Deposit insurance a key step in financial reform

0 Comment(s)Print E-mail Xinhua, December 4, 2014
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China is undergoing one of the boldest financial reforms so far this year after the central bank’s publishing of draft rules on a deposit insurance system.

After 21 years of deliberation, the People’s Bank of China (PBoC), the central bank, published the rules on Sunday and started soliciting public opinion.

Under the draft rules, accounts with deposits of up to 500,000 yuan (US$81,500) will be insured per depositor if a bank suffers insolvency or bankruptcy. Financial institutions will be required to pay insurance premiums into a fund and an agency will be set up to manage the money.

The move highlights the leadership’s resolve in further rebalancing the financial system with market-oriented measures. Deposit insurance was mulled as early as December 1993, when the State Council, or China’s cabinet, said a deposit insurance fund would be founded to protect public interests. Since then, the DIS has been repeatedly brought under the spotlight, including in 2005, 2008 and 2010. Nevertheless, it remained on hold.

The delay was partly due to opposition from banks that would have to pay for the scheme, instead of enjoying the implicit government guarantee already in place free of charge. In particular, bigger banks would have to set aside capital for the DIS despite the chance of a bank run being very unlikely.

The plan did not address in detail what premiums banks would have to pay, but made clear a risk-based system with standard rates plus additional risk rates that took into consideration individual banks. A Bank of Communications research paper published on Monday said the international average was around 0.015 to 0.02 percent of deposits, while Wei Yao, China Economist of Paris-based Societe Generale, put the international average rate at 0.05 percent.

Setting specific rates and managing the DIS fund will be a new agency’s task, according to the plan, which also empowered the agency to step in before bank runs, bearing similarity to the United States Federal Deposit Insurance Corporation’s role in forestalling bank failures.

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