizations not paying deposit insurance premiums" as one of the prohibited acts. This provision emphasizes the mandatory payment of insurance premiums, ensuring the financial sustainability of the deposit insurance system. Paying insurance premiums is not only an obligation but also the basis for creating financial resources for the Deposit Insurance Fund, from which it can perform the function of protecting depositors when necessary. This is one of the core factors ensuring stability and confidence in the banking and financial system. “The Law on Deposit Insurance 2012” clearly stipulates that failure to pay deposit insurance 22 premiums is one of the prohibited acts for deposit insurance participating organizations. This emphasizes the mandatory payment of premiums, establishing a solid legal basis to ensure financial resources for the deposit insurance fund. Paying premiums in full and on time is not only a legal obligation but also demonstrates the commitment of credit institutions to protect depositors and maintain the stability of the financial system. b. Financial Management Safe Investment Principles In the period from 2012 to 2016, as stipulated in Article 5, Clause 4 of Circular No. 312/2016/TT-BTC, the Deposit Insurance of Vietnam (DIV) was permitted to invest its temporarily idle funds exclusively in secure instruments. These included government bonds, which accounted for the majority of investments due to their high reliability; deposits at the State Bank of Vietnam, which ensured quick access to capital when necessary; and State Bank bills, which served as short-term instruments well-suited to meeting liquidity requirements. This conservative investment approach was intended to minimize exposure to high-risk assets such as stocks or real estate, thereby helping the fund maintain stability even under volatile market conditions. Reporting and Monitoring Mechanism According to Article 25 of the same Circular, the DIV is required to prepare annual financial reports, which are subject to independent audits conducted by the State Audit of Vietnam. Additionally, deposit insurance participating institutions must submit quarterly reports detailing the balance of insured deposits, along with their balance sheets and performance evaluations. These reports serve as a crucial basis for adjusting annual insurance premiums, ensuring that the fund remains capable of meeting its payment obligations in the event of adverse developments. 3.1.3 Enforcement Mechanisms a. Legal Framework for Enforcement Mechanism The Law on Deposit Insurance 2012 has clearly stipulated the principles of operation and enforcement mechanisms to ensure the effectiveness of this policy. According to Clause 1, Article 4 of “the Law on Deposit Insurance 2012”, "Deposit insurance" is defined as the guarantee of repayment of deposits to insured depositors within the prescribed limit when the participating organization becomes insolvent or bankrupt. This definition clarifies the main objective of deposit insurance - protecting the interests of depositors- and at the same time establishes the basis for the enforcement mechanisms to be built. The core principle stipulated in Article 5 of “the Law on Deposit Insurance 2012” emphasizes the compulsory nature of this type of insurance. This means that all credit institutions and foreign bank branches that accept deposits from individuals must participate in deposit insurance without exception. This mandatory requirement plays an important role in ensuring credit institutions' compliance, facilitating the synchronous implementation of deposit insurance regulations across the system. The law also clearly stipulates that deposit insurance activities must be carried out in a public and transparent manner in order to ensure the legitimate rights and interests of all relevant parties, including depositors, participating deposit insurance organizations and deposit insurance organizations. This principle of transparency is the foundation for building trust in the financial system and creating the basis for effective monitoring and inspection mechanisms. b. Prohibited Acts and Sanctions for Violations: 23 Article 10 of “the Law on Deposit Insurance 2012” clearly lists prohibited acts in deposit insurance activities, including: 1. The deposit insurance participating organizations fail to pay the fee of deposit insurance. 2. The deposit insurance organizations fail to pay or insufficiently pay the premium 3. Defrauding and falsifying records, materials, and papers on deposit insurance. 4. Obstructing, making it difficult and damaging the legitimate rights and interests of the deposit insurance organizations and the deposit insurance participating organizations, the insured persons of deposit and the agencies and organizations related to deposit insurance. The Government has clearly stated the violations in the “the Law on Deposit Insurance 2012”. However, the sanctions for violations during this period are still limited and lacking. Although “the Law on Deposit Insurance 2012” was issued in 2012, it was not until 2019, when Decree 88/2019/ND-CP was issued, that the sanctions for violations were completed and took effect from December 31, 2019. 