Chinese Deposit Insurance System Establishment Reviewed by China's Economy & Policy

29 May 2012 • by Natalie Aster

In China, the proposal to establish a deposit insurance company was put forward a long time ago. With the expansion of market-oriented financial reform, and concerns about macro-financial prudence caused by the financial crisis in 2008, a deposit insurance system is once again being proposed as a part of reforming the Chinese financial system.

According to the article “Establishing a Deposit Insurance System in China” by China's Economy & Policy-Gateway International Group (China's Economy & Policy), in order to establish a deposit insurance system in China, priorities should be given to four major problems: the degree of concentration in the banking system, the degree of marketization in the financial sector, the regulatory system, and moral hazard.

Article Details:

Establishing a Deposit Insurance System in China
Published: April, 2012
Pages: 6
Price: US$ 200,00

A deposit insurance system requires that various depository financial institutions with eligible qualifications combine to establish an insurance agency or an insurance mechanism. Other depository institutions, as insurance applicants, pay insurance premiums to this agency according to a certain deposit ratio, and in this way, a deposit insurance reserve is established. When one of its members faces a business crisis or bankruptcy, the deposit insurance institution provides financial relief or directly pays part or all of the deposits to depositors, thus protecting the interests of depositors, maintaining bank credit, and stabilizing the financial order.

As an institutional arrangement, the effectiveness of the deposit insurance mechanism depends strictly on the larger system environment, and deposit insurance itself may also trigger some new risks and problems. Therefore, before the specific implementation, it is necessary to further discuss the issues involved in creating a deposit insurance system.

As a kind of insurance system, deposit insurance also needs to follow the basic principles of insurance, that is, the principle of majority. When the principal number of institutions involved in providing the insurance is large, with a high level of independence between them, the insurance mechanism has an appropriate risk-sharing function. This means that only when the number of banks is large, and the businesses are relatively decentralized and independent, can the deposit insurance mechanism fully play its role.

More information can be found in the article “Establishing a Deposit Insurance System in China” by China's Economy & Policy-Gateway International Group.

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