- The Hong Kong Deposit Protection Board (the Board) conducted a public consultation on proposed enhancements to the Deposit Protection Scheme (DPS) between July and October last year. Having carefully considered all the comments received, we are pleased to publish the consultation conclusions today setting out in detail the final policy proposals for the DPS enhancements, which marks a new milestone in the development of the Scheme.
- Since its inception in 2006, the DPS has been playing an important role as the “Guardian of Deposits” in Hong Kong. It gives small depositors peace of mind, making them less likely to be affected by rumours and lose confidence in individual banks or even in the banking system as a whole. This in turn can help reduce the likelihood of rumour-driven bank runs and hence ripple effects on the entire banking system. Deposit protection is indeed a core element of the overall financial safety net.
Comments received during the public consultation
- A key feature of the DPS is the protection limit. It was raised from its original level of HK$100,000 per depositor per bank to the current HK$500,000 in 2011, which has been in place for more than 10 years now. In order to keep up with the latest international and local developments, the Board has proposed a number of enhancements to the DPS, one of which is to raise the protection limit by 60% to HK$800,000.
- During the public consultation, the Board received a total of 33 written submissions from members of the general public, a consumer protection organisation, the banking industry and professional bodies, which contain many valuable comments. To solicit more views from the public, the Board also commissioned the Hong Kong Institute of Asia-Pacific Studies of the Chinese University of Hong Kong to conduct a public opinion survey, successfully interviewing around 1,000 residents aged 18 years old or above with bank accounts in Hong Kong.
- After consolidating all the comments received, we are pleased to note that around 80% of the general public who took part in the survey, the consumer protection organisation and relevant professional bodies agreed with the proposal to raise the protection limit to HK$800,000. They also supported the other proposed enhancements.
- At the same time, we are aware of mixed views within the banking industry, with some banks supporting the proposed HK$800,000 protection limit, while some others suggested further raising the protection limit to HK$1 million.
Final policy proposal
- It is understandable that some quarters of the community and industry may prefer a higher protection limit. However, we are mindful that the primary objective of the DPS is to protect small depositors, thereby helping to maintain banking stability. This is our overarching principle when considering the appropriate level of protection limit. After taking into account all the comments received and carefully considering the relevant factors, the Board is of the view that raising the protection limit to HK$800,000 is sufficient at this stage to suitably enhance protection to depositors and hence promote banking stability.
- We can assess whether a new protection limit can suitably and adequately enhance depositor protection from two perspectives. First, from an individual perspective, any increase in the protection limit should keep pace with inflation so as to maintain the real value of protection for each depositor. A 60% increase in the protection limit to HK$800,000 will be more than sufficient to offset the cumulative impact of inflation since early 2011 (when the protection limit of HK$500,000 came into effect), and will enhance the real value of protection by as much as 20%.
- Another perspective is from the banking system as a whole. Of the 24.4 million depositors in Hong Kong at present, more than 22.5 million will be fully protected under the protection limit of HK$800,0001. In other words, more than 92% of depositors will enjoy full deposit coverage. This figure exceeds the benchmark of 90% recommended by the International Association of Deposit Insurers (IADI). As an international financial centre, Hong Kong has a large number of high net worth individuals and large corporates. Quite a few of the remaining depositors who are not fully covered by the protection limit in fact come from these groups. Therefore, even if the protection limit were to be raised to a higher level, the number of fully protected depositors would not increase significantly.
- Indeed, a protection limit of HK$800,000 in Hong Kong will be significantly higher than many other Asian economies, and also comparable with the European economies (see table below).
Note: Based on exchange rates as at end-December 2023. The US and Canada provide deposit protection on a “per account category” basis, while all other jurisdictions provide deposit protection on a “per depositor per bank” basis.
- While depositors are generally familiar with the scope of protection under the DPS, some may not be fully aware of the fact that deposit protection is backed by the DPS Fund, which is in turn dependent on annual contributions from the banking industry. The higher the level of the protection limit, the more the DPS Fund needs to grow correspondingly to ensure that it has sufficient funds for any potential payout situation in the future. The banking industry has to pay more contributions as a result. If the additional contributions place a significant financial burden on banks, they may have a greater incentive to pass on such costs to their customers.
- Raising the protection limit to HK$800,000 will require only a moderate growth of 30% in the size of the DPS Fund, from the current HK$6.3 billion to about HK$8.2 billion. As the additional costs associated with the higher protection limit are manageable, coupled with competition amongst banks, we believe that the likelihood of banks passing on such costs to their customers can be minimised. This is particularly important for small and medium-sized enterprises and small depositors as they gradually emerge from the shadow of the pandemic.
- Is there any room to further increase the protection limit in the future? The Board is open-minded about this and fully appreciates that policies should be adaptable to changing circumstances. In particular, as the bank failures that occurred last year in the US and Europe have prompted the IADI to review whether there is a need to update some of its Core Principles, and some jurisdictions are also contemplating reforms to their deposit insurance systems, we expect the global deposit insurance landscape to remain uncertain in the coming years. We will keep a close eye on the latest developments and will also expedite the timeline for the next round of review of the DPS. Our aim is to commence the next review exercise three years after the implementation of the HK$800,000 protection limit, and complete the review in the following year.
- Now that the consultation exercise has concluded, we will proceed to the next stage of DPS enhancements – the legislative exercise. At the earlier meeting of the Panel on Financial Affairs of the Legislative Council (LegCo), Panel members in general supported the policy recommendations on DPS enhancements. The Board, together with the Government, is currently working on an amendment bill for submission to the LegCo in the next few months. Our target is to put the new protection limit of HK$800,000 into effect in the fourth quarter of this year, and to implement the other enhancements in phases by early 20252.
- As the effectiveness of the DPS also hinges upon public understanding of and confidence in the Scheme, we plan to launch a series of promotional campaigns in due course to help the general public gain a deeper understanding of the enhanced DPS.
- We hope that this latest round of DPS enhancements will further strengthen Hong Kong’s financial safety net. The bank failures in the US and Europe last year demonstrate that apart from deposit protection, other building blocks of the financial safety net are also crucial in preventing bank failures and mitigating their impact on the overall financial system. They include a robust banking supervisory regime, sound risk management by banks, and an effective resolution regime. The Board will continue to work closely with the Hong Kong Monetary Authority and other stakeholders in the financial safety net to contribute to Hong Kong’s financial stability.
Chief Executive Officer
Hong Kong Deposit Protection Board
6 February 2024
This inSight article is contributed by Mr Donald Chen, Chief Executive Officer of the Hong Kong Deposit Protection Board, to discuss the latest developments of the Deposit Protection Scheme. Mr Chen is also an Executive Director of the Hong Kong Monetary Authority (HKMA). The HKMA and the Board have been working closely to achieve the common objective of promoting the stability of Hong Kong’s banking system.
1 According to information provided by retail banks in Hong Kong as of October 2023.
2 These will include refining the levy system to cater for a higher protection limit, enhancing the deposit protection arrangements in the event of a bank merger, expanding the requirement on the display of the DPS membership sign to digital channels, and streamlining the negative disclosure requirements for private banking customers.