Given the many public comments that have been made recently concerning the current public consultation on what form of protection should be put in place for Hong Kong depositors, the Consumer Council is taking this opportunity to express its views, prior to presentation of its formal submission to Government.
The Council's objective is that Hong Kong depositors should have a protection scheme that will advance the limited protection currently available, and bring Hong Kong into line with world's best practice. The Council therefore concludes that some form of deposit insurance scheme is the best option for Hong Kong and supports HKMA's proposal for such a scheme to be introduced.
A deposit insurance scheme would best serve the interests of consumers because:
- a deposit insurance scheme would contribute to a stable banking system, as small depositors would be less susceptible to act on rumors in the market, and thereby avoid runs on the banking system;
- in the event of a bank failure, a deposit insurance scheme would ensure that small depositors are guaranteed of receiving funds (in that they would not have to worry about a failed bank having sufficient assets to meet their claims);
- even if a failed bank was eventually found to have sufficient assets, the payments would be much more promptly made under an insurance scheme, rather than would be the case under a priority payment scheme, because they would not have to wait for the full process of administration of assets, and recognition of creditor priority, to run its course; and
- there is a strong argument that having a deposit insurance scheme is consistent with the protection that is already in place for investors in the stock and futures markets, and the proposed improvements to that protection through amendments to the Securities and Futures Bill. It could be argued that it is equally, if not more important, that depositors' funds should have similar insurance protection, given that they could represent the life savings, and a major source of liquidity for many consumers.
A number of arguments have been made against introducing such a scheme. For example, the risk of moral hazard, cross subsidisation between banks, and that the costs of a scheme will be directly passed on to consumers.
The answer to the issue of moral hazard is strong regulatory supervision. The Council notes the good work of the HKMA and that it is already in the process of enhancing its supervisory regime to make it more risk-based.
With regard to the arguments of cross-subsidisation, an element of subsidy is inherent in any form of insurance, particularly mandatory insurance. It is considered that deposit insurance would help promote competition in the market for banking services, and that as a result, strong competition between banks will play its part in reducing the extent of costs being passed on to consumers.
With regard to the various options for how a scheme should operate, the Council is in favour of:
- a minimum coverage cap of $100,000 when the scheme is to be introduced and a review at a later stage;
- that a per depositor based approach to coverage for the scheme be adopted;
- that foreign banks be included within the scope of the scheme; and that
- a fixed rate of assessment of premium be used, at least in the early stages of development of the scheme. The option of moving to a risk based premium could be considered after reviewing any possible changes that may have occurred in consumer behaviour and banking practices after a period of time.
The Government has indicated that the detailed arrangements on how a deposit insurance scheme should be structured will need to be examined as part of a separate consultation exercise. The Council welcomes this commitment to further public consultation.