1. How the government can implements Deposit Protection Scheme cost effectively
Section No.: 1
Group No
Group Member:
Cheung Wai Yee,Winnie
Tsui Long Ting,Joey
Chung Ho Ying,Amy
Chong Lai Kam,Jane

2. Agenda What is DPS Joey & Winnie Background Main features of DPS
Discussion Amy & Jane
Recommendation

3. What is DPS?
Purpose:
Provide a measure of protection to small depositors
Improve consumer confidence
Contribute to the stability of financial system
e.g. 68 countries, including U.S.A., Japan and
Canada ….are carried out DPS
China (in the process)

4. Background
1992
A deposit protection scheme was Suggested and then rejected .
1998
Revisit the DPS issue
Late 2000
A broad public support for establishing a DPS
13 December 2000
The Legislative Council adopted a motion urging the Government to “expeditiously implement a DPS, aiming at reducing the risk of moral hazard”.
24 April 2001
The Chief Executive-in-Council approved in principle the establishment of a DPS and requested the HKMA to work out the detailed design features of the scheme.

5. Background Objective:
March 2002
A second consultation paper, was released and received general support for its proposals.
2003
HKMA developed a set of proposals that now form part of the DPS Bill.
May 2004
The Ordinance was enacted in.
January 2005
The Deposit Protection Appeals Tribunal was established.
2006
Expected that the DPS will begin.
Objective:
How DPS can be implemented effectively and efficiency.

6. Main Features of DPS Participation & members
Scope and level of Compensation
DPS Fund
Assessment of Contributions
Administration Framework

7. Main Features of DPS Participation & members
Participation by licensed banks in the scheme is mandatory
overseas-incorporated banks may apply for exemption from participation
Scope and level of Compensation
HK$100,000 per depositor per Scheme member
Apply to the principal amount of a protected deposit and the interest accrued on that deposit
Both Hong Kong dollar and foreign currency deposits are protected.
84% of the depositors would have fully protected under the scheme

8. Main Features of DPS DPS Fund Target fund size of 0.3%
(approximately HK$1.6 billion)
DPS Fund to fluctuate in a range between +15% and -30% of the target fund size.

9. Main Features of DPS Banks with CAMEL Rating
Assessment of Contributions
CAMEL Rating
Banks with CAMEL Rating
Rate of Contribution payable
(as % of the balance of protected deposits)
Until the 1st year in which the target fund size is reached
The rafter 1
0.05%
0.0075% 2
0.08%
0.01% 3
0.11%
0.015%
4&5
0.14%
0.02%

10. Main Features of DPS Administration Framework
The Hong Kong Deposit Protection Board :
Established by legislation to administer the DPS.
A statutory body created under the DPS Ordinance
(May 2004)
The Board’s functions:
Collection of contributions
Managing DPS Fund
Assessing claims made against the Fund
Making payments to depositors
Recovering payments from the assets of the failed bank

11. Discussion & Recommendation

12. Overseas-incorporated banks
If the deposits taken by its Hong Kong offices are already covered by a comparable scheme in its home jurisdiction exempted.

13. Overseas-incorporated banks (Con’t)
Exemption
No Deposit Protection scheme
Need
With comparable scheme or with higher level
No Need
With scheme but under Hong Kong Level

14. Responsible for the government how to protect them is a main problem.
The solution for the oversea bank with scheme but the compensation under Hong Kong level
Responsible for the government how to protect them is a main problem.
Reduce the disorder.
Suggestion:
The government
must discuss on this problem deeply
set up the requirements of the attendant before the scheme starts to run.

15. Scope and level of Compensation
No coverage limit
Such as USA and Japan, they used this method at the beginning.
Advantages:
Protect all of the depositors.
Disadvantages:
The cost of no limit is high.
Easy to cause Moral Hazard problem that the banks and the depositors avoid to take the risk.

16. Scope and level of Compensation (Con’t)
Using deductibles
Advantages:
Prevent the Moral Hazard, that let the depositors know that they need to bear the risk.
Disadvantages:
Cannot protect the small depositors completely.
The cost of the deductible still high cannot afford by the Hong Kong government easily.

