Deposit Insurance Plans 'Likely' by Year-end

China may introduce deposit insurance plans by the end of this year after extensive discussions over the past few years, Wu Xiaoling, a member of the National People's Congress Standing Committee and former vice-governor of the People's Bank of China, said on Monday during a conference in Shanghai.

The central bank has listed the deposit insurance plan as one of the key reform goals for 2013, Wu noted during a conference concerning the protection of consumers' rights for financial services and products at the China Europe International Business School.

Once the deposit insurance system is adopted, it will provide a safety net for consumers' savings in banks, helping to enhance financial market stability and reduce systemic risks, said a central bank circular in May at the height of the liquidity squeeze in the banking system.

Wu did not elaborate on the insurance coverage limit but said the insurance represents "progress" in protection for both individual and institutional depositors.

Ling Tao, deputy director of the central bank's Shanghai branch, said last Tuesday in Shanghai that the central bank had reached a consensus with the departments whose efforts will be needed to set up the deposit insurance system.

According to analysts at UBS Securities, the insurance coverage limit may range between 200,000 yuan (US$32,606) and 300,000 yuan, while Barclays researchers forecast it at 200,000 yuan to 500,000 yuan.

"There have been some banks in China that failed during the past few years. Without a deposit insurance system, individual depositors could get their deposits back with the help of implicit guarantees, while institutions did not," said Wu.

Outstanding bank deposits exceeded 100 trillion yuan in May, according to the central bank.

Extensive discussions over the deposit insurance system have taken some two decades and cleared several obstacles, according to a central bank circular in June. The State Council initially proposed the deposit insurance system in 1993.

The central bank currently allows banks to set loan and deposit rates based on official benchmark rates, which creates greater competition and squeezes bank profits.

"Smaller banks may face greater risk than State-owned ones as interest rates get increasingly liberalized amid intensive competition and higher non-performing loan records," said Jimmy Leung, banking and capital markets leading partner of PricewaterhouseCoopers China.

According to Barclays Research, the deposit insurance system that might be implemented by the end of 2013 may dent banks' net profits up to 1.91 percent in 2014.

Some experts said implementation of deposit insurance could increase moral hazard because lenders might take more, not fewer, risks.

"When an implicit guarantee turns to be an explicit guarantee while the incentives for lenders are not designed properly, more risks may be entailed," said Qiao Yide, general secretary of the Shanghai Development Research Fund.