Deposit insurance plan moving forward

A memorandum of understanding signed between the People's Bank of China and the US Federal Deposit Insurance Corp includes matters of information exchange, policy coordination and depositor protection, the PBOC said on its website. Provided to China Daily

The People's Bank of China, the nation's central bank, has signed a memorandum of understanding with the US Federal Deposit Insurance Corp, a move that market players have taken as a new step toward launching deposit insurance in China.

The MOU includes matters of technical assistance, exchange of information and the coordination of policy, and covered areas of financial services, depositor protection and global financial stability policies, the PBOC said on its website.

The deposit insurance system became a hot-button issue in June, when lenders were hit by a liquidity crunch, and interbank rates were pushed up.

Analysts said having a deposit insurance system is an important piece of China's financial reforms and could be introduced by the end of this year.

"The central bank has listed the deposit insurance plan as one of the key reform goals for 2013," said Wu Xiaoling, deputy director of the Financial and Economic Affairs Committee and standing committee member of the National People's Congress.

A deposit insurance system will provide a safety net for bank customers' savings as well as enhance financial market stability and reduce systemic risks, according to a central bank circular issued in May at the height of the liquidity squeeze.

Analysts at UBS Securities Co said the insurance coverage limit may range between 200,000 yuan ($32,700) and 300,000 yuan, while Barclays researchers forecast the range as being 200,000 yuan to 500,000 yuan.

A PBOC report on financial market stability said conditions for setting up a deposit insurance system are mature and consensus for introducing the insurance policy has been reached.

Over the past few years, when several banks failed in China, individuals could get their deposits back with the help of implicit guarantees, but institutions could not, Wu said.

After the real estate bubble burst in Hainan in the 1990s, Hainan Development Bank could not recover all of its loans, and many depositors took their savings to other State-owned banks starting in early 1998.

A 3.4 billion yuan emergency aid package from the PBOC couldn't save the bank, and on June 21, 1998, Hainan Development Bank closed.

From 1997 to 1998, the PBOC shuttered another 41 problematic financial institutions, mainly urban or rural credit cooperatives.

According to one calculation, rehabilitating the banking system cost China in the 1990s about 1.5 trillion yuan, which amounted to 30 percent of the country's GDP in 1999, Xinhua News Agency reported.

Explicit deposit insurance is considered to be an important mechanism for preventing bank runs and boosting depositor confidence in the global financial market. More than 110 countries and regions have introduced deposit legislation.

Recent moves by the PBOC to liberalize interest rates may dent lenders' already-lean profit margin, analysts say.

On Friday, the PBOC launched a new benchmark lending rate, or "prime rate," to serve as a guide for commercial banks to use in setting interest rates for their best customers.

The rate, which will be announced each working day on the Shanghai Interbank Offered Rate website, was set by nine commercial banks, including China's four largest.

"The new rate will help China's benchmark interest rates market move toward a system led by market forces," the PBOC said in a statement released on Friday.

"Smaller banks may face greater risk than State-owned ones as interest rates become increasingly liberalized amid intensive competition and higher non-performing loan records," said Jimmy Leung, banking and capital markets leading partner of PricewaterhouseCoopers China.

According to Barclays, if the deposit insurance system is in place by year's end, it may crimp banks' net profits by up to 1.91 percent in 2014.