A premium for risk

DEPOSIT insurance is normally intended to make bank failures less likely. It was first adopted in America during the Depression, when nearly half the country's 24,000 banks failed. Similar schemes, which aim to deter runs by indemnifying savers from losses up to a certain level if their bank goes bust, spread through Europe in the wake of financial crises from the 1970s on. The imminent launch of deposit insurance in China, however, inverts the usual logic. The Chinese financial system could hardly be more stable: it has been 16 years since a big bank failed. The aim is to shake things up'to add risk to a banking sector that has come to expect the government's help.After years of studying other countries' deposit-insurance schemes, China's government lifted the veil on its plan on November 30th. It proposes to insure all accounts for up to 500,000 yuan ($81,300). That is well below the $250,000 ceiling in America, but above Hong Kong's guarantee of $65,000 and Singapore's of $40,000. With the vast majority of Chinese savers holding far less than the maximum, the central bank has calculated that 99.6% of depositors will be protected in full.That may sound awfully generous, but it marks a step back from the current assumption that the state will stand behind all financial institutions in all circumstances. At the end of the 1990s, when bad...Continue reading
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