Deposit insurance key to further financial reforms

Preparations for a deposit insurance system have been finished, said China's central bank over the weekend, in the latest signal that the world's second-largest economy is ready to further overhaul its financial system.

"Over recent years, the People's Bank of China (PBOC) has worked with relevant departments to conduct in-depth research and repeated analysis on a deposit insurance system," the PBOC said in a quarterly report on its website. "All preparations are now basically ready for establishing a deposit insurance system."

Similar language was seen in the PBOC's annual work conference communique in January. Those words were markedly different from earlier quarterlies, where the PBOC said it would "advance the construction of a deposit insurance system."

China is one of several among the Group of Twenty countries that have yet to adopt such a scheme, even after the State Council, China's cabinet, said as early as December 1993 that it would "establish deposit insurance funds to safeguard public interests."

Expectations were renewed in November 2013 when the scheme was promulgated as part of an ambitious reform plan in a key document issued by the Communist Party of China.

Deposit insurance is a widely implemented measure to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due.

The insurance adds a layer to the financial system safety net and promotes stability, as its absence usually implies a compulsory role for the state in dealing with bank runs.

Without deposit insurance, the state -- taxpayers' money, in fact -- is at stake in guaranteeing bank savings. In other words, banks enjoy protection that others do not have, contrary to the market-economy principle.

China has one of the highest savings rates in the world, and at a time of straining liquidity as the U.S. Federal Reserve looks poised to continue scaling back its quantitative easing, it's high on the Chinese government agenda to strengthen confidence in its financial system facing more default risks.

Deposit insurance could help to foster a proper relationship between government and market, a principle vigorously campaigned for by the Chinese government of late.

Studies also have shown that deposit insurance helps to enhance smaller banks' position, leveling the playing field for China's fragmented financial system, where megabanks traditionally enjoy greater credibility with depositors.