Insurance draft seen as bank reform milestone

Source:Global Times Published: 2014-12-2 17:48:01

Proposed system likely to hasten rate liberalization, pressure smaller institutions

Illustration: Chen Xia/GT

Editor's Note:

The State Council unveiled draft rules for a long-expected insurance scheme for bank deposits Sunday. The draft, if implemented, would guarantee deposits of up to 500,000 yuan ($81,330). What impact will this proposed new scheme have on the banking industry and the broader economy? The Global Times interviewed three experts to get their views on this issue.

Zhou Hao, economist at Australia and New Zealand Banking Group

The deposit insurance system is a crucial and final step in promoting market-based interest rate reforms in China. Essentially, commercial banks will be allowed to go bankrupt under the system, which will help build a freer and more competitive market.

The deposit insurance system will narrow interest margins across the entire banking industry since banks will have to pay into the insurance system and make their interest rates competitive at the same time.

The system is expected to have the biggest impact on small- and medium-sized banks. There is a possibility that savers will leave smaller banks, which are usually seen as less able to deflect risk.

The insurance of deposits up to 500,000 yuan seems quite reasonable. Internationally, deposit insurance thresholds are usually set at two to five times a country's per capita GDP. In China though, the proposed limit is roughly 12 times per capita GDP.

Lian Ping, chief economist at Bank of Communications

It is still too early to gauge the influence of the insurance system on local banks, since no specific premium rates have yet been set. Based on international experiences, such premiums are generally set between 0.015 and 0.02 percent of deposits. If Chinese banks submit to similar rates, the impact on profitability will be negligible.

Depositors could benefit from higher deposit rates because banks, particularly small- and medium-sized institutions, are likely to raise yields to prevent savings outflows. Bank deposits, which are usually regarded as risk-free places to park cash, will become riskier under the deposit insurance system, accelerating outflows.

Launch of the system will accelerate interest rate liberalization. The banking industry will face heightened pressure to raise interest rates next year amid efforts to give banks more leeway to set rates in relation to government benchmarks.

We recommend that the central bank also cut the reserve requirement ratio (RRR) to dampen market volatility and maintain liquidity, since cash-rich financial institutions are needed to effectively support the real economy.

In the meantime, commercial banks should educate the public about the deposit insurance system to avoid fluctuations in deposit levels.

Liu Yuhui, professor from Graduate School of Chinese Academy of Social Sciences

So far, the details of the deposit insurance system appear well-conceived. In the event of bankruptcy, savers can be compensated in full for deposits of up to 500,000 yuan. In China today, this would offer full coverage of nearly 99.7 percent of all bank depositors. This means that the overwhelming majority of savers no longer need worry about losing the money in their bank accounts.

For large banks, the payment of insurance premiums will reduce liquidity somewhat. If this hinders the operation of commercial lenders, the central bank may consider cutting the industry's RRR to free up more cash within the banking system. The current rate for large banks is about 20 percent.

For smaller banks, concerns about bankruptcy may lead to a certain amount of deposit flight. If the outflows exert a serious negative influence, the central bank has two possible options. First, it could allow banks to put a higher ceiling on deposit rates - perhaps allowing for as much as 30 to 50 percent above benchmark, up from the current limit of 20 percent. Second, it could impose a differentiated RRR regime, allowing small banks to keep less in reserve than their larger peers.

A system to ensure deposits is a key component in any mature financial market. In China, the implementation of such a system would mark an important step in the country's financial reform process. As the system develops, we can expect regulators to next introduce appropriate indemnity limits and reasonable premium rates.

Newspaper headline: Proposed system likely to hasten rate liberalization, pressure smaller institutions

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