China to set up deposit insurance to protect savings in banks as risks rise
Deposit insurance scheme could be set up this year, as financial system faces risks associated with interest rate liberalisation, slower growth
The mainland is poised to have a deposit insurance scheme, after extensive discussions over nearly two decades.
The system, which will provide a safety net for customer savings held by banks, is expected to be established as early as this year, to keep pace with the accelerated financial reforms sought by the newly installed leaders of the world's second-largest economy.
Under a deposit insurance system - already in place in more than 100 countries - commercial banks are required to deposit a portion of their funds into a deposit insurance institution. The safety net provided by the system protects depositors in the event a bank collapses.
Mainland banks face greater risk as interest rate liberalisation intensifies competition and bad loans rise amid a slowdown in growth.
"The Chinese government will soon introduce an explicit deposit insurance system," said May Yan, an analyst at Barclays Securities.
"The ongoing financial reforms require China to build a financial safety net to protect public interests and to enable failed financial institutions to exit the market without causing systemic turmoil."
At a meeting of the State Council chaired by Premier Li Keqiang on Wednesday, the cabinet said China would push ahead with interest rate liberalisation. In June last year, China allowed banks to pay up to 1.1 times benchmark rates to depositors, an important move towards liberalisation.
The People's Bank of China said in its 2013 financial stability report this month it was ready to set up a deposit insurance system, suggesting it could be set up as soon as this year.
"After much research and debate, all sides have reached consensus. We will kick off the scheme at a proper time," the bank said in its report.
Guo Tianyong of Central University of Finance and Economics said China was likely to make the insurance compulsory to all mainland banks, including state-controlled, joint-stock, and foreign lenders. Initially, the premium was likely to be flat, with the authorities working out risk-adjusted premiums later, he said.
UBS Securities analysts expect the insurance coverage limit to be set at between 200,000 yuan (HK$253,000) and 300,000 yuan. Barclays analysts forecast it to range from 200,000 yuan to 500,000 yuan and to protect more than 99 per cent of deposit accounts.
Outstanding deposits in banks on the mainland reached 102 trillion yuan at the end of last month, according to the central bank.
In the early years of the system, and until the insurance fund size reaches its target size of 0.5 per cent of insured deposits, the premiums payable by large banks will be 0.05 per cent of deposits, according to Barclays. For medium-sized lenders, it will be 0.08 per cent, and for small banks it will be 0.11 per cent, the British bank says.
Assuming the system is implemented in the second half of the year, Barclays expects it to dent banks' net profits by between 0.86 per cent and 1.91 per cent next year.
The other cost of the insurance system is increased "moral hazard", as lenders become more willing to take risks.
The State Council raised the subject of a deposit insurance system to ensure depositors' interests were protected for the first time in 1993. Big banks gave the proposal the cold-shoulder then, saying it was unnecessary because they were backed by the government.