China will institute a new deposit insurance scheme to better protect savers and at the same time fully liberalize interest rates, Xinhua reported.
The details of the new deposit insurance scheme are set forth within a set of draft regulations comprised of 23 articles which has recently been published and circulated by the Legislative Affairs Office of China's State Council. The draft, which is accessible at its website, is available for public comment and recommendation until Dec. 30.
As provided for under the new scheme, financial institutions, except overseas branches of domestic banks and China branches of foreign banks, will be required to pay insurance premiums to a special fund that will be constituted for the purpose. A new agency will be set up to manage the special deposit insurance fund.
The new agency that will be established to oversee the deposit insurance fund will make the detailed implementing rules and guidelines as well as set the insurance premium rates for the different banks based on certain criteria, which will include how riskily they run their business.
The fund will pay a maximum compensation of 500,000 yuan ($81,500) per depositor if a bank suffers insolvency or bankruptcy. Banks will then use their own assets to indemnify those incurring losses in excess of the 500,000 yuan.
Regarding how the ceiling was set for the maximum compensation that may be received in the event of bank failure, the People's Bank of China (PBoC), the country's central bank, told Xinhua that 99.6 percent of Chinese depositors have been found to have less than 500,000 yuan in their savings accounts.
According to the PBoC, having a state-sanctioned deposit insurance scheme is an important component of a financial safety net for bank depositors. It not only helps in the supervision of banks, but more importantly, it prevent risks in the financial sector.
Also, it will significantly improve the competitiveness of medium and small-sized banks since the insurance will assure depositors of the safety of their savings.
"It will help create a fair environment for all financial institutions," said the PBoC.
Having a state-backed deposit insurance scheme is also a necessary first step toward the full liberalization of interest rate, a move which has long been a high priority on China's financial reform agenda.
Huang Xiaolong, vice director of the PBoC's Financial Stability Bureau, told Xinhua that "the establishment of such scheme is critical to deepening the financial reform."
According to Xinhua, the new deposit insurance scheme will likely be implemented as early as the beginning of 2015.