A public consultation on enhancing deposit protection in Hong Kong is now in progress. It is important that the views of ordinary members of the public should be heard.
We are now about half way through the three-month consultation on the subject of enhancing deposit protection in Hong Kong. It is quite normal, in this type of public consultation, for formal submissions to be made nearer the end of the consultation period. The initial reaction, gleaned from media editorials soon after the consultation paper was published, seems to be quite supportive of having a deposit insurance scheme in Hong Kong. This was followed mainly by public views expressed by members of the banking community, either on their own initiative or in response to press enquiries. Understandably, these views from the industry are mixed, as indeed the pros and cons of having a deposit insurance scheme are finely balanced. And, equally understandably, since such a scheme, if implemented, would have a different impact on different banks, the way in which views have been expressed has also varied: some are more objective than others. But we have nevertheless been listening attentively and trying to distil the gist of their views on the merits of the case, having regard to the overall public interest, from the more narrow overtones that reflect vested interest. On a matter of such importance to the great majority of members of the community who have deposits with banks in Hong Kong, clearly we should all strive to be objective.
In this connection, I must confess, speaking here as a depositor as well as a banking supervisor, to feeling a little uncomfortable about the alarmist comments deployed by some who are opposed to the proposal. To listen to some of the pessimists on this subject, one might almost think that Hong Kong's entire banking system will collapse if deposit insurance is introduced. Take, for example, the claim that all costs will eventually be borne by the depositor. This was made so authoritatively and confidently that the truth of the claim might almost seem to be beyond question. Commercial decisions are a matter for the banks themselves. But it is hard to believe that competition among the many retail banks in Hong Kong would not lead to at least some of the costs of deposit insurance being shared by the banks.
And what is ten basis points of the relevant deposits, or two basis points of total assets, when the net interest margin (as a percentage of total assets) of banks is well over 100 times that? Put simply, this means that, for every $100 saved in a bank account in a year, the cost will be just 10 cents. When banks are capable of undercutting each other's mortgage rates by more than 3% in the last three years, do we really think that they will be unable to absorb this amount through the usual mechanics of competition? And even if they cannot, will depositors really, as some have claimed, wish to risk placing their wealth in some remote offshore island in order just to earn another 10 cents extra interest in every $100?
I am not seeking to promote deposit insurance here. Indeed, although we see the need for greater deposit protection, we have not made up our minds on what form it should take. The external environment has changed a great deal in the past few years as a result of globalisation, and all we are asking is whether there is a need for an additional and explicit safety net for our small depositors. All else remains the same, including, crucially, our effective supervisory framework, developed in partnership with the banking community.
At this stage of the consultation, I fear that the views of those who matter most - the small depositors - may not be forthcoming and adequately represented. That is why I welcome the forthcoming motion debate on this subject in the Legislative Council, which will enable the people's representatives to consider the subject in an open and informed manner.
As a further effort to establish the views of depositors, who are very much the silent majority, I have just written to the chairmen of the District Councils to invite them to solicit such views and bring them forward. If invited, staff in the HKMA will be happy to pay them a visit and explain what the issue is all about.
Joseph Yam
7 December 2000
More information on Enhancing Deposit Protection in Hong Kong can be found here.
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