Significance for China to implement deposit insurance
Recently, the State Council has unveiled Deposit Insurance Act and declared that the Act is to be implemented from May 1 of this year. How to look upon the significance of Deposit Insurance System? I think this might start from Enterprise Bankruptcy Law.
Will the bank go bankruptcy? As to the majority of Chinese people, this might be an inconceivable problem, for they think the bank certainly will not go bankruptcy. But, if the enterprise may go bankruptcy, why the bank (also a kind of enterprise) can not?
Observing from the world range, it is the best choice to make those incompetent banks go bankruptcy for realization of market clearing, which helps to make the market play a decisive force in resource allocation. In 1970s to 1980s when America implemented interest rate liberalization, there were several hundreds of banks going bankruptcy every year. However, the bankruptcy of a large number of banks didn’t result in economic instability. On the contrary, it enabled the market to achieve cheaper fund. In 1980s, the Japanese financial institution faced a lot of problems, but few of them went bankruptcy due to policy support of the government, and finally the market couldn’t realize efficient resource allocation, which is also an important reason for Japan’s “lost twenty years”.
Seeing from the past 30 years, the key of the reform in China has always been to get rid of the soft budget constraint of state-owned enterprises, while bankruptcy is an important manifestation for breaking soft budget constraint down. In fact, it has always been one of the core elements in China’s economic reform to make those enterprises losing in market competition withdraw from the market in form of bankruptcy. Through nearly 20 years of trial implementation, Enterprise Bankruptcy Law was finally formulated in 2006, but it has made separate stipulations on bankruptcy of financial institutions. It is difficult to make financial institution go bankruptcy because measures should be taken to protect the savings of ordinary depositors. Seeing from the experience of other countries, this kind of protection is realized through Deposit Insurance Act. America has established deposit insurance system in 1930s, while Japan is in beginning of this century.
Seeing from the content of China’s Deposit Insurance Act, it can be really guaranteed to prevent the interest of majority of depositors from being damaged. As is stipulated in Deposit Insurance Act that quota reimbursement will be implemented in deposit insurance and the maximum repayment amount is RMB 500,000. According to the data provided by PBoC, the deposit insurance will cover 99.63% of depositors. If aggregated amount of the principal and interest of all the insured deposit accounts of the same depositor at the same insurance agency is within the maximum repayment quota, full amount repayment will be implemented; and the exceeding portion will be compensated from the liquidating property of the insurance agency. In fact, such kind of stipulation has been different from the bankruptcy liquidation procedure of ordinary enterprises, for the reason that, in other enterprises, all the unsecured claims will be repaid according to proportion in liquidating property. The stipulations different from ordinary bankruptcy liquidation procedure are certainly to protect the interests of small depositors, and to make the financial system be more steady, and thus prevent small depositors from runoff and avoid systematic risk.
The release of Deposit Insurance Act is indicative that China has done ultimate preparation for interest rate liberalization. As for general depositors, this is a good thing. Looking from the experience of other countries, like America, phenomena of enhancing deposit interest rate and reducing loan interest rate often appear at initial stage during implementation of interest rate liberalization, which is an effective weapon having to be taken out by the bank for welcoming competition and thus expels the banks with poor operation out of the market. So, will China’s banks respond to Deposit Insurance Act? What kind of reform bonus will the depositors obtain? Let’s wait and see what will happen.
Published in China Times | 2015-4-11
