How the government can implements Deposit Protection Scheme cost effectively Section No.: 1 Group No. 2 Group Member: Cheung Wai Yee,Winnie 033083 Tsui Long Ting,Joey 033105 Chung Ho Ying,Amy 033106 Chong Lai Kam,Jane 033110

Agenda What is DPS Joey & Winnie Background Main features of DPS Discussion Amy & Jane Recommendation

What is DPS? Purpose: Provide a measure of protection to small depositors Improve consumer confidence Contribute to the stability of financial system e.g. 68 countries, including U.S.A., Japan and Canada ….are carried out DPS China (in the process)

Background 1992 A deposit protection scheme was Suggested and then rejected . 1998 Revisit the DPS issue Late 2000 A broad public support for establishing a DPS 13 December 2000 The Legislative Council adopted a motion urging the Government to “expeditiously implement a DPS, aiming at reducing the risk of moral hazard”. 24 April 2001 The Chief Executive-in-Council approved in principle the establishment of a DPS and requested the HKMA to work out the detailed design features of the scheme.

Background Objective: March 2002 A second consultation paper, was released and received general support for its proposals. 2003 HKMA developed a set of proposals that now form part of the DPS Bill. May 2004 The Ordinance was enacted in. January 2005 The Deposit Protection Appeals Tribunal was established. 2006 Expected that the DPS will begin. Objective: How DPS can be implemented effectively and efficiency.

Main Features of DPS Participation & members Scope and level of Compensation DPS Fund Assessment of Contributions Administration Framework

Main Features of DPS Participation & members Participation by licensed banks in the scheme is mandatory overseas-incorporated banks may apply for exemption from participation Scope and level of Compensation HK$100,000 per depositor per Scheme member Apply to the principal amount of a protected deposit and the interest accrued on that deposit Both Hong Kong dollar and foreign currency deposits are protected. 84% of the depositors would have fully protected under the scheme

Main Features of DPS DPS Fund Target fund size of 0.3% (approximately HK$1.6 billion) DPS Fund to fluctuate in a range between +15% and -30% of the target fund size.

Main Features of DPS Banks with CAMEL Rating Assessment of Contributions CAMEL Rating Banks with CAMEL Rating Rate of Contribution payable (as % of the balance of protected deposits) Until the 1st year in which the target fund size is reached The rafter 1 0.05% 0.0075% 2 0.08% 0.01% 3 0.11% 0.015% 4&5 0.14% 0.02%

Main Features of DPS Administration Framework The Hong Kong Deposit Protection Board : Established by legislation to administer the DPS. A statutory body created under the DPS Ordinance (May 2004) The Board’s functions: Collection of contributions Managing DPS Fund Assessing claims made against the Fund Making payments to depositors Recovering payments from the assets of the failed bank

Discussion & Recommendation

Overseas-incorporated banks If the deposits taken by its Hong Kong offices are already covered by a comparable scheme in its home jurisdiction exempted.

Overseas-incorporated banks (Con’t) Exemption No Deposit Protection scheme Need With comparable scheme or with higher level No Need With scheme but under Hong Kong Level

Responsible for the government how to protect them is a main problem. The solution for the oversea bank with scheme but the compensation under Hong Kong level Responsible for the government how to protect them is a main problem. Reduce the disorder. Suggestion: The government must discuss on this problem deeply set up the requirements of the attendant before the scheme starts to run.

Scope and level of Compensation No coverage limit Such as USA and Japan, they used this method at the beginning. Advantages: Protect all of the depositors. Disadvantages: The cost of no limit is high. Easy to cause Moral Hazard problem that the banks and the depositors avoid to take the risk.

Scope and level of Compensation (Con’t) Using deductibles Advantages: Prevent the Moral Hazard, that let the depositors know that they need to bear the risk. Disadvantages: Cannot protect the small depositors completely. The cost of the deductible still high cannot afford by the Hong Kong government easily.

Scope and level of Compensation (Con’t) Have coverage limit Advantages: Lower the cost of the government. Reduce the Moral Hazard problems. Increase the bank competition opportunities. Will not affect the benefits of the small depositors. Disadvantages: Decrease the capital of the small banks.

