Premier Li Keqiang has recently signed a State Council Decree to promulgate the Regulations on Deposit Insurance which will take effect on May 1, 2015. The officials of the State Council Legal Affairs Office and People's Bank of China(PBC) answered press questions on the Regulations.

Q: What are the purposes of the Regulations?

A: The deposit insurance scheme, as an important component of the financial safety net, is an important measure designed to protect the interests of depositors. The deposit insurance scheme works through a deposit insurance fund established with the premium payments from the deposit-taking financial institutions (generally referred to as insured institutions). When an insured institution is in distress, the agency that manages the deposit insurance fund will use the resources in the fund to provide prompt compensation to the depositors in accordance with the regulations and takes necessary measures to maintain the safety of deposits and of the deposit insurance fund. More than 110 countries and jurisdictions have established their own deposit insurance schemes. Since 2009, there have been continued efforts around the globe to improve the institutional arrangements of deposit insurance scheme, protect the rights and interests of depositors, and forestall and resolve financial risks. The deposit insurance scheme has played an important role in preserving financial stability.

The launch of a deposit insurance scheme will help improve China's financial safety, provide better protection for depositors, reinforce market and public confidence in the banking system, further straighten out relations between the market and government, deepen financial sector reform, safeguard financial stability and promote the sound development of the financial system. As early as in 1993, the State Council had put forward the proposal of establishing a deposit insurance fund to protect public interests. The People's Bank of China, together with the relevant departments, has since then carried out studies in a systematic way, and solicited views and proposals from many parties. At present, the conditions are ready for the launch of a deposit insurance scheme. The formulation of the Regulations is to provide a legal basis for the launch and regulation of deposit insurance scheme.

Q: What is the range of protection of the deposit insurance?

A: To effectively protect the interests of depositors, to ensure fairness and equity, promote fair competition in the banking sector, the Regulations provide for compulsory insurance. Deposit-taking banking institutions established within the territory of China, i.e. commercial banks (including foreign-funded banks and joint venture banks), rural cooperative banks, rural credit cooperatives, shall all take part in the deposit insurance. Following international practice, the Regulations stipulate that deposits of foreign banks' branches in China that are not legal persons and of the overseas branches of Chinese banks are not covered in the deposit insurance, except in cases otherwise stipulated in the deposit insurance arrangements between China and the relevant jurisdiction.

The coverage of deposit insurance includes RMB deposits, foreign currency deposits, savings of private individuals and deposits of companies and other entities, and both the principal and interests are insured. However, inter-bank deposits and money that a member of the senior management of an insured institutions has deposited in the institution are not insured, for the purpose of preventing moral hazards and allowing market mechanism to enforce discipline. This is also consistent with international practice.

Q: Who are to pay the premiums of deposit insurance? What is the standard for determining the premium rate?

A: Banking financial institutions which are insured pay the premiums for deposit insurance. Depositors do not pay premiums. China’s deposit insurance scheme adopts a premium rate system combining a basic rate with risk-based differential rate. The standards for determining premium rates are set and adjusted by the deposit insurance fund management agency after taking into consideration the factors such as economic and financial development, the structure of deposits, and deposit insurance fund accumulation. The standards are submitted to State Council for approval before implementation. The amount of premium to be paid by each insured institution is to be determined by the deposit insurance fund management agency based on the institution’s operation and risk profile. The application of a premium rate system combining a basic rate with a risk-based differential rate will help promote fair competition, provides a positive incentive, strengthens market discipline on the insured institutions, and encourages prudential operation and healthy development of these institutions. Based on considerations of various factors such as the international practice, affordability to financial institutions and their need for risk resolution, the level of China’s deposit insurance premium will be lower than that in most countries’ both at their early stage and the current stage of deposit insurance scheme.

Q: How is the insurance limit of 500,000 yuan determined? Does it mean that deposits in excess of this limit are without protection?

