HONG KONG: Hong Kong government may raise deposit protection coverage at local banks to HK$500,000 from HK$100,000 in 2011, after the current 100 percent deposit guarantee scheme expires by the end of next year.

According to documents submitted on Friday by the Hong Kong Monetary Authority to Legislative Council for discussion next Thursday, the Hong Kong Deposit Protection Board aims to submit legislative proposals to the Legislative Council in the first quarter of 2010 to raise the proposed coverage amount to $500,000 (from the previously proposed HK$100,000).

The Hong Kong Deposit Protection Board aims complete the legislation process to allow the enhanced scheme to come into effect by 2010, before the full deposit guarantee expires. Local depositors argued that the proposed HK$100,000 coverage would not have been enough.

In October 2008, the city's de facto central bank announced his plan to guarantee 100 percent of deposits at Hong Kong banks until the end of 2010, to ensure all the money saved in local authorized banking institutions is fully protected.

Before the introduction of the 100 percent deposit guarantee, the HKMA protected savings up to only HK$100,000 under the government's deposit protection scheme in place since 2006.

Despite the government's plan to exit the full-deposit guarantee scheme, local depositors seem to welcome the move to raise the deposit protection coverage to HK$500,000.

Joanna Law, a civil servant, said the HK$500,000 guarantee coverage is enough to protect her savings in Hong Kong banks.

"My current deposits at banks are not exceeding HK$500,000, so the coverage will provide me complete protection. Even if it exceeds HK$500,000, I can still distribute my savings into different local banks to enjoy the protection," Law said.

She added that she will continue to save money in the small-and-medium-sized local banks, as they usually offer higher interest rates.

The market has been particularly concerned about the stability of Hong Kong banks, after the collapse of US investment bank Lehman Brothers in September last year.

To comfort the city's depositors, the SAR government vowed to use the city's exchange funds to guarantee the repayment of all customer deposits held in authorized institutions in Hong Kong.

The government said the measure was in line with those taken in a number of jurisdictions throughout the world to reinforce confidence in banks.

More than a year after the global financial crisis, as the city's financial and economic conditions gradually pick up, the Hong Kong government is considering ending the full bank-deposit guarantees.

Financial Secretary John Tsang told reporters on Thursday that the government plans to work with Singapore and Malaysia to simultaneously withdraw the 100 percent deposit guarantee scheme, to deter investors from moving their money abroad.

"If we were to do it together, we could enhance the certainty - the stability factor in the region," Tsang said after meeting officials from the two Southeast-Asian countries.

The move, however, may lead to deposits flowing into other regions that provide higher guaranteed coverage for savings, according to Billy Mak, an associate director of the MBA class at Hong Kong Baptist University.

"But it may not have much impact on the majority of depositors in Hong Kong. The HK$500,000 guarantee may have already covered more than 90 percent depositors' savings in the city," Mak said.

He added that the new measure may whittle down deposits in local deposit-taking companies, as the existing deposit protection scheme does not guarantee savings in these companies.

Currently, around 40 percent of depositors saved their money in the deposit-taking companies, with deposit balances of less than HK$500,000.

"The deposit-taking companies usually offer very high interest rates to depositors. However, as the full bank-deposit expires next year, deposits in these companies will not be guaranteed. That will move money back to the traditional banks in the city," Mak said.

(HK Edition 11/14/2009 page2)