Hong Kong bank customers could lose the temporary, full protection offered by the government on bank deposits next year. The government says it will depend on the state of the global economy. Depositors are assured, however, of being much better protected than before the guarantee was introduced in October. When our current deposit protection scheme was introduced in 2006, the ceiling of protection was capped at HK$100,000. Now, following a two-month consultation, the Deposit Protection Board has proposed raising the figure to HK$500,000 and extending the scope of coverage to include secured deposits. The proposed cap is comparable in money terms, and as a ratio of per capita GDP, with protection levels in Britain and Europe. The percentage of depositors covered will rise from 77 to 91, in line with an International Monetary Fund recommendation. In the light of recent developments, the board's proposal is likely to meet with public approval. After all, the existing scheme, with its limited coverage, failed to prevent a run on the Bank of East Asia in September. However, while the proposed enhanced scheme may make bank customers feel better, it is no substitute for sound prudential supervision of the banks. In the event of systemic problems arising from a financial crisis, the scheme will not ensure confidence, as evidenced by the government's provision of a full guarantee. Thanks to prudent capital-reserve and lending practices, our banks have passed the stress tests of the Asian and world financial crises. Deposit insurance undermines this discipline and introduces the moral hazard argument - that government protection of deposits should a bank fail removes a disincentive to risky lending. The board argues that the moral hazard will be no greater than overseas, and that our robust, well-supervised banking sector is in a better position to manage it. True, the latest financial turmoil was caused by lax supervision and imprudent financial innovation elsewhere. Nonetheless, the higher protection increases moral hazard. If it is adopted, the government must make doubly sure the banking sector is closely supervised and does not lend irresponsibly.