The Hong Kong Monetary Authority has firmly rejected local banks' calls for another reduction or delay in a new deposit insurance plan, announcing the scheme would go ahead in 2005 with a HK$1.6 billion fund, as targeted. Further cuts to the fund - it was trimmed from an initial target of between HK$3 billion and HK$5 billion - could undermine the credibility of the programme and stray from international standards, the banking regulator said. The de facto central bank told legislators in a paper that the scheme would start in 2005 provided a bill could be enacted by the end of next year. Legislators will discuss the issue in a financial affairs panel meeting on Monday. The long-awaited scheme was first proposed in 2000 and would pay depositors up to HK$100,000 if a bank failed. Banks would be required to pay a standard premium at eight basis points (or 0.08 per cent) of insured deposits, with lower risk-rated banks enjoying a discount and higher risk-rated banks paying slightly more. Banks wanted to delay or scale down the size of the fund to lower the levy and thus save money. Hong Kong Association of Banks (HKAB) chairman Liu Jinbao said in May that the scheme should not be introduced while the economy was weak, and urged the government to further cut the target fund to HK$1 billion. The HKMA had already reduced it from a HK$3 billion to HK$5 billion range to an amount equal to 0.3 per cent of the sector's total insured deposits - which stood at HK$1.6 billion in August. In yesterday's Legco paper, it clearly rejected the HKAB's call. 'Faced with increasing pressure on bank profitability, HKAB has queried whether there is scope for the target fund size to be reduced,' the paper said. But the HKMA rejected the call: 'The proposed target fund size is consistent with international standards on the adequacy of deposit protection funds. Any significant reduction . . . might undermine the credibility of the scheme.' The HKMA said that if the fund could not cover all depositors' payouts the Exchange Fund would provide a loan to the scheme. It now planned to submit a bill for the scheme to legislators next year. After the bill is enacted it will set up a deposit protection board in the first half of 2004 ahead of the 2005 launch. The HKMA said the deposit protection board, appointed by Chief Executive Tung Chee-hwa, would collect levies from the banks, manage the fund and pay claims to depositors if a bank collapse occurred. COUNTING THE COST The HKMA has already trimmed the fund from HK$3 billion to HK$1.6 billion It says more cuts will undermine the fund's credibility The long-awaited scheme will start in 2005 and pay depositors up to HK$100,000 if a bank fails
