Chinese Government Set to Insure Bank Deposits in Crucial Move Toward Financial Liberalization

The People’s Bank of China (PBOC) has announced last week that the Chinese government will create a national insurance system for bank deposits. The move is seen as a necessary step to let the Chinese banking system operate without direct government backing.

The proposed system will insure individuals' bank accounts of as much as ¥500,000 (around $81k), the People’s Bank of China said in a draft on its website. No start date was given nor details disclosed on the premiums banks will be required to pay. The central bank did state that the premiums may vary depending on the bank's lending management and risk conditions. The PBOC is seeking feedback on the plan by Dec. 30.

The system would apply to all deposit-taking financial institutions and would cover both local and foreign currency deposits. The aim of the system is to “promote the establishment of market-based risk prevention and resolution mechanisms,” the central bank said in the statement. And the insured amount proposed will be enough to cover all the bank deposits of 99.6% of savers.

The Small Advantage

In a separate statement, the PBOC said a deposit-insurance-fund management agency, to be decided by the State Council, will set the premium rates. The ratios will be “much lower" than the starting level or current level in most countries with a deposit insurance system, and the financial impact on lenders will be “very small.”

The purpose of a national deposit insurance is that the government can assure private savers that their funds are safe, preventing bank runs or having to bail out big banks in case of troubles. These troubles can affect the whole economy while letting small banks' clients suffer losses. Following this line of thinking, the PBOC said the deposit insurance system will “significantly” enhance smaller banks’ credibility and competitiveness and create a fair environment for them to compete against the big banks.

If the Chinese banking system will ever come under the stress Western banks had to endure in the last financial crisis, this assertion might not stand up to the test. In the United States, for example, despite having the Federal Deposit Insurance Corporation (FDIC) in place since 1933, the American political establishment found it impossible to let a "too-big-to-fail" bank collapse and created a "moral hazard" whereby investors and savers knew the government wouldn't let a big bank fall no matter the costs and culpability.