The Role of Deposit Insurance to Rural Banks
Jiang Zeshen
China Banking Regulatory Commission
The views on Deposit Insurance
One piece of Finance safety net, But NOT entire; Front line VS “lender of last resort” More practice in mature financial system than rural finance；
The Purpose of Deposit Insurance
Core Function
Maintain depositor confidence, reduce risk of “bank run” and insolvency;
Affiliated Function Control moral hazard Keep market efficiency and fairness
Key principles should be considered
The time of fund resource formed ——ex ante or ex post？ The arrangement of Co-insurance;
The design of supervision framework;
Challenge faced by Deposit Insurance for rural financial institution
Rural financial institutions Large number; Small size; Poor risk management; High industry risk; Low competition within region; High intervention from local government ;
Challenge faced by Deposit Insurance for rural financial institution
Which indicate:
Huge demand on insurance fund;
High cost to be insured;
High cost of supervision and monitoring;
Challenge faced by Deposit Insurance for rural financial institution
Incentive from large and sophisticated is low：
Low expected benefit from deposit insurance due to their sound financial condition;
Low expected loss for large bank when rural financial institution failed;
Premium paid by large bank will be possibly “charity” to rural financial institution;
Challenge faced by Deposit Insurance for rural financial institution
Assumption: Can dual-system works？
D.I sys for mature institutions
D.I sys for rural institutions
Fund from Market players
Fund from Market players; Government transfer; Donation;
Challenge faced by Deposit Insurance for rural financial institution
Deposit insurance can not be entirely effective without joint effort from other policy：
Industry policy specialized for agriculture; Agricultural infrastructure; Technology progress; Education and social security;
Challenge faced by Deposit Insurance for rural financial institution
Deposit insurance can not be entirely effective without joint effort from other policy：
Improve the quality of financial services in rural area; Introducing diversified financial institution to improve quality of competition; Promote financial innovation for Agricultural characteristics; Increase the liberalization of fund pricing;
Challenge faced by Deposit Insurance for rural financial institution
Deposit insurance can not be entirely effective without joint effort from other policy：
Introduce new tools and strengthen the risk management; More insurance products for risk mitigation; More commodity derivatives for risk hedging; On-going regulation and supervision; Improve credibility of local borrower;
Thanks