XN000022-1992-02-18 — Page 2

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TUESDAY, FEBRUARY 18, 1992

PUBLIC CONSULTATION ON DEPOSIT PROTECTION SCHEME BEGINS

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THE GOVERNMENT HAS TODAY

(TUESDAY) RELEASED A PUBLIC

CONSULTATION PAPER ON A BANK DEPOSIT PROTECTION SCHEME (DPS).

EXPLAINING THE PURPOSE OF THE CONSULTATION EXERCISE, A GOVERNMENT SPOKESMAN SAID THE GOVERNMENT HAD REACHED NO CONCLUSION, PRELIMINARY OR OTHERWISE, AS TO WHETHER OR NOT A DPS SHOULD BE INTRODUCED IN HONG KONG.

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"DPS HAS ITS PROS AND CONS. THE GOVERNMENT WOULD PREFER то LISTEN TO THE VIEWS OF VARIOUS SECTORS BEFORE MAKING UP ITS MIND, НЕ SAID.

THE PAPER NOTES THAT DPS HAS ITS LIMITATIONS.

SPECIFICALLY, IT WOULD NOT BE ABLE TO PREVENT BANK FAILURES NOR WOULD IT BE ABLE TO COPE WITH SYSTEMIC FAILURE OF BANKS, OR EVEN THE FAILURE OF ONE OF THE VERY LARGEST BANKS IN THE ECONOMY.

ON THE OTHER HAND, THE PAPER ACKNOWLEDGES THAT DPS WOULD HAVE A ROLE IN THE EVENT OF AN ISOLATED FAILURE OF A SMALL OR MEDIUM-SIZED BANK.

"IN SUCH CIRCUMSTANCES, A DPS MIGHT BE ABLE TO COMPENSATE SMALL DEPOSITORS EITHER FULLY OR PARTLY AND TO ENHANCE THE STABILITY OF A BANKING SYSTEM AT TIMES OF UNFOUNDED RUMOURS BY PREVENTING, OR REDUCING THE SCALE OF, UNNECESSARY AND CONTAGIOUS RUNS ON HEALTHY BANKS," THE SPOKESMAN SAID.

THE PAPER, HOWEVER, NOTES THAT SUCH FUNCTIONS OF DPS MUST BE CAREFULLY WEIGHED ACAINST THE OPPOSING ARGUMENTS AND THE COST IMPLICATIONS.

THE SPOKESMAN SAID COMMENTARIES SHOULD TAKE ACCOUNT OF THE VARIOUS ADVERSE FACTORS IDENTIFIED. THESE INCLUDED MORAL HAZARD PROBLEMS AND THE PAPER HAD HAD PARTICULAR REGARD TO THESE PROBLEMS

IN

IDENTIFYING OPTIONS.

"ANOTHER ISSUE IS THAT, GIVEN THE VERY SKEWED DISTRIBUTION OF DEPOSITS IN FAVOUR OF A FEW LARGE BANKING GROUPS, THE BULK OF THE COST 19 GOING TO BE BORNE BY THE DEPOSITORS OF THESE BANKING GROUPS, WHO MAY NOT SEE THEMSELVES AS OBTAINING PROPORTIONATE BENEFIT FROM

DPS," HE SAID.

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HE ADDED THAT OPTIONS WERE IDENTIFIED SO THAT THE PUBLIC RECOGNISE THAT DIFFERENT DESIGNS OF DPS HAD DIFFERENT IMPLICATIONS TO COST, DEGREE OF MORAL HAZARD PROBLEMS AND EFFECTIVENESS.

"THIS IS NOT TO SUGGEST THAT THE GOVERNMENT HAS DECIDED TO ADOPT ONE OF THE POSSIBLE OPTIONS. THEY ARE MERELY IDENTIFIED TO FACILITATE DISCUSSION ON WHETHER OR NOT IT IS WORTHWHILE TO PROCEED ANY FURTHER, HAVING REGARD TO ALL THE IMPLICATIONS.

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