Deposit insurance will help real economy

The credit squeeze in June that exposed banks' liquidity management shortcomings has given fresh impetus to the establishment of a deposit insurance scheme.

Though common in most other financial markets, deposit insurance is an idea that has remained in the planning stage in China for years. The big banks do not like it because they are loath to subsidize the smaller banks in a way that could increase their competitiveness. The regulators are not in a hurry to push it either, because they feel there are sufficient mechanisms in place, such as the reserve requirements and the cap on the loan to deposit ratio, to rein in banks.

Such complacency was shattered by the June fiasco when normally staid bankers scrambled for money in uncharacteristically ungentlemanly ways outside the sanctuary of the chummy interbank market. Some banks were known to offer exceptionally high interest for overnight deposits from the public in the liquidity crunch that drove the short-term interest rate to more than 30 percent a year at one stage.