HKMA's Policy Response to the Banking Sector Consultancy
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Transcript HKMA's Policy Response to the Banking Sector Consultancy
Enhancing Deposit Protection
in Hong Kong
October 2000
1
Why are we looking at this again?
Hong Kong banking system is robust and our
supervision is generally regarded as effective
But unexpected bank failures can still occur and
contingency plans are needed in case they do
The international trend is in favour of explicit
deposit protection schemes
The issue can now be considered from a position of
strength
Part of an evolutionary process of enhancing
depositor protection
2
Objectives of the Study
To make a fair, objective and independent
assessment of deposit protection in HK
To consider the relative costs and benefits of three
broad alternatives
– maintain status quo
– enhance current system of priority claims protection
– introduce some form of deposit insurance
3
Key issues addressed
Are changes to the current system merited?
If so, what are the options for change?
Is it sufficient simply to enhance the current
arrangements?
Is deposit insurance more suitable?
If so, who should bear the cost of insurance?
Who controls and operates the DPS?
How much will an insurance scheme cost and how
should it be funded?
What should be the main design features of an
insurance scheme?
4
Objectives of deposit protection
To provide a measure of protection to small
depositors
To contribute to the stability of the financial
system
To define more clearly the role and extent of
government support in protecting depositors
5
The current system
Current scheme gives priority to depositors of up
to HK$100,000 in a liquidation
This has certain limitations
– no certainty of full payment of priority claims
– uncertain timing of payment
– lack of pre-determined contingency plan
Consultant’s conclusion
– changes to the current system are merited
– enhancements of the current system are not sufficient to
meet the objectives of deposit protection
6
The Consultant’s recommended
option for change
Deposit insurance scheme (“DIS”) is considered
best able to promote depositor confidence and
system stability
Moral hazard is a risk, but can be controlled
through
– good system design
– effective supervision
– high level of financial disclosure
DIS should be funded by the banks but
administered by the public sector (“public DIS”)
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DIS funding
Need to decide whether the banks contribute to a
DIS fund upfront (“ex ante” approach) or only pay
if a bank fails (“ex post” approach)
Even if the former is chosen, not envisaged that
the fund would be large
– sufficient to meet “expected shortfall loss” of the DIS
and its financing costs
The Exchange Fund would be used to provide
back-up liquidity to the DIS
– in the form of a loan repayable with interest by the DIS
from the assets of the failed bank
8
Indicative premium
Under the ex ante approach, the banks would pay
a regular premium
This is difficult to estimate with precision
But based on conservative assumptions, the
Consultant has indicated that 10 basis points per
annum seems feasible
Payment of the premium might be suspended once
a sufficient fund had been built up
9
Main Design Features of DIS
Only fully licensed banks would be covered
Foreign banks would be included
Mandatory participation
Coverage up to HK$100,000 or HK$200,000
Foreign currency deposits would be covered
No co-insurance (eligible claims met in full)
Coverage on a per depositor basis
Limited netting of loans against deposits
Flat-rate premium to begin with
10
Way forward
The HKMA will seek the views of all interested
parties before it makes a final recommendation on
whether and how to proceed
Further consultation on detailed design features
may be necessary
Likely that legislation will be required
Therefore unlikely to implement before 2002
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