The establishment of a deposit insurance system is being planned
that aims to protect depositors when financial institutions go
bankrupt.
The ?is working closely with the China Banking Regulatory
Commission, the Ministry of Finance and other related
government agencies on the design of the system.
"The State Council has agreed in principle, but more work needs
to take place," said an official familiar with the plan. "It's
going to be a long process."
The system, which would require banks to buy insurance for the
deposits they take and compensate depositors if the banks go
bankrupt, aims to raise public confidence in the banking system,
reduce government spending on covering losses from bankruptcies of
financial institutions, and contain moral hazards that may arise if
the government fully covers losses, the official said.
As reforms deepen, financial authorities are increasing efforts
to build mechanisms to safeguard stability.
The authorities announced the establishment of an insurance
protection fund earlier this month, which aims to compensate
policyholders in case of insurer bankruptcy.
The idea of establishing a deposit insurance system, which is
commonplace in developed countries, was proposed in China during
the 1997 Asian financial crisis, when a string of small financial
institutions closed.
The need became more urgent last year, when a few loss-making
securities brokerages were shut down and the failure of an
influential private company pushed some of its subsidiaries,
including financial firms, to bankruptcy.
"The sooner the system can be established the better," said Qiu
Zhaoxiang, dean of the Institute of Finance at the University of
International Business and Economics in Beijing.
Financial security networks typically include a combination of
central bank lending, prudent supervision and a depositor
compensation system.
China has typically compensated the creditors of failed
financial institutions with central bank lending, often guaranteed
by local governments' fiscal incomes, and the cost can be very
high.
The system is likely to provide only partial compensation to
creditors by setting a ceiling to prevent moral hazards, and will
treat individual and institutional creditors on an equal basis, the
official said.
In previous cases, individual creditors have generally been
fully compensated by the government.
The deposit insurance system, which would charge higher-risk
banks higher premium rates, will also provide strong incentives for
financial institutions to operate prudently, the official said.
China is reforming its banking sector at an increasingly fast
pace as it gradually opens up to foreign competition.
(China Daily January 13, 2005)