Mon, Dec 01, 2014 - Page 14 News List

China drafts deposit insurance in bid to free interest rates

Bloomberg

China is set to launch an insurance system for bank deposits, in a step toward scrapping the country’s remaining controls on interest rates and allowing lenders to fail in a more market-driven economy.

The government will insure deposits of as much as 500,000 yuan (US$81,370) per saver at each bank covered, the People’s Bank of China said in a draft rule on its Web site yesterday.

It did not give a start date or detail what premiums banks may pay, saying only that these may differ depending on lenders’ management and risk conditions. The Chinese central bank is seeking feedback through Dec. 30.

Deposit insurance removes an implicit government guarantee behind China’s state-controlled banks and clears the way for the nation to deregulate savings rates, increasing competition for funds. That may exacerbate a liquidity shortage at smaller banks and boost their chance of failure as savings shift to the biggest lenders.

“Deposit insurance is not only standard in all developed banking markets, but in addition it is one of the least contentious of banking reforms — this looks like an ‘easy win’ for financial sector reform,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd, said before the announcement. “China needs deposit insurance now because the mainland economy is less robust and there is, implicitly, a greater risk of small banks having a liquidity crisis.”

China’s savers had piled up 112 trillion yuan deposits as of Oct. 31, while bad loans have climbed to a six-year high, pointing to stresses within the financial system.

State-controlled lenders’ dominance has left savers believing in an implicit government guarantee. China is the only major Asian economy without a formal deposit insurance system.

Deposit insurance can help to prevent bank runs. At the same time, by acknowledging the possibility of bank failures, it may encourage depositors with balances of more than 500,000 yuan at small lenders to shift their money to larger lenders seen as more stable.

The insured amount proposed will be enough to cover all the bank deposits of 99.6 percent of savers, the central bank said separately.

The rule is to apply to all deposit-taking financial institutions and covers local and foreign-currency deposits, the draft says.

A deposit insurance fund management agency will set the premium rates.

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