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Following is the speech by the Secretary for Financial Services, Mr Frederick Ma, in moving the second reading of the Deposit Protection Scheme Bill in the Legislative Council today (April 30):
Madam President,
I move the second reading of the Deposit Protection Scheme Bill.
The purpose of establishing the Deposit Protection Scheme (DPS) Bill is to enhance deposit protection in Hong Kong and contribute to the stability of the financial system. Although our banking system is sound and supervisory system effective, one cannot rule out the possibility of a sudden and unexpected loss of confidence in our banks owing to circumstances beyond our control. We therefore need to strengthen the resilience of our banking system against external shocks. In its recent Article IV Consultation conducted for Hong Kong, the International Monetary Fund has reiterated the need for Hong Kong to introduce a DPS which would help to underpin the stability of the financial system in Hong Kong.
The Government received submissions from the banking industry, insolvency practitioners, the Consumer Council and other interested parties in the two rounds of public consultation conducted on the DPS in October 2000 and March 2002. The outcome of the consultations have indicated broad support from the public for the proposal of introducing a DPS in Hong Kong. We have considered all the submissions received in formulating the details of the DPS Bill. We hope the proposal would provide effective protection to depositors, and the cost of the Scheme and potential moral hazard would be kept to the minimal, which is the also same message expressed by the Legislative Council to the Government in a motion carried in December 2000.
Let me introduce to Members briefly the content of the DPS and the main provisions of this Bill.
The establishment of the Deposit Protection Board
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The proposed DPS would be established and maintained by an independent Hong Kong Deposit Protection Board (the Board). The Board would be appointed by the Chief Executive, which would consist of 4 to 7 unofficial members and three ex-officio members. With a view to reducing the cost of deposit protection and to avoid duplication of functions with the Hong Kong Monetary Authority (HKMA), the Board would only have 'paybox' functions, which would be confined to collection of contributions, managing the funds of the DPS, assessing claims made against the fund, making payments to depositors and recovering the payments from the assets of the failed bank.
In respect of corporate governance, the Board's books and accounts would be subject to regular audits. Its annual budget would need to be approved by the Financial Secretary. The Board would also be required to prepare an annual report and statement of accounts and lay them before the Legislative Council every year.
Since there is no need for the Board to maintain a high staff level that is required to handle the workload in the unlikely event of a bank failure, the Board, with a view to saving costs, would perform its functions through the HKMA. This arrangement would enable the Board to leverage on the existing IT, staffing and office administration resources of the HKMA. Under this arrangement, the HKMA would essentially be acting as an agent of the Board in administering the scheme and would, in this respect, be subject to the oversight of the Board. Part 2 of the Bill sets out in detail the establishment, functions and other related details of the Board.
Participation by all banks
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Participation by all licensed banks would be mandatory under the proposed DPS. This is an essential design feature to ensure the viability of the scheme and to avoid the problem of adverse selection whereby only riskier banks would choose to join the scheme. An overseas incorporated bank may apply for exemption from participating in the scheme if the deposits taken by the bank's Hong Kong offices are protected by a scheme in the bank's home jurisdiction and the scope and level of protection afforded by that scheme are not less than those afforded to such deposits by the DPS in Hong Kong. However, an exempted bank is required to take measures to inform its depositors or prospective depositors that it is not a member of the scheme, and to provide details of the protection offered by its home jurisdiction scheme including the level of protection and the types of deposits protected. Part 3 of the Bill sets out the membership and provisions on exemption.
Establishment of the DPS Fund
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The DPS would collect contributions from the banks to establish the DPS Fund (the Fund). The target fund size is proposed to be set at 0.3% of the banking sector's total amount of protected deposits. Contributions are calculated on the basis of individual member banks and a differential rate system based on the supervisory ratings of individual banks determined by the HKMA. In considering the appropriate size of the fund, the aim is to cover potential losses that might be suffered by the scheme. According to HKMA's estimate, the proposed target fund size is consistent with international standards on the adequacy of deposit protection funds. The Exchange Fund would provide back-up funding to enable the Board to make prompt payment to depositors. Part 4 of the Bill stipulates the establishment and operational details of the DPS Fund.
Level of compensation
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As regards the scope of compensation, compensation from the Fund is payable if a winding up order has been made or the HKMA has made a decision that compensation should be paid. The HKMA's decision is subject to review by the Chief Executive in Council. The compensation limit for protected deposits with a member bank will be HK$100,000 per depositor. There was support from the public consultation, including the banks and the Consumer Council, for the coverage limit to be initially set at HK$100,000. It is estimated that 84% of the depositors in Hong Kong would have their total deposits fully protected under the scheme. In determining the amount of deposit protection payouts, the Board would net off the depositor's liabilities to the failed bank against his protected deposits in determining his entitlement to compensation under the scheme. The DPS would be entitled to recover the amount paid to the depositor of a failed bank out of the depositor's ultimate claim on the assets of the bank in a liquidation. The DPS would have the benefit of the priority status afforded in the liquidation to the deposits in respect of which it had made a payment. Provisions in Part 5 of the Bill set out the conditions to trigger payment of compensation, detailed compensation arrangements, and the powers and functions of the Board in respect of payments.
Appeal mechanism
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The DPS also contains an appeal mechanism. The decisions and assessments of the Board, particularly those relating to the determination of compensation payments, would be subject to the review of an independent tribunal to be known as the "Deposit Protection Appeals Tribunal" (the Tribunal). At the request of depositors and member banks, the Tribunal would review the decisions or assessments of the Board or the HKMA made under this Bill. The Tribunal would be chaired by a judge or a retired judge. All members of the Tribunal would be appointed by the Chief Executive. The decisions of the Tribunal would be final except on a point of law. Provisions in Part 6 of the Bill stipulate the setting up, powers and functions of the Tribunal.
Conclusion
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To conclude, the Bill serves to put in place the necessary legislative framework which is required for the establishment of a DPS in Hong Kong, which aims to provide protection to depositors and enhance the stability of the banking sector with the underlying principles of keeping the costs of operation and potential moral hazard to the minimal.
I hope Members would support the Bill. Thank you, Madam President.
End/Wednesday, April 30, 2003
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