China should push ahead deposit insurance system quickly
“China’s banking system has its dominant position, whatever the huge one or small one it could not go bankrupt”, commented recently by Yan Qingmin, the deputy Chairman of China Banking Regulatory Commission (CBRC). He also said that in the near future China will push all the banks into the market, and let the banks to be developed or died out by market. If any commercial bank which could not secure the debt by its assets or even property, this bank should be closed down. His abovementioned words again caused a mighty uproar in China’s financial circles.
Actually, it was early in January 2014, the People’s Bank of China (PBOC) pointed out in its “2014 Working Conference” that the preparations for launching the deposit insurance system had already been finished. Although the PBOC did not issue the time table, most of the people among financial circles believe that the system should be launched within the year of 2014, at least, it may put out even in the first half year.
At present, there’s hidden deposit insurance system in China’s banking industry, and actually almost all banks are protected by the state credit guarantees. When a bank is approved to be established, every depositor has no worry about the security of their money. Such system draws banks’ moral hazards that they issue loans without reasonable risk controls, and the government has to bear the related risks. This is an important reason why interest rates in China are under control. Otherwise banks would like to use much higher interests for accepting deposits and releasing loans, which is more liable to accumulate systemic risk. Under the implicit credit guarantees, China’s banks have no incentives for business innovation at their own risk and just pursue the safe profits.
But the side effects of interest rate controls are very obvious. The big spread between government-controlled deposit and lending rates made banks earning too much. The benefits of the real economy were dramatically diverted into the financial industry, then it caused China’s economic structure lost its balance.
The most serious problems came out when the market-oriented reform went deeper. Many financial products popped out to replace the traditional products of bank deposits and loans, and those products always have much higher interest, those products caused great amount of bank savings and deposits moving out of banks. Then the money was quickly into another channel, in the name of so called wealth management products, different named funds and trust deposits, actually the money finally directly went into those persons who need money quite urgently. It is does not matter if it is only simple borrowing and lending business between the person to person, but the problem is that the business is always through our banks to sell out. The products by the hands of banks, trust agencies, and different funds, the customers could not clearly see the real risk from, and who is the real body to undertake the financial risks. So people would consider those products as safe as the deposits in the bank, and equals to the state credit guarantee.
You may find different fantastic phenomena in our society today. Many people would say wealth management products with high return rate between 5%-8% are as safe as the deposits in the banks. Even, people regard the bonds with return rate over 10% and trust products with over 15% as products with no financial risk at all. Because they believe the state government would not let them to default. As a contrast, statistics shows that the return rate on net assets for those A shares of listing Corporations is less than 5% on average in 2012. That is to say the total money earned by the companies is not enough to pay for loan interest, and this is a systematic risk in our financial system.
As a matter of fact, under the circumstance of bank interest mechanism controlled and with the implicit government guarantees to our banking industry, plus while the interest rate tends to be market-oriented, investors would more and more like to find a sugar daddy as bank for themselves, because they could easily overdraft the national credit. But it is ultimately harm the interests of the whole society. And with the emerging of internet financial products like “Yu E’Bao”, the deposit in most banks moves out at even great speed, but the financial risk which should be undertaken by banks is getting bigger and bigger. At this critical moment, even a slight risk might lead to market breakdown.
So with the explicit deposit insurance system, the risk of deposit could become more explicit, and take away the national credit out of the banks. Thus the burden of undertaking safety for deposit only by the state could be realized. Only with the deposit insurance system, banks can be considered truly independent. Also, banks will have big freedom to determine their interest rate for greater competition and the bankruptcy of individual bank failure will not affect the operations of other banks.
It should be noted that the introduction of the deposit insurance system is sooner rather than later. At present, the China financial system has already accumulated various kinds of risks. Once the U.S. quit QE, there would be great deleveraging pressures in the long term of our financial system. Then it is impossible to let the economy hit by defaults of financial products or the bankruptcy of financial institutions without any intervenes from the government. In such a case, the sooner the banks bear their own risks, the more beneficial to eliminate the negative impact from bankruptcy of individual banks and some financial institutions, the more conducive for the government to buy time to eliminate the systemic risk.