3.1.4 Payout Process The payout process under Vietnam's deposit insurance system is a structured mechanism designed to ensure efficient compensation for depositors when a participating institution fails. As outlined in the Deposit Insurance Law of 2012, the process begins when the deposit insurance organization determines that a participating institution—such as a credit institution or foreign bank branch operating under the Law on Credit Institutions—can no longer meet its deposit obligations or has become bankrupt. Once this determination is made, the organization assesses the insured amount for each individual depositor, which includes all eligible deposits, covering both principal and accrued interest, held at the failed institution. For depositors with outstanding loans from the same institution, the insured amount is adjusted by subtracting the loan balance, adhering to the legal principle of set-off. The final step involves disbursing the calculated amount to depositors, up to a specified maximum limit. This process is supported by Decree 68/2013/NĐ-CP, effective since August 19, 2013, which provides detailed guidelines—such as those in Article 12 for authorizing payouts and Article 13 for receiving compensation—ensuring transparency and operational consistency in protecting depositors’ rights during a bank failure. 3.2. Challenges & Shortcomings Despite significant progress in the 2012-2016 law drafting period, the deposit insurance system in Vietnam still faces many challenges, typically in terms of structure and operation, limiting the effectiveness of the law and requiring further reforms. These shortcomings are reflecting certain limitations and difficulties in implementation, requiring management agencies to address. First challenge is about coverage limitations. A significant challenge lay in the limited scope of coverage, which only extended to individual depositors rather than including legal entities or business accounts. This restriction created protection gaps in the financial system and potentially limited the stabilizing effect of deposit insurance during financial stress. Research has shown that more comprehensive coverage can better prevent bank runs and maintain financial stability during crises, suggesting this limitation may have undermined one of the system's primary objectives. Second, enforcement mechanisms is also another difficulty. Although the legal framework prohibited participating institutions from failing to pay deposit insurance premiums and forbade the deposit insurance organization from refusing or incompletely paying insurance claims, questions remained about the effectiveness of enforcement mechanisms. The penalties for violations were further clarified in Decree 24 88/2019/NĐ-CP concerning administrative violations in currency and banking activities, but during the 2012-2016 period, enforcement remained a challenging aspect of implementation. Another significant challenge was the deposit insurance system's operational readiness for managing large-scale bank failures. While the legal framework established the compensation procedures, the capacity to process numerous claims simultaneously during a systemic crisis remained untested. This uncertainty created potential vulnerabilities in the system's ability to fulfill its mandated function during extreme financial stress. Despite the legal framework's emphasis on transparency and openness, public awareness of deposit insurance protections remained limited. Many depositors did not understand coverage limits, eligible deposits, and claim procedures. This knowledge gap potentially undermined one of the system's primary purposes—maintaining depositor confidence and preventing panic-driven withdrawals during financial uncertainty. The interface between deposit insurance payouts and the broader bank resolution framework presented coordination challenges. The 2012-2016 regulatory framework did not fully clarify how deposit insurance would interact with other resolution tools, such as bank mergers, acquisitions, or asset transfers. This ambiguity created potential efficiency losses in managing failing institutions and protecting depositors' interests. 