A: The level of insurance limit is designed to provide adequate protection for the depositors’ interests and to prevent moral hazards at the same time. In terms of international practice, the insurance limit of deposit insurance is generally twice to five times the GDP per capita in that country or jurisdiction. China’s deposit insurance will have an insurance limit of 500,000 yuan, as specified in the Regulations. This is the outcome of repeated calculations and reviews by the PBC together with all parties concerned based on the factors such as the volume and composition of deposits in China, taking into account the facts that the Chinese population has strong inclinations to save, and the savings provide them with supports similar to the social security regime. This standard is about twelve times China’s GDP per capita in 2013, and above the insurance limit level in a large majority of countries. For 99.63 percent of Chinese depositors, this limit is sufficient to cover their bank savings in its entirety. Moreover, this standard will not be a fixed one. With approval of the State Council, it will be adjusted when necessary in view of conditions such as economic development, changes in deposit structure and the risk exposure of the financial system.

It also needs to be clarified that, the deposit in an individual account in excess of the insurance limit is not without protection. According to the Regulations, the resources of the deposit insurance fund can be used to compensate the depositors, and can also be used to support another insured institution to acquire the insured institution in distress or perform risk resolution. Looking at the experiences of the countries and jurisdiction where deposit insurance schemes have been functioning, the resources of the deposit insurance fund, in most cases, are used first to support a qualified insured institution to acquire the troubled institution, or take over the latter’s business operation, assets and liabilities. Such takeover moves depositors’ money into a qualified institution and puts them under full protection. In the case where the attempts of acquisition and takeover by another insured institution have failed, compensation payments will then be made, based on the insurance limit, directly to the depositors of the institution in distress. In addition, deposits in excess of the insurance limit can be compensated in the liquidation procedure of the insured institution.

Q: Under what circumstances do depositors have the right to request compensation of their insured deposits?

A: It is very important for the purpose of depositor protection to define, as part of the legal system, the circumstances under which depositors have the right to request compensation of their insured deposits. It is also one of the top concerns of depositors. For this purpose, the Regulations provide specific descriptions of the circumstances under which depositors have the right to demand deposit insurance fund management agency to use the resources of the fund to compensate for their insured deposits. These circumstances are as follows: (1) the deposit insurance fund management agency acts as the receiver of an insured institution; (2) the fund management agency assumes the task of liquidating a closed institution; (3) a people’s court decides to accept an insured institution’s filing for bankruptcy; and (4) other circumstances as approved by the State Council. In order to ensure prompt compensation to depositors, the Regulations also stipulates that the deposit insurance fund management agency makes full compensation payment to the depositors for their insured deposits within seven business days after any of the above-mentioned circumstances occurs.

Q: What measures will be taken to guarantee the safety of deposit insurance fund?

A: To ensure the safety of deposit insurance fund, the Regulations places certain restrictions on how to manage the fund’s resources in the principle of safety, liquidity, maintaining and increasing value. The money can be deposited with the PBC, invested in government bonds, central bank bills, financial bonds with good credit rating as well as other highly-rated bonds, and other forms of investment approved by the State Council. In the meantime, drawing on successful international experiences, the deposit insurance fund management agency is entrusted with the early intervention and risk resolution functions, under the precondition of not changing the current banking regulatory framework, and in the principle of the banking regulatory authority and the deposit insurance fund manage agency having appropriate division of functions and respective focus in their work. The above-mentioned functions mainly involves the following activities: conducting reviews on matters related to premium calculation and on the authenticity of data and information reported by the insured institutions; participating in the financial regulatory coordination mechanism, obtaining information by sharing information with other parties, and demanding further information without delay from insured institutions for the purposes of insurance fund risk control, prompt compensation payment and differential premium rate calculation; issuing risk warnings to the insured institutions after identifying capital inadequacy that might threaten the safety of deposits and deposit insurance fund; taking corrective measures as needed for risk management after spotting a dramatic decline of capital adequacy ratio in the insured institution that seriously endangers the deposits and deposit insurance fund. All of these mean that the deposit insurance fund as contemplated by the Regulations is not just a cashier or cash-box. In addition, in order to integrate with the existing legal system, the Regulations also provides that, for the purpose of minimizing fund loss, the deposit insurance fund management agency has various tools at its disposal in dealing with an insured institution in distress. Besides making direct compensation payments to depositors, the fund management agency can use flexible means such as entrusted payments, offering support to a qualified institution to acquire the troubled institution or take over its assets and liabilities, in order to protect the interests of depositors, minimize the cost of fund operation, achieve prompt and effective financial risk resolution, and in the meantime, maintain the normal operation of the banking industry and financial stability.