BACK

POLICY PAPER

MORE PAPERS

29 April 2002

Banking Development Department
Hong Kong Monetary Authority
30^th Floor
3 Garden Road
Central
Hong Kong

(Reference: DIS)

Dear Sir,

We are writing with our comments on the above consultation paper.

We would like first of all to reiterate our opposition to the idea of deposit insurance for Hong Kong. We opposed the idea when it was first proposed, and subsequently rejected in 1992. We also wrote in January 2001 to oppose the idea when it was proposed again. Links to our respective submissions are as follows:

http://www.hkdf.org/papers/920517deposit.htm

http://www.hkdf.org/papers/010129deposit.htm

The reasons for our opposition are set out in these letters: essentially the moral hazard the scheme will entail, the increased cost, the inadequacy to deal with large-scale failures and the unfairness as between banks.

 Our specific comments on the proposals in this consultation paper are as follows:

1. We think that it is highly regrettable that another new statutory body is being created to administer the proposed DIS. There has been a proliferation of such bodies in Hong Kong in recent years. Setting up a new body immediately introduces the problem of how it relates to other existing bodies, particularly the HKMA. The discussion on how this relationship would work occupies an entire chapter of the paper (chapter 8) and is by no means convincing. Establishing such new body will entail new costs for staffing and introduce "political" complexities in the conduct of its function. We would prefer the scheme to be administered by the respective regulator, namely the HKMA itself.
   
   
2. The paper does not appear to cover the relationship between the DIS and the investor protection funds in the securities market. Since many banks are also securities dealers or exempt dealers, active in the securities business, this relationship should be made clear.
   
   
3. Para 3.22. We think it highly regrettable that the DIS should cover foreign currency deposits. This seems to be underwriting foreign currency speculation, and is quite at odds with the stated aim of protecting the small depositor.
   
   
4. Para 5.7. The parameters appear arbitrary, and the fund proposed would not cover a larger-scale failure, e.g. of one large bank or three medium ones.

We hope that these comments are helpful.

Yours sincerely,

Alan Lung Ka-lun
Chairman