3.3. Reforms Significant reforms to Vietnam’s deposit insurance system took place between 2012 and 2016, establishing a more robust legal framework and laying the foundation for future improvements. These reforms addressed previous legal loopholes and brought the system more in line with international standards and best practices. The most essential reform during this era was the thorough codification of principles and operations related to deposit insurance as encapsulated in the 2012 Deposit Insurance Law (Deposit Insurance Law No. 06/2012/QH13 was passed by the 13th National Assembly on June 18, 2012, and took effect on January 1, 2013). This legislative enactment supplanted the antecedent mosaic of regulations with a cohesive legal framework that governs all dimensions of deposit insurance operations. The statute elucidated the characterization of deposit insurance as a compulsory protective mechanism, thereby ensuring systematic coverage throughout the banking sector instead of permitting optional participation. A significant reform advancement was achieved through Decree 68/2013/NĐ-CP, which delineated comprehensive implementation directives for the foundational legislation. This decree elucidated practical dimensions of deposit insurance operations, encompassing the certification protocol for participating entities, the procedures for authorizing insurance disbursements, and the frameworks for obtaining compensation. These regulatory implementations transmuted expansive legislative principles into actionable procedures for all stakeholders engaged in the deposit insurance framework. The legislative reform instituted more rigorous accountability frameworks for deposit insurance entities and the affiliated financial institutions. The statute categorically forbade institutions from neglecting their obligations to remit deposit insurance premiums and prohibited the deposit insurance agency from rejecting or inadequately fulfilling legitimate insurance claims. These restrictions were bolstered by enforcement mechanisms that established significant repercussions for non-adherence, although these would be further augmented in subsequent regulatory revisions. 25 The reforms instituted enhanced procedural safeguards for the management of joint deposit accounts as well as for exceptional circumstances. In the context of jointly owned deposits, the legislation delineated explicit provisions for the allocation of compensation in accordance with ownership agreements or established legal principles. Likewise, the regulatory framework tackled intricate scenarios, such as depositors with outstanding loans at the failing institution, elucidating the methodology by which compensation would be computed in these situations. While Decree 88/2019/NĐ-CP, which lies beyond the analytical scope of the 2012-2016 timeframe, is poised to more comprehensively advance the complete enforcement regime, the foundational elements of this enforcement architecture were instituted during the phase of legal codification. The legislation enacted in 2012 delineated prohibited actions and established the principle that infractions would incur administrative or criminal repercussions contingent upon their gravity, thereby laying the groundwork for more nuanced enforcement stipulations in subsequent regulatory frameworks. During the phase of legal codification, a robust foundation for a comprehensive framework governing regulatory enforcement and transparency was established, thereby facilitating the introduction of more detailed provisions in subsequent regulations, notably Decree 88/2019/NĐ-CP. The legislation enacted in 2012 delineated prohibited actions and specified that infractions would incur administrative or criminal repercussions contingent upon their severity, thereby ensuring adherence to regulatory standards, financial stability, and market integrity. Concurrently, a significant reform mandated stringent transparency requirements for deposit insurance operations, obligating that all activities be conducted with openness to safeguard the legitimate rights of stakeholders and uphold accountability. These transparency stipulations bolstered public confidence, permitted more effective regulatory oversight, and mitigated the risks associated with mismanagement and corruption. The measures concerning enforcement and transparency were instrumental in enhancing compliance, governance, and trust within the financial system, thereby establishing a solid groundwork for forthcoming regulatory advancements. 4. Phase 3: System Enhancement (2017–2020) During the period from 2017 to 2020, Vietnam undertook significant measures to enhance its deposit insurance system, aiming to bolster financial stability and protect depositors. This phase focused on refining regulations, addressing existing challenges, and implementing reforms to strengthen the overall framework. 4.1. Regulations Several key regulatory developments occurred during this period, focusing on various aspects of the deposit insurance system. 4.1.1 Coverage Scope and Participation Requirements During the period from 2017 to 2020, the coverage scope of deposit insurance in Vietnam included various types of deposits in Vietnamese Dong (VND), such as term deposits, demand deposits, savings accounts, deposit certificates, promissory notes, treasury bills, and other deposit types regulated by the Law on Credit Institutions. The coverage limit was set at VND 75 million per depositor per insured institution from August 5, 2017, until it was increased to VND 125 million in December 2021. Participation in the deposit insurance system is mandatory for all credit institutions licensed by the State Bank of Vietnam (SBV), including commercial banks, people's credit funds, cooperative banks, and microfinance institutions. These institutions must pay premiums to the Deposit Insurance of Vietnam (DIV) based on their insured deposits. The DIV assesses and collects these premiums, which are used to fund potential payouts in case of bank failures. 