The Hong Kong Monetary Authority (HKMA) has today released a consultation paper on enhancing deposit protection in Hong Kong following the completion in July 2000 of an independent consultancy study ("the Study") on this subject.
The Study was commissioned by the HKMA in April this year and was aimed at making a fair and objective assessment of deposit protection in Hong Kong based on independent evaluation with due regard to international practices and local conditions.
Specifically, the Consultant was asked to consider the relative costs and benefits of the following:-
For the purposes of the Study, the HKMA agreed with the Consultant that the primary objectives of any deposit protection scheme should be to provide a measure of protection to small depositors and to contribute to the stability of the financial system.
The Consultant's conclusion is that the best protection for small depositors would be achieved with an insurance based system. The Consultant considers that this is most likely to have the features of liquidity and credibility which are necessary to make deposit protection effective. A non-insurance based system based on an enhancement of the current priority claims protection for small depositors would be less likely to yield the same benefits.
"With the effects of the Asian crisis having diminished and with the recovery of the local economy, it is an opportune time to consider the pros and cons of deposit insurance from a position of strength. In this connection, we believe that the Consultant has put forward a coherent set of proposals for enhancing deposit protection in Hong Kong, which should provide a good basis for public discussion on this subject," said Mr David Carse, Deputy Chief Executive of the HKMA.
"In the international context there is a growing trend in favour of explicit forms of deposit protection. However, it is also recognized that deposit insurance schemes are not without their drawbacks. In particular, the risk of moral hazard is one that needs to be taken seriously. This is why both the Consultant and international bodies such as the IMF have stressed the importance of proper design of a deposit insurance scheme," Mr Carse added.
The Consultant further recommends that, in line with practices in most other countries, the deposit insurance scheme ("DIS") should be publicly administered and privately funded. Other recommendations relating to the main features of the proposed scheme include -
"While we are generally supportive of moves to enhance deposit protection in Hong Kong, neither the Government nor the HKMA have yet formally endorsed the proposals of the Consultant", Mr Carse stressed. "We will need to consult the public fully on this important matter before considering the implementation of any specific proposals. We would therefore encourage all interested parties to submit their views to the HKMA," Mr Carse added.
The consultation period will end on 17 January 2001. The HKMA will carefully consider all comments received before any final decision is made on whether it should recommend to the Government that changes to the current arrangements should be implemented and, if so, the form that these changes should take.
Hong Kong Monetary Authority
24 October 2000