Market purists get nervous about the idea of governments guaranteeing deposits in the event of a bank failure. They worry that savers will become too trusting, and that lenders will take greater risks. In China, where the central bank on Nov. 30 unveiled proposals for deposit insurance after 21 years of talk, the reverse is true. Savers already trust too much. The proposed reform is more like an anti-guarantee.
The Chinese government started discussing a scheme to protect household deposits as early as 1993. In 2004, the central bank set up a department to handle its introduction. Why has it taken so long? One reason is powerful state-owned banks, who are the obvious losers from a levy that will be introduced to fund the insurance scheme. Their opposition isn’t entirely irrational. Being big and government-backed, they’re already the least likely to fail.
A bigger reason for caution is that deposit insurance in China could be seen as a negative signal. It would challenge the prevailing belief that the state backs everything. The collapse of Hainan Development Bank in 1998 was a rare exception to the received wisdom that all Chinese banks are too big to fail. Rich clients would probably move savings above the insured threshold into the biggest banks, leaving smaller lenders short of funding.
Read Full Article HERE