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Deposit Protection Scheme

Deposit Protection Scheme. Lam Wai Hei 053022 Shiu Cheuk Pan 053063 Chu Po Yan 053158 Ho Kei Ying 053156 Ng Kwun Hwa 053033 Ng Man Ho 053126. BCCI Crisis and subsequent bank runs (1991) Introduction of Priority Claims System in Companies Ordinance (1995) Rumor driven bank run (1997)

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Deposit Protection Scheme

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  1. Deposit Protection Scheme Lam Wai Hei 053022 Shiu Cheuk Pan 053063 Chu Po Yan 053158 Ho Kei Ying 053156 Ng Kwun Hwa 053033 Ng Man Ho 053126

  2. BCCI Crisis and subsequent bank runs (1991) • Introduction of Priority Claims System in Companies Ordinance (1995) • Rumor driven bank run (1997) • HKMA Consultation Paper on how the DPS in Hong Kong • should be structured (2002) • Enactment of the Deposit Protection Scheme Ordinance (2004) • Commencement of Deposit Protection (2006)

  3. Background the DPS can help to meet the following objectives: • Reduce the probability of failure by reducing the risk of rumor-driven runs; • Provide an orderly means of compensating depositors if a bank failure does occur; and • Reduce the fall-out effects of a bank failure.

  4. Main features of the DPS • all licensed banks, unless otherwise exempted by the Board, are required to participate in the DPS as Scheme members; • the compensation limit is set at HK$100,000 per depositor per Scheme member;  • both Hong Kong dollar and foreign currency deposits are protected;  • differential contributions will be assessed based on the supervisory ratings of individual Scheme members.

  5. Rule of DPS in Hong Kong • The Board and the HKMA are empowered by the DPS Ordinance to make rules governing the operation of the DPS. These rules are issued in the form of subsidiary legislation.

  6. Rules made by the Board "Representation Rules" • made under section 51(1)(d) and (2) of the DPS Ordinance. • objective : to assist members of the public to distinguish between DPS protected and non-DPS protected financial products, so that they can make an informed decision in selecting financial products suitable for them.

  7. "Contribution Rules“ • prescribe the manner in which Scheme members should pay contributions or late payment fees to the Board, as well as the manner in which the Board should pay rebates of contribution to Scheme members. • made under section 51(c) of the DPS Ordinance.

  8. "Asset Maintenance Rules" • The objectives : ensure that, in the event of the failure of a Scheme member, there will be sufficient assets in Hong Kong to cover the priority claims of depositors, thereby reducing the shortfall loss of the Board. • made under section 53 of the DPS Ordinance of the board.

  9. Structure Board • Members of the Board are appointed by the Financial Secretary • The Board currently comprises nine members • come from different professions

  10. The Investment Committee • to make recommendations on the investment policy and strategy in respect of the DPS Fund • to monitor the investment performance of the DPS Fund and to establish proper risk management controls for the investment activities of the Board • to work on any other matters as determined from time to time by the Board

  11. Consultative Committee • to exchange views on issues of common interest • To keep the industry informed of the development of the DPS Deposit Protection Appeals Tribunal • the amount of contribution payable by a Scheme member • the amount of compensation payable to a depositor

  12. Funding • The Scheme is funded by contributions paid by Scheme members • with a target fund size of 0.3% of the total amount of deposits • The contributions payable by individual Scheme members are determined by the amount of protected deposits and the supervisory ratings assigned to them by the HKMA

  13. Accountability • does not need to report to a particular Government official • to submit its budget to the Financial Secretary for approval every year • its annual report and accounts must be audited and laid before the Legislative Council for public scrutiny

  14. Coverage &Transparency

  15. Coverage • limit of HK$100,000 • regardless of the currency • all types of ordinary deposits with a maturity not exceeding five years

  16. Transparency • annual report and accounts must be audited and laid before the Legislative Council for public scrutiny

  17. ConclusionReviews of Hong Kong’s DPB. • Objectives: Whether the deposit insurance in HK provides: • 1. comprehensive protections for most depositors • 2. enhancement in financial stability • Tools for measuring : mandates and power; coverage; funding; public awareness;

  18. Mandates and power: • 9 Members of the board are appointed by the Financial secretary,e.g. insolvency law, accountant. • Strength: Government can enact complementary policy very quickly. • Weakness: • government has played over weighted role, • a paybox system may not needed permanent staff. • A PUBLIC AGENCY MAY BE APPOINTED .

  19. Coverage : • Highest compensation $100,000 regardless of the currency denominated. Strengths: Provides great protections for small amount deposit. Fast and guaranteed . Weakness: Large amount deposit may still seek protection from bankruptcy law.

  20. Funding: • Risk- adjusted premiums • The Scheme is funded by contributions paid by Scheme members. • Accounts for 0.3% of total deposit in financial system 1.3 billion • Strength: • Fair , low risky banks does not subsidy high risky banks. (limiting moral hazard.) • Weaknesses: • Need profound knowledge to calculate risks • Government does not promise to finance emergency fund.

  21. Accountability • There is an advisory board of 13 bank representatives to monitor the 9 members appointed by HKSAR. • Strengths: • Clear rules defining the responsibilities of members • No direct interest conflicts arised. • Weakness: • Whether the advisory board could have real power to affect the mandates’ decision.

  22. Public awareness. • Advertisement on TV ,the internet…etc • Periodical publication • Strengths : Citizens are kept informed of what the DPB has done. Good transparency.

  23. Strengths :clear rules and accountability fair premium charged, good transparency. good public support , good public awareness • Weaknesses: Lack of emergency funding, government has played over weighted role,a paybox system may not needed permanent staff.

  24. Conclusions AS A WHOLE, • 1.has increased comprehensive protections for most depositors 2. enhancement in financial stability • Deposit insurance in HK has increased the overall protection for depositors in addition to bankruptcy law. • Discourage risky investment for institutions, hence reduce moral hazard . Increase depositors’ confidence. However, the DPB has only been established for short time That is too short to evaluate it’s function.

  25. THE END

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