DEPOSIT PROTECTION SCHEME (AMENDMENT) BILL 2024
President, in my capacity as Chairman of the Bills Committee on Deposit Protection Scheme (Amendment) Bill 2024 (“the Bills Committee”), I hereby report to the Legislative Council the key deliberations of the Bills Committee.
The Deposit Protection Scheme (Amendment) Bill 2024 (“the Bill”) seeks to amend the Deposit Protection Scheme Ordinance to enhance the Deposit Protection Scheme (“DPS”), including raising the deposit protection limit for depositors, adjusting the levy system, strengthening the deposit protection arrangements for depositors in the event of a bank merger or acquisition, and improving the representation regime.
The Bill proposes to raise the deposit protection limit from the existing $500,000 to $800,000 on a per depositor per bank basis. Given that this new protection limit is lower than that for bank depositors in the United Kingdom and the United States, members have enquired whether this level of protection is adequate and why the percentage of total protected deposits under this limit is only 25%, which is far lower than the 67%-79% in other jurisdictions.
The Administration has advised that the considerations for setting the protection limit at $800,000 are based on the fact that the ratio of depositors to be fully covered by the new protection limit will rise to 92%, which complies with the standard of 90% as recommended by the International Association of Deposit Insurers (“IADI”), and it represents a 21% increase in the real value of the protection limit. Regarding the relatively low coverage ratio by deposit value as compared with that in some jurisdictions, the Administration has explained that Hong Kong is an international financial centre as well as an asset and wealth management hub with many high-end individuals and corporate customers who place large deposits into their accounts. The proposed protection limit of $800,000 is higher than that in many other Asian economies, such as Singapore, and is comparable to that in other advanced economies, such as the United Kingdom and some European Union economies.
The Bills Committee has discussed the feasibility of raising the protection limit to $1 million and enquired about the resultant increases in the amount of protected deposits and in the annual contributions payable by the DPS banks, as well as how this will increase the risk of moral hazard as purported by the Administration.
According to the Administration, if the protection limit is to be further raised from $800,000 to $1 million, the ratio of protected deposits will only increase moderately from about 25% to 27.8%, but the target size of the DPS Fund will have to be further raised from $8.2 billion to $10.9 billion, meaning an additional fund size of $2.7 billion, which will need to be financed by the DPS members’ higher annual contributions over the next eight years.
As regards the increase in moral hazard, the Administration has explained that when deposits are excessively protected, depositors may ignore the risk management of banks, while banks may be inclined to take on more risks to offer high interest rates to attract depositors as the threat of depositors withdrawing their funds is low. This will distort competition amongst banks and increase systemic risk in the banking system.
The Bill proposes to re-introduce a build-up levy on DPS members which is at a higher rate than the current expected loss levy, so as to raise the target size of the DPS Fund from the current $6.3 billion to $8.2 billion in about three years. Members have expressed concern that DPS members may transfer the additional cost to bank customers.
The Administration has explained that if DPS members continue to contribute at the expected loss levy rate, which is lower than the build-up levy rate, the DPS Fund is likely to take more than 10 years to reach the new target size, and such a protracted build-up period will weaken the credibility of and the public’s confidence in DPS. The Administration is of the view that under the proposed protection limit of $800,000, the annual contributions payable by DPS members will increase by an average of 26%, which should be relatively moderate.
Given that the DPS Fund has not been used since the inception of DPS, the Bills committee members have suggested that in its consideration of further raising the protection limit in the next round of DPS review, the Administration should consider extending PDS members’ contribution period and charging them a lower level of levy, rather than setting the target of achieving the new target size within three years.
According to the Administration, the Hong Kong Deposit Protection Board will take into account the comments of the banking industry and other stakeholders in conducting the next DPS review which will take place three years after the implementation of the new protection limit of $800,000. The Administration will remain open-minded about any further enhancements to DPS, and will take into account the views of the industry and the public, as well as the latest international developments.
Deputy President, the above is my report on the work of the Bills Committee, to be followed by some views and observations of mine on the scrutiny of the Bill.
The Bills Committee received one submission on the Bill during the scrutiny, to which the Government has responded earlier. Some members of the banking industry have expressed to me their different views on the response; and I am also aware of a newspaper advertisement this morning, posted by individuals claiming to be from the banking industry, about proposals on the Bill, in which they suggest increasing the deposit protection limit to HK$2 million.
Some members of the banking industry have commented during the two consultations that the use of Gross Domestic Product (“GDP”) metrics to justify the protection limit and the thresholds of Loss Absorption Capacity (“LAC”) is inconsistent. In its reply, the Financial Services and the Treasury Bureau (“FSTB”) has pointed out that the two consultations are two separate exercises, and that the main considerations for proposing the new protection limit do not include GDP metrics. Regarding this response, I hold that due consideration should be given to whether these metrics, or other factors if any, are applicable to Hong Kong but not to other jurisdictions.
Moreover, the Administration has also pointed out that both DPS and LAC are conducive to enhancing financial stability. However, according to some members of the banking industry, the GDP metrics are used to support the application of a low deposit protection ratio to DPS while the same metrics are used to substantiate the need to mandatorily impose very low thresholds of LAC, and such inconsistent use of the GDP metrics may be far from appropriate. They consider enhancing deposit stability by way of increasing the deposit protection limit is more cost-effective than by implementing overly stringent measures on liquidity, capital, LAC and regulation.
Regarding “coverage ratio by deposit value” and “coverage ratio by depositor”, many banks have emphasized the importance of “coverage ratio by deposit value” over “coverage ratio by depositor” for banking stability. Hong Kong is the lowest among other jurisdictions on “coverage ratio by deposit value”. Some in the banking industry have suggested to me that the deposit protection limit can be further increased to reduce the need for depositors to split deposits across banks, which will improve customers’ experience, particularly as the Administration has indicated that Hong Kong has one of the world’s highest proportions of high asset individuals.
In addition, as pointed out by FSTB, the Government needs to meet IADI’s standard of 90% of depositors under full deposit coverage; and the relatively low deposit coverage is due to Hong Kong’s status as an international financial centre as well as asset and wealth management hub, which has attracted a large number of deposits from high net worth individuals and large corporations, and that the 8% of the depositors who cannot be fully covered under the increased protection limit are precisely the 75% of the depositors who own the deposits not covered by DPS. I believe that members of the banking industry generally do not have the means to grasp the rationale behind the Administration’s explanation. FSTB may consider disclosing more information in the future to make this rationale more convincing.
Personally, I believe that any further raising in the protection limit hinges on, among others, the contribution generated by the build-up levy on the banking sector. I wish to stress once again that given the DPS Fund has never been utilized, there is genuine leeway for the Administration to offer greater flexibility in meeting the requirements of the DPS Fund.
All in all, the protection limit of HK$800,000 has gained the support of all Bills Committee members. I hope that the Government will seriously consider the different views expressed by members and other stakeholders during the scrutiny, and in its next review on DPS in three years’ time, adopt an open attitude in determining the next protection level and duly take forward the related arrangements.
I wish to express my gratitude to all Bills Committee members for meticulously but pragmatically making positive suggestions on the inadequacies of the Bill. I also owe my thanks to the Administration for its patience in listening to our views and in refining the clauses of the Bill, so as to create a stronger safety net for the savings of the public, enhance public confidence in cash deposits and promote the stability of the banking system.
With these remarks, Deputy President, I support the Bill.