Decoding the deposit insurance system

The deposit insurance system will play an important role in economic reforms, says the Decision on Major Issues Concerning Comprehensively Deepening Reforms, which was issued by the Third Plenary Session of the 18th Communist Party of China Central Committee on Nov 15.

Deposit insurance system is aimed at protecting depositors. Under the system, banks have to deposit a part of their funds in a deposit insurance institution so that depositors are guaranteed to get back at least part of their money in case of a bank collapse. The system is also designed to avoid a bankruptcy crisis involving financial institutions. In short, the core of such system is to apportion the losses because of bankruptcy rationally and reasonably by establishing a market-oriented risk compensation mechanism.

The deposit insurance system has been in practice since the 1930s, and today more than 100 countries have such a system in place. So there is enough global experience to help China study the system and avoid the mistakes committed by other countries.