The development of deposit insurance

The Executive Council has given the go-ahead for a Deposit Insurance Scheme to be developed for Hong Kong. A number of details now have to be considered.

Last week the Executive Council gave approval in principle for the introduction of a Deposit Insurance Scheme in Hong Kong. The Council further asked the Hong Kong Monetary Authority to develop detailed recommendations on how the scheme might be structured before a final decision is taken by the Council on whether to proceed with implementation. The HKMA will develop these detailed recommendations expeditiously and there will be public consultation on them. In discharging this task we shall look at the issues concerned comprehensively. In particular, we shall pay special attention to the following areas.

1. Type of institutions covered: The objective of a deposit insurance scheme is to protect small depositors. This calls into question whether the scheme should include institutions, namely, the restricted licensed banks and the deposit-taking companies that are not allowed to take small deposits. But we shall re-examine this position in view of the representations made to us during the consultation period.
2. Form of participation: Our view, supported by international experience, is firmly that participation by institutions as well as by the relevant depositors should be compulsory for the scheme to be viable.
3. Coverage Cap: We favour the original recommendation by the consultants of a coverage cap of HK$100,000. This cap has the wide support of the banks and the majority of those in the non-bank sector responding to our consultation.

4. Funding: We favour ex ante funding (i.e. funding up front) over ex post funding and this is also the view of the majority of those who have responded to our consultation. The existence of a pool of funds would help speed up payment and bolster depositors' confidence in the scheme.
5. Premium: In view of the comments received on this subject, we shall explore again the feasibility of introducing from the start a relatively simple risk-based approach to the calculation of premium. Internally, as a supervisory tool, the HKMA gives a rating to all the licensed banks on the basis of five factors - Capital, Asset quality, Management, Earnings and Liquidity. This is referred to as the CAMEL rating and it might be conveniently used for differentiating the premium to be paid by each bank.
6. Administration and legal structure: The choice seems to be between having a separate legal entity and asking the HKMA to run the scheme. The arguments are finely balanced. The HKMA can probably run the scheme more efficiently, simply because we know the banks better. But I have no wish to overload the HKMA with responsibilities, particularly in view of the possible political concerns about the expansion of our activities. A compromise may be for the scheme to be run by a separate legal entity and for there to be arrangements to ensure that it is as lean and cost-effective as possible. It may be that the HKMA or other outside parties can assist in the performance of certain functions.

    

There are many other details to be worked out. We hope to be able to consult further on these during the rest of this year and aim to finalise recommendations by the end of the year. I now invite those interested in the subject to continue to express their views as freely as they have done in the past.

Joseph Yam
3 May 2001

More information on Enhancing Deposit Protection in Hong Kong can be found here.

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