26 4.1.2 Premium System and Financial Management a. Premium System The deposit insurance premium system remained based on a flat-rate model, where insured institutions paid a fixed percentage of their total insured deposits. According to Circular No. 24/2017/TT-NHNN, issued by the State Bank of Vietnam (SBV), the premium rate was set at 0.15% per year of insured deposits. While this system provided stability, it lacked differentiation between high-risk and low-risk financial institutions. Many international markets, including the United States, Canada, and European countries, had already adopted risk-based premium models, where institutions with higher financial risk pay higher premiums. The drawbacks of the flat-rate model became evident when examining the financial performance of Vietnam’s banking sector. Between 2017 and 2020, some smaller credit institutions and weak banks experienced financial distress, leading to concerns about systemic risk. Despite this, they paid the same premium rate as large, well-capitalized banks. The absence of a risk-based system failed to discourage risky behavior among financial institutions. Recognizing the need for a more equitable approach, Vietnamese regulators began studying the feasibility of a risk-based premium system. In 2019, the Deposit Insurance of Vietnam (DIV) initiated research in collaboration with international organizations such as the World Bank and IADI to explore possible models suitable for the Vietnamese market. However, full implementation remained a future goal beyond 2020. b. Financial Management During the period from 2017 to 2020, the financial management of the Deposit Insurance of Vietnam (DIV) involved several key components to ensure the stability and effectiveness of the deposit insurance system. The DIV collected premiums from insured institutions, which were used to fund potential payouts to depositors. Notably, in 2020, the total collected premiums reached VND 8,322 billion, exceeding the assigned plan by 108.7%. This achievement reflects the DIV's efficiency in managing its premium collection process. The DIV also invested its temporarily idle capital primarily in government bonds and other low-risk securities, with a total of VND 67,688.3 billion invested as of December 2020, marking a 19.3% increase from the previous year. However, due to decreasing interest rates, the returns on these investments were relatively low. The DIV's charter capital, provided by the state budget, was crucial for enhancing its financial capacity. Additionally, the DIV conducted regular on-site examinations and off-site supervision to ensure compliance with deposit insurance regulations, monitoring for inaccuracies in premium payments and applying penalties for non-compliance. Overall, the DIV's financial management during this phase focused on optimizing premium collection, prudent investment strategies, and robust risk management practices to support the stability of Vietnam's banking sector. 4.1.3 Enforcement Mechanisms To strengthen the effectiveness of deposit insurance, enforcement mechanisms were enhanced in several key ways: First, stronger supervision and compliance monitoring: The Deposit Insurance of Vietnam (DIV) intensified its oversight of insured institutions to ensure compliance with regulatory requirements. Secondly, collaboration with the SBV: A more integrated approach was adopted, allowing real-time data sharing between the DIV and SBV to detect financial risks early and intervene when necessary. Besides, stricter penalties for non-compliance: Institutions that violated deposit insurance regulations faced consequences such as financial penalties, operational restrictions, or even license revocation in severe cases. Notably, in 2019, several weak financial institutions were placed under special supervision, allowing the DIV and SBV to intervene and prevent potential failures. However, enforcement 27 effectiveness was still limited by resource constraints and the lack of advanced data analytics for risk assessment. Enforcement mechanisms are also another difficulty. Although the legal framework prohibited participating institutions from failing to pay deposit insurance premiums and forbade the deposit insurance organization from refusing or incompletely paying insurance claims, questions remained about the effectiveness of enforcement mechanisms. The penalties for violations were further clarified in Decree 88/2019/NĐ-CP concerning administrative violations in currency and banking activities, but during the 2012-2016 period, enforcement remained a challenging aspect of implementation. 