Scope and level of Compensation (Con’t) Hong Kong Deposit Protection Board suggests that : The coverage limits is set at HK$100,000 per depositor per Scheme member. 84% of the depositors in Hong Kong would have their total deposits fully protected under the scheme.

The suitable level of Compensation for Hong Kong? Many countries choose using coverage limit. If don’t have coverage limit, crisis that the bank cannot indemnify all depositors. In Hong Kong, the government and the bank are willing to choose have coverage limit.

Methods of Contributions There are two systems to collect the contributions from Scheme members: Standardized of Contributions. Assessment of Contributions.

Standardized of Contributions Advantages: Reduce the costs that the government needs not put resources to research the rate system on the banks. Easy to handle and calculate. Fair to the bank with high risks to fight with the low risks bank. Disadvantages: Unfair for the low risk banks that they may not need the DPS to protect them. Easy to cause the Moral Hazards that the high risk banks is uncontrolled to increase their risks continuously.

Assessment of Contributions Advantages: Control the high risks banks increase their hazards unhealthy. Reduce the low risks bank concern on the unfair payment. Disadvantages: Make the scheme become complicated and increase the administration cost. Reduces the power of the small banks with high risk that needs to pay more with the higher costs.

How to using assessment of contributions Based on the equality between each bank in Hong Kong. The high risk banks don’t want to have the assessment of contributions The lose risk banks think it is fair for them. Each bank must canvass the problem and have a common consensus with the government. The effective of the scheme on each bank is high. Too much contention must obstruct the development of the scheme.

Transferring cost to which parties Collected from Scheme members - Banks. In the public, there are concerned that the costs will transfer to the depositors. In Japan, there are negative interest rate occurred after the practicing DPS of the economics downturn. Most of the banks in Hong Kong have the safekeeping charge for the clients who deposits cannot achieve their lower limits.

Transferring cost to which parties fair for the depositors enjoy the benefit and have a duty to bear the costs of DPS. reduce the costs of the banks. However, Affect the Purpose of the DPS: Protect the small depositors. Increase the burden of the small depositors and loss the original idea of DPS.

The position of government on deciding which parties pay the transferring cost. The government unable to take too much attention on deciding the undertaker of the transfer cost. must discuss with bank about the transfer cost before the scheme starts.

References Annual Report of Hong Kong Deposit Protection Board Consultation Paper and related documents related to DPS 風險為本評定保費一舉兩得 《信報》 2000年12月12日 存款保險體系 美日有啟示 《香港經濟日報》 2000年7月11日 透視美國存款保險制度改革草案《銀行家》雜誌 2003年1月14日 美國存款保險制度建立完善及啟示 《濟南金融》2004年1月 通貨緊縮 日考慮推行負利率 《自由時報》2002年8月8日 日本《保險法》指導存款保險5年蟄伏盼建自我責任機制 《國際金融報》 2004年6月30日

References http://www.info.gov.hk/hkma/eng/public/qb200306/fa5.pdf (DBS Bill, camel rating system) http://www.tdctrade.com/econforum/hkma/hkma040501.htm http://www.info.gov.hk/hkma/eng/dis/index_dis_all.htm http://www.info.gov.hk/hkma/chi/public/pshk/pshk_chi.pdf (金融體系的審慎監管) http://www.dphk.org/database/opress/001024.htm (民主黨歡迎金管局表示支持加強存款保障) http://210.69.188.227/analysis/research/volume4/a%20study%20on%20methods%20of%20dealing%20with%20problem%20financial%20institutions%20in%20the%20United%20States,Japan,South%20Korea,and%20Taiwan.pdf (美國、日本、南韓與我國問題金融機構處理模式之探討 郭秋榮)

Question 1 Answer is D Which of the following about DPS is false? Aim to protect small depostiors Improve consumer confidence Stabilize the financila system Launched in 1992 All is true Answer is D

Question 2 What is the suggest target fund size of DPS in Hong Kong? 0.2% 0.3% 0.4% 0.5% 0.6% Answer is B

Question 3 What is the suggest coverage limit of DPS in Hong Kong? HK$100,000 HK$200,000 HK$300,000 HK$400,000 HK$500,000 Answer is A