China issued the Deposit Insurance Regulations on March 31, 2015, more than twenty years after Chinese authorities first began discussing the need for a deposit insurance system. The program went into effect on May 1, 2015. With the introduction of deposit insurance in China, the large Asian economies have adopted deposit insurance programs.
While China’s deposit insurance shares many similar objectives and design features of other deposit insurance programs in Asia, the specifics of China’s plan differ in many aspects.
China’s program applies to all deposit taking institutions, including commercial banks, rural cooperative banks and rural credit cooperatives, but excludes foreign banks’ branches and Chinese banks’ branches overseas.
All of Asia’s deposit insurers require major deposit taking institutions to be members. Most Asian economies, with the exception of Japan and China, extend membership to domestic branches of foreign banks. Korea and the Philippines also extend their coverage to deposits taken by foreign branches of domestic banks.
China will insure deposits denominated in RMB and foreign currencies. Financial institutions’ inter-bank deposits and deposits by senior managers in their own institutions are not covered. The Deposit Insurance Fund Manager may also exclude certain other deposits from the program. It’s unclear if structured deposits are covered.
Core demand and saving deposit products are covered by all deposit insurance programs. With the exception of Japan, Singapore, Thailand and Vietnam, all the deposit insurance authorities in Asia cover foreign currency deposits. Islamic deposits receive separate protection in Indonesia and Malaysia.
For Chinese depositors, the maximum payout amount per depositor per institution is RMB 500,000 (US$76,001), including principal and interest, with unpaid amounts in excess of the maximum payout to be claimed from the liquidation of assets of the relevant financial institution. This plan is estimated to fully cover 99.6% of all Chinese depositors but constitutes only 46% of all money on deposit.
Coverage levels in the region differ considerably, ranging from Rs 100,000 (US$1,472) in India to Rp 2 billion (US$146,789) in Indonesia, reflecting historical and circumstantial differences. India introduced deposit insurance in 1962, the second country in the world to do so. Despite periods of high inflation, it has increased its coverage ratio only five times since and the current level was set over 20 years ago. At the end of the spectrum, Indonesia provides a high level of coverage and stipulates that systemic banks will continue to receive blanket coverage in order to avoid a destabilizing shift in deposits from the many of the smaller banks to the country’s state and foreign banks. The maximum coverage limits in the Asian systems, China included, appear to fully protect the majority of their small depositors.
The Financial Stability Bureau of the People’s Bank of China (PBOC) has been provisionally designated as Deposit Insurance Fund Manager by the State Council in the initial stages of operation. It is unclear whether the Deposit Insurance Fund Manager will eventually become an independent entity.
All deposit insurance authorities in Asia are government legislated and publicly administered with the exception of Hong Kong and Singapore, which are privately administered. With the exception of China, the Asian systems are all legally independent organizations, separate from central banks.
Under the plan introduced in China, the deposit insurance premium rate is made up of a basic rate (flat fee) and a risk-based differential rate determined by factors including the business management and risk conditions of the insured financial institution. According to the PBOC, the premiums are set at between 0.01-0.02%, much lower than those levied in other countries. With such a low insurance levy, analysts expect that it will take a decade to accumulate the amount needed to cover the deposits of even the small Chinese banks. Therefore, the agency will most likely receive government support to finance its operations at the outset.
Most countries in Asia continue to apply a flat rate to calculate deposit insurance premiums although several countries are considering moving to risk-adjusted rates. Hong Kong, Singapore and Taiwan apply risk-adjusted rates while Malaysia uses a hybrid approach, depending on the type of operation. Premiums vary from 0.02% to 0.48% across the region, with China mandating the lowest premiums.
It is unclear what China’s Deposit Insurance Fund Manager’s full mandate will be. Beyond broad guidelines, few details as to how the system will work in practice have been released. Singapore, Hong Kong and India have relatively narrow “paybox” mandates (see Table 1) and rely wholly on bank supervisory authorities to take prompt remedial action. Thailand and Vietnam have “paybox plus” models, which provides authorities with added regulatory or resolution powers. The other Asian economies have provided more extensive regulatory and resolution powers to their insurers. To a large extent, this reflects differing country circumstances. For example, Hong Kong and Singapore opted to restrict their deposit insurers to very narrow mandates due to their physical size and personnel constraints. Meanwhile, the Philippines provides its insurer with failure resolution, liquidations and examination authority. This stems from the country’s experience in having to resolve a large number of banking failures.
Table 1 – Deposit Insurance Mandates
|Types of Deposit Insurance Mandates||Description|
|Paybox||Responsible only for payment of funds in the event of bank failure.|
|Paybox Plus||Paybox responsibility plus resolution and/or regulatory function.|
|Loss Minimizer||Responsible for identifying and selecting “least-cost” resolution strategies.|
|Risk Minimizer||Comprehensive risk reduction and mitigation functions and commensurate powers of assessment, oversight, intervention and resolution.|
Within the past two decades, all the major economies of Asia have adopted deposit insurance programs, reflecting the progress and maturation of the region’s financial systems. With the recent introduction of deposit insurance in China, the region as a whole is in a stronger position to weather financial turbulence in the future.