4.1.4 Payout Process During this phase, one of the main objectives was to improve the deposit insurance payout process to ensure depositors received timely compensation in case of institutional failures. The implementation of an automated payout system reduced processing time from 60 days to 30 days, significantly enhancing efficiency. Additionally, investments in technology upgrades improved the accuracy of depositor records, ensuring faster and more transparent reimbursements. The State Bank of Vietnam (SBV) and the Deposit Insurance of Vietnam (DIV) conducted crisis simulation exercises to test regulators' preparedness for financial institution failures and refine response strategies. However, payout efficiency remained lower than in many developed markets, where depositors could receive compensation within 7 to 14 days. This slow process in Vietnam was primarily due to the lack of real-time deposit records and coordination challenges between banks and regulators .between banks and regulators. 4.2. Challenges & Shortcomings During the period from 2017 to 2020, Vietnam's deposit insurance system faced several challenges and shortcomings that needed to be addressed to enhance its effectiveness and better protect depositors. One of the primary challenges was the economic growth and inflation in Vietnam, which led to an increase in consumer prices and average deposit amounts. This made the existing deposit insurance coverage limit of VND 75 million less effective, as it no longer fully protected a significant portion of depositors. In comparison to international practices, Vietnam's deposit insurance coverage limit was relatively low. Many countries adjust their coverage limits based on GDP per capita and the ratio of insured depositors to total depositors. Furthermore, the Deposit Insurance of Vietnam (DIV) faced challenges in maintaining an adequate financial capacity to support insured institutions and pay out deposit insurance reimbursements. The profitability of the DIV's idle capital decreased due to low interest rates on government bonds, which were the primary investment vehicle. Regarding shortcomings, the coverage limit of VND 75 million was insufficient for many depositors, especially as economic conditions changed. This limited coverage could erode depositor confidence in the banking system. Additionally, the DIV's investment options were limited, primarily to government bonds and State Bank of Vietnam bills, which offered low returns due to decreasing interest rates. This affected the DIV's ability to grow its funds effectively. There was also a need for clearer guidelines regarding the DIV's role in restructuring weak credit institutions and managing uninsured deposits. Finally, the system required more robust risk management practices to ensure the stability of the banking sector and protect depositors' interests effectively. Addressing these challenges and shortcomings was crucial for enhancing the deposit insurance system in Vietnam and ensuring it remained effective in protecting depositors and maintaining banking stability. 28 4.3. Reforms To address these challenges, several key reforms were implemented or planned for future execution. The government raised the deposit insurance coverage limit to VND 125 million in 2021, providing stronger protection for depositors. Research and feasibility studies on transitioning to a risk-based premium system continued, paving the way for a future shift from a flat-rate to a risk-adjusted premium model to encourage better risk management among financial institutions. Additionally, public education campaigns were launched to enhance depositors' understanding of the benefits and limitations of deposit insurance, strengthening confidence in the financial system. Lastly, the DIV explored further improvements to the payout process by leveraging digitalization and automation to reduce processing times and better meet depositor needs. 5. Phase 4: Modernization (2021–2025) 5.1. Regulation 5.1.1. Coverage Scope and Participation Requirements a. Coverage Scope The Prime Minister's Decision No. 32/2021/QĐ-TTg marked a watershed moment, elevating coverage to 125 million VND ($5,500 USD) while retaining the scope of insured instruments. Although Vietnam's deposit insurance coverage limit increased significantly in nominal terms, from 30 million VND in 1999 to 125 million VND in 2021; the coverage-to-GDP per capita ratio declined from 5.5x to just 1.47x. This shift isn't necessarily a sign of policy lag or failure. Rather, it reflects a deliberate strategy: Vietnamese policymakers have prioritized broad protection (coverage breadth) over high percapita payout limits (coverage depth). In a financial system where commercial banks are effectively shielded from failure—often being merged or restructured instead of going bankrupt—the real risk lies with smaller institutions like people's credit funds (PCFs) and cooperative banks, which operate closer to rural and low-income communities. These institutions play a crucial role in financial inclusion but are more vulnerable, and protecting their depositors ensures systemic stability at the grassroots