New deposit protection scheme will cover "99.6% of Chinese customers", says People's Bank of China

Out-Law News | 03 Dec 2014 | 10:16 am | 1 min. read

A new deposit protection scheme proposed for Chinese banks will cover the first 500,000 renminbi (RMB) (£51,800) of customer deposits at each bank where they have an account, according to the People's Bank of China (PBoC).

The PBoC, which is China's central bank, is now consulting on the scheme, which it says will "give full protection to 99.6% of the depositors in China". The new scheme will be established "in six months or a year", the PBoC said.

"The deposit insurance system will strengthen the protection of depositors, effectively stabilise their market expectations and increase public confidence in the banking system," said Huang Xiaolong, deputy director-general of the bank's financial stability bureau.

The scheme as proposed will fully insure the first 500,000 RMB of each customer's deposits at each bank. An additional fund would also be created which would enable well-managed banks to take on the accounts and customers of banks experiencing financial difficulties. This means that those customers with larger deposits would be protected by "having their deposits transferred to well-managed banks", the PBoC said.

Banks participating in the new deposit protection scheme would be set insurance premiums by the PBoC, which it said would be "based on [the bank's] operating and risk management conditions". In most cases this premium would only amount to around 0.5% of the bank's operating costs, meaning that it would not "increase their financial burden" and would have "minimum impact on their profits before tax", the PBoC said.

Guo Tianyong, director of the Chinese Banking Industry research centre at the Central University of Finance and Economics in Beijing, said that the new scheme would increase competition in the Chinese banking sector while at the same time allowing customers to feel safer about their deposits.

"The system will significantly raise the credit and competitiveness of small and medium-sized banks, rather than causing deposits to flow from small banks to large banks," he said.

According to Reuters, the new scheme will not cover foreign bank branches operating in China or overseas branches of Chinese banks.