The heads of the People’s Bank of China and the Legislative Affairs Office of the State Council answered questions on the bank deposit insurance program that will take effect on May 1.
Q: Why launch the deposit insurance program?
A: The program, part of China’s financial safety net, will protect the interests of depositors. Under this program, financial institutions will be required to contribute to a fund that will insure depositors against losses caused by a bank’s inability to pay its debts.
Similar programs have been long-established in more than 110 countries and regions around the world, and play an important role in protecting savers from financial upheaval, such as the global financial crisis of 2008. China first considered the program as early as 1993. Now the conditions are ripe to launch it, as part of ongoing efforts to further reform the financial system as well as balancing the relationship between the government and the market.
Q: What does the program cover?
A: The insurance program is compulsory for all financial institutions in China that accept deposits, including those that are set up in China but are foreign-funded and Sino-foreign funded banks. In principle, foreign banks operating in China, and overseas branches of Chinese banks, are not covered by the program.
The program will cover both RMB deposits and foreign currency deposits from individuals as well as companies. Both the principal and interest are protected by the program.
Q: Who will fund the program, and how?
A: Banks, instead of individual savers, will fund the program. The State Council will approve standard rates for the insurance program, along with additional risk rates. China is expected to tailor the rates and make them lower than those in most other countries.
Q: Why is the maximum compensation of the program set at 500,000 yuan ($80,600)?
A: According to international practice, deposits two to five times a country’s gross domestic product (GDP) per capita are generally insured. In the case of China, where residents prefer depositing to consuming, the figure is 12 times the country’s GDP per capita of 2013, covering 99.63 percent of depositors. Meanwhile, the People’s Bank of China, approved by the State Council, can adjust the maximum amount of compensation according to the changing situation and potential risks.
Please note that while the program directly covers 500,000 yuan it doesn’t mean that deposits of more than 500,000 yuan will not be safe. If a bank fails, other financial institutions are likely to take over its business, assets and debts with the aid of the fund under the program. Besides, a bankrupt bank will pay indemnity with its own assets after it enters the liquidation process.
Q: At what point can a depositor apply for the insurance?
A: A depositor can apply for the insurance when one of the following conditions is fulfilled:
First, the manager of the fund takes over the assets of a failed bank. Second, the manager of the fund starts carrying out liquidation procedures for a bankrupt bank. Third, a court accepts the bankruptcy petition filed by a bank. Fourth, other conditions approved by the State Council are fulfilled.
The fund manager shall reimburse depositors within seven working days when one of these conditions is fulfilled.
Q: How to ensure safety of the fund?
A: The program has made several regulations for the use of the fund. The fund will invest in high-grade bonds such as government bonds, central bank bills, financial bonds with excellent credit ratings and other projects that have been approved by the State Council. The manager of the fund is encouraged to take early action and minimize potential loss. The manager will use various financial tools to ensure the stability of financial system and the banking industry.