level. As such, maintaining a moderate coverage limit while maximizing the percentage of protected depositors (91% in 2021) is a rational trade-off within Vietnam’s state-backed financial safety net model. Year Coverage (VND) GDP/Capita Coverage/GDP Protected Depositors 1999 30 million $400 5.5x 80% 2005 50 million $700 3x 81% 2017 75 million $2,500 1.5x 87.32% 2021 125 million $3,743 1.47x 91% Table 1: Deposit Insurance Coverage and Economic Indicators Over Time The International Association of Deposit Insurers (IADI) sets global standards to ensure effective deposit protection systems. As of 2024, Vietnam is only partially compliant with IADI core principles, mainly due 29 to its use of a flat-rate premium system, where all insured institutions pay the same rate regardless of risk—unlike countries with risk-based pricing models. Additionally, coverage limit adjustments in Vietnam are made through political discretion, not automatic indexation to inflation or GDP as recommended by IADI. This, combined with a policy focus on protecting a high percentage of small depositors rather than matching income levels, results in a relatively low coverage-to-GDP ratio (1.47x) compared to peers like Indonesia or Mexico, which exceed IADI’s 2.5–5x guideline. Country Coverage Limit GDP per Capita Coverage/GDP Ratio Vietnam $5,500 $4,700 1.17x Indonesia $127,129 $4,800 26.49x Mexico $143,000 $10,000 14.30x Philippines $17,000 $12,000 1.42x China $70,000 $13,000 5.38x IADI Guidance - - 2.5-5x Table 2: Deposit Insurance Coverage Limits vs. GDP per Capita (Selected Countries) in the year 2024 b. Participation Requirements According to Article 15 of the Deposit Insurance Law, institutions participating in deposit insurance must publicly post a copy of the Deposit Insurance Certificate at all transaction points accepting deposits. This certificate is issued by the Deposit Insurance of Vietnam (DIV). Furthermore, under Article 10 of the Credit Institutions Law (2024), credit institutions and foreign bank branches are required to participate in deposit insurance as mandated by law and must publicly disclose their participation at their headquarters and branches. The institutions contributing to deposit insurance premiums include commercial banks, cooperative banks, people's credit funds, microfinance institutions, and foreign bank branches. As of 2023, Vietnam’s deposit insurance system covers 1,280 institutions, the majority of which are People’s Credit Funds (1,179). Despite their small individual deposit volumes, they make up over 90% of insured institutions, reflecting the unique structure of Vietnam’s financial system. While commercial banks and foreign bank branches remained stable at 96, other segments like cooperative and microfinance institutions had marginal shares. This structure reflects Vietnam’s financial landscape, heavily weighted toward small, community-based institutions. The system has seen little change in participant numbers over the past decade, indicating a mature but concentrated base. The prevalence of small-scale, lowerrisk-profile institutions also explains Vietnam’s continued use of a flat-rate premium, another factor contributing to partial IADI compliance, which favors risk-based schemes for greater alignment with institutional risk. 5.1.2. Premium System and Financial Management a. Premium Structure 30 The current deposit insurance premium mechanism is the flat rate mechanism (the premium is 0.15% per year calculated on the entire average deposit balance of individuals in Vietnamese dongs at the insured institutions), applied since the establishment of the DIV until now. This rate is applied uniformly across all participating institutions. In addition, DIV exempts deposit insurance premium as prescribed for insured institutions under specially controlled; promptly answer and handle arising problems in order to minimize late, excess and underpayment of deposit insurance premium. This is also a source of revenue to help the DIV's professional reserve fund to grow steadily. By the end of June 30, 2023, the technical reserve fund was more than VND 96 trillion, which increased by about 16% compared to the same period in 2022. With the financial resources accumulated year by year, the DIV may be ready to reimburse depositors when necessary for small and medium-sized insured institutions, effectively participating in the process of restructuring the credit institutions system. According to the 2024 Law on Credit Institutions, DIV may need to propose increasing insurance premiums to compensate for special loans from SBV if its reserve funds are insufficient to cover depositor claims in insolvency cases. This new measure requires further research and regulatory adjustments to define the authority and procedures for premium increases. b. Financial management According to Article 13 of the Law on Deposit Insurance (2012), the Deposit Insurance of Vietnam (DIV) is responsible for managing and preserving the deposit insurance fund, with permission to use idle funds for (i) purchasing government bonds, (ii) buying treasury bills from the State Bank of Vietnam (SBV), (iii) depositing at the SBV, and (iv) purchasing long-term bonds issued by supporting credit institutions under SBV guidance. While these provisions have existed since 2012, DIV had primarily focused on lowrisk instruments like government bonds and SBV deposits until recent years. Following the issuance of Decision No. 689/QĐ-TTg in June 2022, which laid out the roadmap for restructuring credit institutions and handling bad debts through 2025, DIV was formally assigned the task of studying and preparing for a more active financial support role, including the potential use of long-term bond purchases. Although this decision did not immediately change DIV’s legal authority, it set the stage for operational changes. In 2023, DIV began implementing this direction in practice by participating in the SBV-led effort to support weak credit institutions through long-term bond investments — a significant shift in investment strategy. This practical move not only aligned with the national restructuring roadmap but also anticipated the broader institutional role to be solidified in the 2024 Law on Credit Institutions. By the end of 2023, DIV had cumulatively invested 106.487 trillion VND of idle funds, up 15.05% from 2022. In that year alone, 16.136 trillion VND was newly invested, exceeding the planned target by 8.8%. Investment returns reached 4.068 trillion VND, slightly above the annual plan. This flexible and diversified investment approach has enhanced DIV’s financial strength while maintaining safety and liquidity. 5.1.3. Payout Process The insurance payout includes both principal and interest for all insured deposits up to the insurance limit defined in Article 24 of the Law. For joint accounts, the payout is divided according to the agreement of the co-owners. If no agreement exists, the payout will be governed by legal provisions. Claims will be adjusted if the depositor has any outstanding debts with the insured institution. 31 According to Article 26 of the Deposit Insurance Law, the payout process must begin within 10 working days from the moment the obligation to pay insurance arises. The institution participating in deposit insurance must submit a request for payment, including a list of insured depositors, their deposit balances, and the proposed amount of insurance to be paid, within this period. After receiving the request, the deposit insurance organization has five working days to review the documents and verify the amounts. After verification, the deposit insurance organization must have a plan to pay the insurance within 10 working days. They must also publicly announce the location, time, and method of payment in three consecutive editions of one central and one local newspaper, as well as one Vietnamese e-newspaper. The list of depositors receiving the payout must be posted at the announced locations. Upon receiving the insurance payment, the depositor must present documents proving legal ownership of the insured deposits at the participating institution. The deposit insurance organization may directly pay the insurance to the depositor or authorize another participating institution to do so. After a period of 10 years from the date the deposit insurance organization has announced the first time the payment of premium, the unclaimed premium shall be established the state ownership and added to the operating capital of the deposit insurance organization. The person who has the ownership of the insured deposit shall not have the right to request the deposit insurance organization to return that premium. 5.2. Challenges & Shortcomings After 26 years of operation, the Deposit Insurance of Vietnam (DIV) faces pressing challenges in adapting to a rapidly evolving financial landscape. A major concern is the absence of an officially promulgated Deposit Insurance Development Strategy, which is increasingly urgent both legally and practically. The global context—including post-COVID economic volatility, heightened indirect investment flows, rising foreign debt, and the liberalization of financial services—places additional pressure on domestic financial institutions to enhance service quality, operational efficiency, and competitiveness. Vietnam's deepening international integration and increasing competition for foreign direct investment (FDI) highlight the need for DIV to strengthen its institutional capacity. This includes expanding its legal mandate, upgrading its financial strength, and professionalizing its operations to effectively respond to potential systemic risks in the banking sector. Moreover, challenges persist in improving the efficiency of deposit insurance payouts, particularly in reducing claims processing time to better protect depositors during crises. 