Higher coverage levels are needed to improve the domestic deposit insurance system as the Vietnamese banking system integrates more deeply into the global economy, according to a seminar held in Hanoi on Aug. 23 by the National Assembly Committee on Economy and Budget.

The meeting was held to gather expert comments on proposed amendments to the Law on Deposit Insurance.

Dinh Sy Dung, deputy director of the Government Office's justice department, told the meeting that deposit insurance was viewed as high risk since it was expected to protect depositors from losses caused by a bank's insolvency by guaranteeing them against the loss of deposits.

Deposit insurance currently covers up to 50 million VND (2,400 USD) per eligible deposit per bank or credit institution in Vietnam , but participants at the meeting argued that was too low to ensure confidence in the nation's banking system.

However, they acknowledged that premiums currently charged by Deposit Insurance of Vietnam (DIV) to banks and credit institutions were no longer adequate.

DIV general director Bui Khac Son said that the fixed premium of 0.15 percent was too low in the context of significantly growing deposits, threatening the solvency of DIV's current funding.

Through the end of last year, total premiums contributed by commercial banks and credit institutions had reached 4.484 trillion VND (215.6 million USD), growing at an average annual rate of 20 percent, he said.

However, the proportion of available funding to the total amount of insured deposits has fallen significantly from 1.07 percent in 2005 to 0.8 percent last year, Son noted. Current funding was therefore only adequate to cover the bankruptcies of two mid-sized banks only, he said.

Several experts wondered about the criteria for setting premiums, with some suggesting that premiums should be set flexibly based on risk levels presented by the bank. Others said that the premiums might be according to the inflation rate and the total amount of deposits in commercial banks and credit institutions.

They also discussed whether deposit insurance should be mandatory. Nguyen Am Hieu from the Ministry of Justice said that, in all developed countries, deposit insurance was required for all credit institutions.

Deposit insurance operated worldwide under three models, Hieu noted, including purchase and assumption, payout and risk reduction methods.

The new Law on Deposit Insurance needed to be in line with international standards but take Vietnamese characteristics into account, several participants at the meeting said.

The role of the deposit insurance agency in supervising the financial market remained poor, many said, suggesting that the lack of legal framework had contributed to the sector's poor performance.

A number of experts suggested that the deposit insurance body be operated as a company with a board of directors, executive management, and an internal audit system. /.