Calls widen for rise in deposit insurance cap

PUBLISHED : Monday, 06 October, 2008, 12:00am
UPDATED : Monday, 06 October, 2008, 12:00am

Bank depositors are likely to join a clamour for an increase in the HK$100,000 ceiling in Hong Kong's deposit insurance scheme following last month's run on the Bank of East Asia, said analysts.

Billy Mak Sui-choi, an associate professor at the department of finance and decision science at Hong Kong Baptist University, said he expected more depositors to lobby for higher protection limits after customers formed long queues to withdraw their money from BEA last month.

'The banks themselves, particularly small and medium-sized lenders, are likely to accept the idea so long as the additional cost is not very high,' Mr Mak said.

And resistance to the plan from bigger banks, which enjoy a natural advantage over their smaller rivals when it comes to customer confidence, would probably be minimal against the background of the global financial turmoil, he added.

Talk of raising the cap on the insured level of deposits surfaced after rumours swept through Hong Kong on September 25 that BEA faced a crisis because of its exposure to troubled financial institutions in the United States.

Reassuring comments from the government and the Hong Kong Monetary Authority and a declaration from Li Ka-shing that he was buying BEA shares calmed the depositors.

'A rise in the protection limit should help to mitigate the behaviour of depositors who want to withdraw their money from banks due to such unfounded rumours,' said Sin Chung-kai, a vice-chairman of the Democratic Party.

The deposit protection scheme, launched in 2006, insures bank deposits of up to HK$100,000 in each bank in case of a collapse. It does not cover structured, secured or term accounts with a maturity of more than five years. The coverage, in terms of the number of depositors fully protected, is about 81 per cent.

One BEA customer said last month: 'I have more than HK$100,000 at BEA. As the deposit protection scheme will only compensate each depositor up to HK$100,000 if a bank collapses, I decided to take some money back and leave only HK$100,000 here.'

Earlier this year, former HKMA executive David Carse, now an independent consultant for the authority, suggested in a report that the government should consider raising the maximum level of compensation to about HK$200,000.

'It's likely that Hong Kong's deposit protection will be lifted as the US Federal Deposit Insurance Corp is also going to increase its insurance limit on bank deposits to US$250,000 from US$100,000,' said a banker.

Raymond Li, the chief executive of the Hong Kong Deposit Protection Board, said: 'The probability of raising the protection level could be higher if there is a consensus in society.'

The board was conducting a review of the scheme to see if it was appropriate to lift the protection limit and widen the protection scope to more deposit types, Mr Li said.

'Details of recommendations could be reached as early as March next year,' he said.

Legislator Chan Kam-lam said he was not opposed to raising the deposit protection limit, but a strengthening of banking supervision would be more important.