5.3. Reforms To address these challenges, the State Bank of Vietnam (SBV) and the government have introduced a series of reforms. Article 13 of the Law on Deposit Insurance (2012) mandates that deposit insurers develop a development strategy, subject to SBV approval. In line with this, Decision No. 986/QĐ-TTg (2018) outlines the Strategy for the Development of the Banking Sector until 2025 with a vision to 2030. This strategy emphasizes transparency, technological advancement, risk control, and sustainable banking practices, with DIV positioned as a state-owned institution responsible for depositor protection and financial stability. DIV’s mandate has gradually expanded. Although the Law on Deposit Insurance (2012) already allowed DIV to use idle funds for purchasing long-term bonds of supporting credit institutions under SBV guidance, this tool was only utilized in practice in 2023—marking a strategic shift toward more active involvement in bank restructuring. Further support came from Decision No. 689/QĐ-TTg (2022), which approved the “Project on Restructuring the System of Credit Institutions associated with Non-performing Loan Settlement for the 32 2021–2025 Period.” While the decision does not directly assign new legal powers to DIV, it sets a roadmap that requires agencies like DIV to review, amend, and supplement the Law on Deposit Insurance, enabling it to participate more effectively in the restructuring of weak institutions. To improve payout efficiency, DIV has also undertaken internal reforms, including the development of a deposit insurance reimbursement handbook, and simulation exercises for large-scale reimbursement operations. The goal is to reduce claims processing time to 30 days by 2025 and 15 days by 2030, aligning with international best practices in protecting depositor interests. C. CONCLUSION Deposit insurance has significantly shaped Vietnam’s commercial banking landscape by enhancing stability, fostering public trust, and supporting systemic reforms. Established in 1999 through the Deposit Insurance of Vietnam (DIV), this mechanism has evolved to protect depositors, with coverage limits rising from VND 30 million to VND 125 million by 2021. Its influence on commercial banking is evident in several major changes. Firstly, it has bolstered depositor confidence, reducing the risk of bank runs and encouraging greater use of banking services, which strengthens the financial system’s stability. Secondly, it has facilitated banking sector reforms by aiding the restructuring of weaker institutions, creating a healthier competitive environment for commercial banks. Thirdly, mandatory participation ensures all banks contribute to a safety net, though the flat-rate premium of 0.15% has raised concerns about moral hazard, where banks might take excessive risks knowing depositors are protected. Lastly, deposit insurance mitigates systemic risks during crises, such as the 1997-1998 Asian Financial Crisis, ensuring smoother operations for commercial banks. The document primarily details the history, rationale, regulations, and reforms of deposit insurance, with its effects on commercial banking being indirect but substantial. DIV’s role in protecting 91% of depositors by 2021, supporting financial inclusion, and aligning with national banking strategies underscores its importance. However, challenges like the exclusion of foreign currency deposits, limited enforcement mechanisms, and a uniform premium system highlight areas needing improvement. Looking forward, the future outlook is promising, with planned reforms poised to enhance commercial banking further. Transitioning to a risk-based premium system, researched since 2019 with international collaboration, could incentivize safer banking practices. Improving payout efficiency to 15 days by 2030 through digitalization would boost depositor trust, benefiting banks’ deposit bases. Expanding DIV’s mandate to handle systemic risks and amending the Law on Deposit Insurance to address regulatory gaps would provide a more stable and predictable environment for commercial banks. Additionally, increasing public awareness and aligning with global standards, such as those from the International Association of Deposit Insurers (IADI), could elevate the sector’s credibility and attract investment. Recommendations include supporting these reforms to ensure long-term stability and growth. Policymakers should prioritize legal updates and risk-based premiums, while bank leaders should advocate for faster payouts and public education. Together, these efforts will strengthen Vietnam’s commercial banking sector, making it more resilient and competitive in an evolving financial landscape. 33 D. REFERENCE 1. Are saving deposits insured in Vietnam? What is premium payment in Vietnam? (2024, February 6). Lawnet.vn. https://lawnet.vn/ngan-hang-phap-luat/en/tu-van-phap-luat/bao-hiem/are-saving-depositsinsured-in-vietnam-what-is-premium-payment-in-vietnam-401823 2. Bảo hiểm tiền gửi Việt Nam. (2023). Báo cáo thường niên 2023. 3. Deploy the detailed action program to implement the deposit insurance development strategy to 2025, with orientation to 2030 and achieve the set goals. (2025). 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