Deposit insurance system mulled

Development is major step in liberalization of interest rates

The time for establishing a deposit insurance system - a major step for interest rate liberalization - is basically ripe, and banks are resilient enough for market-oriented pricing of deposits and loans, said the People's Bank of China on Friday.

"We're now working with other departments to improve the implementation plan, and promote the establishment of such a system as soon as possible," the People's Bank of China said in its 2013 financial stability report.

Deposit insurance protects depositors from losses caused by a bank's inability to pay its debts. The insurance is one component of a financial safety net that promotes financial stability.

China will make commercial banks pay into a fund to back the new deposit insurance system, with an initial maximum coverage of 500,000 yuan ($81,470) for each bank account, Reuters reported on Friday, citing three anonymous banking sources.

The PBOC will be responsible for managing the fund, and banks with better operations will be allowed to pay lower rates in the future, the report said.

The report said a protection system for depositors will be implemented after the central government reaches a consensus on the long-discussed subject.

Pan Gongsheng, a central bank deputy governor, said earlier in March that such a system could be available "very soon", as the conditions are right.

"The central bank has worked on establishing the system for many years, and we're just waiting for the right time to make a substantial move," he said.

The deposit insurance system is seen as a major step toward more liberalized interest rates, which would widen performance gaps among banks. Chinese banks currently can pay up to 110 percent of the benchmark deposit rate, and charge loan rates as low as 70 percent of the benchmark rate.

The PBOC said in the financial stability report that it has conducted a round of pressure tests among 17 banks with systemic importance at the end of 2012. The results showed that the capital adequacy ratio among banks would drop only 0.08 percentage point if both deposit and lending rates were raised 75 basis points.

If deposit rates go up and lending rates fall, banks would lose 0.31 percentage point in their capital adequacy ratio with the "mild" scenario, and 0.73 percentage point in the "severe" scenario.

The tests also found that under "severe shock" - a rise of 150 basis points in yuan bond yields - the capital adequacy ratio among banks would decline only 0.012 percentage point, while its impact on joint stock lenders was more obvious than it is on major State-owned banks.