Dec 09, 2013 03:31 PM

PBOC Said to Be Talking to Major Banks about Deposit Insurance

(Beijing) – The central bank has been consulting executives of major banks about creating a deposit insurance mechanism and may announce a draft plan early next year, a source close to the situation said.

Advocates have called for such a system for years, saying it is the cornerstone of further financial reform. Without it, they argue, the government will be held as hostage to banks who may act irresponsibly because they know the government will not let them fail and hurt tens of millions of depositors. 

Based on current discussions, the insurance mechanism would mostly likely start with the creation of a special fund controlled by the central bank, the People's Bank of China, from which money would be drawn to cover depositor losses if a bank fails, the source said.

Both companies and individuals would be shielded from losses of 500,000 yuan per account. As the mechanism matures, an independent company would be established to take over the fund, the source said.

The central government has also agreed to the central bank's proposal that the scheme cover all deposit-taking institutions, including thrift institutions in rural areas, which analysts say would be affected most.

The ratio of profits each bank will need to contribute to the insurance fund will be decided based on their capital conditions and risk control performance. Most would range between 0.015 and 0.02 percent. Small banks may pay lower rates or granted a grace period.

In general, it means that the large banks would be subsidizing the small ones, the source said.

The initial size of the fund may be between 10 and 15 billion yuan, or about 1 to 1.5 percent of the banking industry's annual profit in recent years. Experts do not expect this to be a heavy burden on the industry as a whole.

The insurance mechanism is aimed at allowing unqualified institutions to leave the market in an orderly manner instead of all at once, a central bank official said. "It would serve as a warning, so those remaining would behave themselves."

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