Enhancing Deposit Protection in Hong Kong 24 April

Enhancing Deposit Protection in Hong Kong 24 April 2001 1

Results of Public Consultation n n The consultation indicates that there is broad public support for a DIS in Hong Kong – Leg. Co motion debate – District Councils – 41 out of 59 respondents supported DIS However, most large banks remain opposed. 2

Government’s View n Taking into account the results of the public consultation, Ex. Co approved in principle the proposal to introduce a DIS. n HKMA is requested to undertake more detailed work to produce a set of final recommendations on how the scheme should be structured. 3

Concerns of the Respondents n The main concerns of the respondents as revealed by the consultation are - – the risk of moral hazard – cross subsidisation between banks and unfair to the large banks – the cost of insurance, and the extent to which this may be passed onto small depositors 4

Concerns of the Respondents (2) n These are legitimate concerns. n They will be addressed through careful design of the DIS. In particular – we are inclined to adopt a lower coverage cap of $100, 000 to reduce cost and moral hazard – there appears to be scope to bring down the premium (from 10 basis points to, say, 8 basis points) and to reduce the target fund size – we are exploring the feasibility of introducing a simple risk based system based on supervisory ratings of banks to assess premium 5

Other Design Features n Preliminary view on other main design features: – all licensed banks would be covered, but the HKMA will consider further whether RLBs and DTCs should be included – participation should be mandatory in order for the scheme to be effective – an ex-ante funded scheme is preferred – the DIS would be operated by a separate legal entity for better accountability but with a lean structure in order to minimize cost 6

Way Forward n There is still a considerable amount of detailed design work to be done, in particular – further study on the detailed design features – the priority claim status and netting arrangements for the DIS and other related liquidation issues – the preparation of draft legislation n Further consultation with relevant parties will be conducted as necessary. n Any scheme could only be implemented in 2002 at the earliest. 7