China formalises broad parameters of deposit insurance scheme
On 31 March 2015, China’s State Council finally made public the long-awaited regulations introducing, with effect from 1 May 2015, China’s own scheme of deposit insurance, aiming to follow in the footsteps of more than 110 jurisdictions in protecting depositors’ legal rights and maintaining financial stability. Key points of the new regulations include defining the institutions participating in the scheme, the types of deposits to be insured and the maximum payouts to depositors. In addition to protection of depositors, through uniform rules that apply to all deposit-taking banking financial institutions (“Deposit-taking Institutions”), the scheme is seen as an important step to further interest rate deregulation in the banking industry.
- Institutions participating in the scheme: the scheme applies to all Deposit-taking Institutions in mainland China, including commercial banks, rural cooperative banks and rural credit cooperatives, but excluding foreign banks’ branches and Chinese banks' branches overseas unless otherwise required by any applicable inter-governmental deposit insurance arrangement. Deposit-taking Institutions already established before 1 May 2015 must contribute to the scheme within a period to be prescribed by the manager of the deposit insurance fund (the “Deposit Insurance Fund Manager”), and those established thereafter are given six months to do so from the receipt of a business licence in accordance with the Deposit Insurance Fund Manager’s requirements. The People’s Bank of China (“PBOC”) has been provisionally designated as Deposit Insurance Fund Manager by the State Council in the initial stages of operation of the scheme.
- Deposits to be insured: the scheme will cover deposits denominated in both RMB and foreign currencies. Financial institutions’ inter-bank deposits and deposits by senior managers in their own institutions are not included. The Deposit Insurance Fund Manager may also exclude certain other deposits from the scheme.
- Contributions: contributions to the scheme in the form of premiums will be paid by the Deposit-taking Institutions to the Deposit Insurance Fund Manager. The rate-setting standards for contributions to the scheme will be approved by the State Council, on the basis of which the Deposit Insurance Fund Manager can set the rate for specific Deposit-taking Institutions (which may be further adjusted if a Deposit-taking Institution suffers material loss). Contributions are required to be paid on a semi-annual basis. The Deposit Insurance Fund Manager may charge a late payment fee of 0.05 per cent. per day on any unpaid premium. Liquidation assets of Deposit-taking Institutions distributed to the Deposit Insurance Fund Manager, proceeds arising from the investment of the premiums by the Deposit Insurance Fund Manager, and other income earned on the premiums accrue to the deposit insurance fund.
- Permitted investments: the Deposit Insurance Fund Manager may place contributions on deposit with the PBOC or invest them in government bonds, central bank bills, financial bonds with high credit ratings or other high credit rating bonds, or other methods approved by the State Council. No provision for contributions to be invested overseas has been made at this stage.
- Protection to depositors: the maximum payout amount per depositor per institution under the scheme has currently been set at RMB500,000 (including principal and interest), with unpaid amounts in excess of the maximum payout to be claimed from the liquidation assets of the relevant Deposit-taking Institution (individual depositors enjoy priority over other general creditors in the insolvent liquidation of a PRC commercial bank). The cap can be further adjusted with the approval of the State Council in response to economic conditions, changes in the structure of deposits, financial risk and other factors. Other ways in which the Deposit Insurance Fund Manager can protect depositors (which are not subject to the cap) include the receivership of failing Deposit-taking Institutions and guaranteeing their debts.
- Further guidance awaited: in addition to the setting of contribution rates and the exact timing of contribution to the scheme, more clarification from the State Council and the PBOC is awaited for a fully workable scheme to be developed. More detail is needed on the specific types of deposits that qualify for protection; for example, the rules are silent on whether or not the various structured products which Deposit-taking Institutions market to their depositors fall within the scheme. The rules are also silent on how long a depositor has to wait to obtain payment if a bank fails to honour the deposit (although payment is required to be made within seven working days of a Deposit-taking Institution being placed into receivership or liquidation or a court’s acceptance of a petition to wind-up a Deposit-taking Institution), and how the Deposit Insurance Fund Manager is to select between the various possible measures open to it in dealing with failing institutions.