Following the enactment of the Deposit Protection Scheme Bill yesterday, the HKMA is now preparing for the launch of the scheme. The scheme has been designed both to be cost-effective and to reduce the risk of moral hazard.
On 13 December 2000 the Legislative Council passed a motion urging the Government to "implement a Deposit Protection Scheme (DPS), which is cost- effective and easy for depositors to understand, for effectively protecting small depositors, and to formulate appropriate complementary measures aimed at reducing the risk of moral hazard". After two rounds of public consultation in 2000 and 2002 and seven months of extensive discussions by a Bills Committee in the current legislative session, the DPS Bill was finally passed into law yesterday. I would like to express my gratitude to the Hon. Albert Ho for his able chairmanship of this Bills Committee.
The enactment of this legislation marked an important milestone in the banking history of Hong Kong. It provides an explicit safety net, particularly for those depositors not well equipped to protect themselves, in the event of a banking crisis. To the extent that this safety net is able to reduce the incidence of unnecessary rumour- driven runs, it also contributes to banking stability. The establishment of this infrastructure should not be taken to imply anticipation of any deterioration in the soundness and strength of our banking system. Our banks are well run and remain highly liquid and well capitalised to an average of nearly double the international minimum requirements. However, even with the best supervisory system in the world, we cannot rule out the possibility of a sudden and unexpected loss of confidence in our banks owing to circumstances beyond our control, such as unfounded rumours or external factors. The BCC(HK) incident in the early 1990s was a vivid example of this. A DPS can provide a pre-determined mechanism on how to handle such a crisis so that any risk of contagion to the rest of the banking system can be reduced to a minimum.
The scheme that we will be setting up has incorporated features that will address the two main concerns of both the Legislative Council and the banking industry, namely, the risk of moral hazard and the costs associated with a DPS. To address the first concern, the scheme will adopt a differential system for assessment of premium contributions so that banks will be rewarded for having good supervisory ratings. The protection limit is also pitched at an optimal level of HK$100,000 per depositor, which would cover approximately 84% of depositors in Hong Kong but only 16% of deposits by value. This should leave sufficient market discipline in the banking system with the bulk of large deposits (84% by value) excluded from protection. To address the second concern, the DPS will be able to enjoy the priority claim rights associated with its payouts to small depositors. This would significantly reduce the shortfall risk in a bank liquidation. We have also acceded to the banking industry's request that the scheme be administered by the HKMA so as to relieve the DPS Board of the need to maintain a staff level that is required to handle the workload in the event of a bank failure but otherwise not needed in normal times. The work of the HKMA in this respect will of course be accountable to the future DPS Board.
With the enactment of the Bill, the project of establishing a DPS now enters the start-up phase. The first step will be to set up the DPS Board to oversee the progress of the whole project. We note the industry's earlier concern about the introduction of the DPS when the interest rates are low. This concern is still valid, given that interest rates in the interbank market as well as customer savings deposit rates have fallen to near zero. Even a very modest premium charge of 8 basis points on an average bank would be considered high in today's interest rate environment. However, it is expected that the preparation for the launch of the DPS will take at least 18 months (including the development of the IT systems for payouts and the relevant rules and regulations). So this is not an imminent issue that we have to address. By the time we are fully ready to launch the scheme, the interest rate environment should be quite different (strong economic growth in the US suggests that US interest rates may rise faster than originally expected). We shall therefore keep up the momentum of all preparatory work and build up this important infrastructure step by step.
Joseph Yam
6 May 2004
Related information:
- Enhancing Deposit Protection in Hong Kong
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