Thesis: Deposit Insurance system is theoretically good for China, but some consequent actions also need to take to make sure it works.
Deposit Insurance is not a new word for Americans, who established a national deposit insurance system as early as 1933 during the great depression period, and even before that various deposit insurance scheme based on self-regulation were also tried out. But China did not introduce such a policy until recently. On Tuesday China detailed a plan to launch a deposit-insurance system in May and which is seen as a prelude to liberalize financial system (WSJ, Mar 31th).
Most people are excited about the news. For the public, deposit insurance is another safety lock for their money saved in the bank. China has one of the most amount of saving in the world. Up to 2015, the total saving is around 122 trillion yuan ($19.654 trillion). Based on the Chinese Center Bank calculation, the up-to 500,000 yuan ($80,558) deposits limit could cover 99.63% people’s all deposit. For the banks, especially those small and private banks, it is a chance to enlarge their clients. since for those people who have more than 500,000 yuan deposit in one bank, it is time that they shift part amount of money to other institutions in case the deposit insurance cannot cover lose, which give chances to some small banks. For the central government, deposit insurance scheme frees the government from the role of ‘invisible person in charge’. Before deposit insurance, it is the central government who takes duty and pays for the clients when a bank goes to bankruptcy (it also explained why no bank has bankruptcy in China before, government is their supporter). Now the central government does not have the burden. What is more, deposit insurance encourages the competition among banks which is good for market.
However, people may over emphasis the advantages of deposit insurance. First, the deposit insurance requires banks to pay a certain amount of insurance premium, given that the current deposit-reserve ratio is around 20% in China, the running cost for banks are going to increase hugely. To overcome the cost problem, banks may charge a higher service fee to clients. Second, deposit insurance bring moral hazard problem. Banks have more incentives to risk clients’ money since they have insurance as their back up, plus that they need to make more money to compensate the insurance premium. Most importantly, the core goal of deposit insurance is to protect depositors’ money. Being differ from American free market, the saving account in China actually already been in shield by the central government even without deposit insurance. Personally thinking that most Chinese never worry about that the banks are going to bankruptcy and they are going to lose deposit given the government is supporting behind. Thus introducing deposit insurance does not make any difference for depositors or banks if the central government does not exit.