China is designing a deposit insurance system and a mechanism for closing troubled banks to better cope with the risks generated by financial reforms, China's top banking regulator said.

In an interview with Qiushi Journal, a political periodical run by the Central Committee of the Communist Party of China, Shang Fulin, head of the China Banking Regulatory Commission, called for a more forward-looking perspective on risk control.

Shang said risk control remains a monumental task, given the slowing economy, rising bad assets, industrial overcapacity and "shadow banking".

The central bank recently eliminated the floor on loan interest rates, an early step in the market-oriented reform of interest rates.

The next step is to free up deposit interest rates, which would require an insurance system to protect bank depositors from losses caused by a bank's inability to pay its debts when due.

"Deposit insurance is a fundamental component of the interest-rate reform package," said Xu Wenbin, senior analyst at the Bank of Communications Co Ltd. "It is a financial safety net for banks amid financial turbulence or crisis."

"It is high time for China to adopt a deposit insurance mechanism," said She Minhua, an analyst with Haitong Securities Co Ltd.

"As private capital enters the banking sector, growing competition will push some players out of the market. The insurance will guarantee that depositors' money remains intact even when a bank fails."

But She also noted that during the financial crisis in 2008, deposits in troubled banks were ultimately covered by government bailout funds because these banks were "too big to fail".

So, She noted, whether the deposit insurance mechanism will fulfill its role in China remains to be seen.

Shang encouraged investment in private, independent financial institutions, including banks, financial leasing firms and consumer finance companies.

The CBRC will help these private institutes find their market niches, Shang said. The regulatory system will also be differentiated for various types of institutions, he added.

"Private banks better understand the needs of small businesses, covering areas ignored by their large commercial counterparts, which mainly lend to State-backed projects at high loan rates and with low risks," She said.

Allowing private banks to flourish "also satisfies the central government's strategic shift to consumption and income-boosting industries".

"Higher risks should come with higher loan rates. Therefore, a comprehensive risk assessment system is of primary importance to these small players," Xu said.

No private banks have been approved since the 1996 establishment of China Minsheng Banking Corp Ltd, a national joint-stock commercial bank with investments dominated by non-State enterprises.

yangziman@chinadaily.com.cn

(China Daily USA 09/03/2013 page13)