New insurance initiative may provide depositors with some much needed protection
China is launching a new deposit insurance initiative. The initiative is meant to protect depositors from the financial risks they face in the current economic climate. The insurance coverage provided to depositors will serve as a safety net from the losses they see when a bank fails to pay its own debts. A new insurance agency is being formed as part of this initiative and will be responsible for providing coverage to financial institutions operating in China.
Banks will be required to hold deposit insurance when they do business in China
All foreign banks will be required to have deposit insurance coverage when doing business in the country. Chinese banks that have branches in other countries will also be required to purchase the appropriate insurance protection. Banks operating solely within China’s borders will be exempt from this rule. A new fund is also being established that will help offset the financial impact of a failed bank. The fund will pay a maximum of $81,500 per depositor.
New regulations designed to govern insurance initiative are being formed
The Legislative Affairs Office of China’s State Council has published a draft of the regulations that will govern the new deposit insurance initiative. The agency has made this draft open to the public and is requesting insight from financial industry experts and others in order to form better regulations. In early 2015, the agency is expected to release its finalized regulations, which will be enacted in order to ensure that the insurance initiative and its associated fund are managed adequately.
Deposit insurance may help lower interest rates for depositors
Deposit insurance is nothing new and is often used to soften the financial blow caused by a failing financial institution. When banks collapse because they cannot manage their debts appropriately, those depositing in these banks stand to lose a significant amount of money. This insurance coverage will also bring other benefits, apart from financial security. Chinese officials believe that the new insurance initiative will help drive down interest rates throughout the country, introducing some financial flexibility to the commerce sector.