17. Scope and level of Compensation (Con’t)
Have coverage limit
Advantages:
Lower the cost of the government.
Reduce the Moral Hazard problems.
Increase the bank competition opportunities.
Will not affect the benefits of the small depositors.
Disadvantages:
Decrease the capital of the small banks.

18. Scope and level of Compensation (Con’t)
Hong Kong Deposit Protection Board suggests that :
The coverage limits is set at HK$100,000 per depositor per Scheme member.
84% of the depositors in Hong Kong would have their total deposits fully protected under the scheme.

19. The suitable level of Compensation for Hong Kong?
Many countries choose using coverage limit.
If don’t have coverage limit,
crisis that the bank cannot indemnify all depositors.
In Hong Kong,
the government and the bank are willing to choose have coverage limit.

20. Methods of Contributions
There are two systems to collect the contributions from Scheme members:
Standardized of Contributions.
Assessment of Contributions.

21. Standardized of Contributions
Advantages:
Reduce the costs that the government needs not put resources to research the rate system on the banks.
Easy to handle and calculate.
Fair to the bank with high risks to fight with the low risks bank.
Disadvantages:
Unfair for the low risk banks that they may not need the DPS to protect them.
Easy to cause the Moral Hazards that the high risk banks is uncontrolled to increase their risks continuously.

22. Assessment of Contributions
Advantages:
Control the high risks banks increase their hazards unhealthy.
Reduce the low risks bank concern on the unfair payment.
Disadvantages:
Make the scheme become complicated and increase the administration cost.
Reduces the power of the small banks with high risk that needs to pay more with the higher costs.

23. How to using assessment of contributions
Based on the equality between each bank in Hong Kong.
The high risk banks don’t want to have the assessment of contributions
The lose risk banks think it is fair for them.
Each bank must canvass the problem and have a common consensus with the government.
The effective of the scheme on each bank is high.
Too much contention must obstruct the development of the scheme.

24. Transferring cost to which parties
Collected from Scheme members - Banks.
In the public, there are concerned that the costs will transfer to the depositors.
In Japan, there are negative interest rate occurred after the practicing DPS of the economics downturn.
Most of the banks in Hong Kong have the safekeeping charge for the clients who deposits cannot achieve their lower limits.

25. Transferring cost to which parties
fair for the depositors enjoy the benefit and have a duty to bear the costs of DPS.
reduce the costs of the banks.
However,
Affect the Purpose of the DPS: Protect the small depositors.
Increase the burden of the small depositors and loss the original idea of DPS.

26. The position of government on deciding which parties pay the transferring cost.
The government
unable to take too much attention on deciding the undertaker of the transfer cost.
must discuss with bank about the transfer cost before the scheme starts.

27. References Annual Report of Hong Kong Deposit Protection Board
Consultation Paper and related documents related to DPS
風險為本評定保費一舉兩得 《信報》 2000年12月12日
存款保險體系 美日有啟示 《香港經濟日報》 2000年7月11日
透視美國存款保險制度改革草案《銀行家》雜誌 2003年1月14日
美國存款保險制度建立完善及啟示 《濟南金融》2004年1月
通貨緊縮 日考慮推行負利率 《自由時報》2002年8月8日
日本《保險法》指導存款保險5年蟄伏盼建自我責任機制 《國際金融報》 2004年6月30日

28. References
(DBS Bill, camel rating system)
(金融體系的審慎監管)
(民主黨歡迎金管局表示支持加強存款保障)
(美國、日本、南韓與我國問題金融機構處理模式之探討 郭秋榮)

29. Question 1 Answer is D Which of the following about DPS is false?
Aim to protect small depostiors
Improve consumer confidence
Stabilize the financila system
Launched in 1992
All is true
Answer is D

30. Question 2
What is the suggest target fund size of DPS in Hong Kong?
0.2%
0.3%
0.4%
0.5%
0.6%
Answer is B

31. Question 3
What is the suggest coverage limit of DPS in Hong Kong?
HK$100,000
HK$200,000
HK$300,000
HK$400,000
HK$500,000
Answer is A