Hong Kong SAR: Full Deposit Guarantee

Following the collapse of Lehman Brothers and the bailout of AIG, on September 24, 2008, the Bank of East Asia, Hong Kong’s fifth-largest bank, experienced a run, as depositors feared it had exposures to Lehman and AIG (Chu 2011; Marks and Yao 2008). On October 12, 2008, Australia and New Zealand announced guarantees for their depositors (Reserve Bank 2008; Rudd 2008). In light of these conditions, on October 14, 2008, Hong Kong’s financial secretary announced the Full Deposit Guarantee, which was a preemptive measure to “further strengthen confidence in Hong Kong's banking system” (Tsang 2008).

On October 14, 2008, Hong Kong’s financial secretary announced two preemptive measures to “further strengthen confidence in Hong Kong's banking system” (Tsang 2008). One measure was the CBCF, which was meant to provide capital to approved banks if necessary (Tam and Kelly 2021; Tsang 2008; Yam 2008). The second measure was the Full Deposit Guarantee, which provided an unlimited guarantee on most deposit accounts in eligible institutions (Tsang 2008). The Full Deposit Guarantee expanded upon the HKDPB’s guarantee in the existing DPS, which insured HKD 100,000 per depositor per institution (HKDPB n.d.a; Legislative Council 2004, article 15).

Malaysia and Singapore introduced unlimited guarantees following the Full Deposit Guarantee’s announcement (IADI 2012; Li 2010; Marks and Yao 2008). Although their announcements were not initially coordinated, the governments later formed the Tripartite Working Group to synchronize their exit strategies (Tripartite Working Group 2009). This regional cooperation helped ensure a smooth crisis response—namely, that there would be no incentive for depositors to move their funds from one country to another, in the hope of taking advantage of a guarantee (IADI 2012).

Hong Kong established the DPS, its pre-crisis deposit insurance scheme, with the DPS Ordinance, Cap. 581, of 2004 (Legislative Council 2004, article 3). The HKMA administered the DPS, overseen by the HKDPB (HKMA 2004; Legislative Council 2004, article 3). The HKDPB guaranteed HKD 100,000 held in accounts at Authorized Institutions through the existing DPS (HKDPB n.d.a; Legislative Council 2004, articles 4, 11-12). This guarantee covered licensed institutions, which were automatically enrolled, and insured HKD and foreign currency deposits (HKDPB 2009c). All institutions with banking licenses were automatically enrolled as “Authorized Institutions” and covered under the pre-crisis DPS (Legislative Council 2004, article 12). Article 13 of the DPS Ordinance exempted banks incorporated outside Hong Kong and deposits that were protected by another guarantee scheme (Legislative Council 2004, article 13). The pre-crisis DPS insured HKD 100,000 per depositor per bank and charged fees to participating institutions, which funded the DPS Fund (Legislative Council 2004, article 15).

The Full Deposit Guarantee was backed by the existing HKD 40 billion standby facility from the government’s Exchange Fund (Marks and Yao 2008; Tsang 2008). Articles 6(3) and 6(4) of the DPS Ordinance, Cap. 581, of 2004 allowed the HKMA, under the financial secretary, to utilize the Exchange Fund to cover expenses associated with a guarantee. The Exchange Fund was established in 1935, pursuant to the Exchange Fund Ordinance (Legislative Council 1935, 1–2). The Hong Kong government funded the Exchange Fund (Legislative Council 1935, 1–2). The Exchange Fund’s purpose was to maintain the exchange value of Hong Kong’s currency and to maintain “Hong Kong as an international financial centre,” which allowed the financial secretary to expand the guarantee scheme (Legislative Council 1935, 2). The Exchange Fund could also be used to “maintain the stability and the integrity of the monetary and financial systems of Hong Kong” (Legislative Council 1935, 2).

The HKMA administered Hong Kong’s existing deposit insurance scheme under the DPS Ordinance, which assigned the HKMA to be the executive arm of the HKDPB (Legislative Council 2004, article 6[1]). Given its control over the Exchange Fund, the HKMA also administered the Full Deposit Guarantee (Legislative Council 2004, articles 4, 6[1]).

As Hong Kong’s central bank and primary bank regulator, the HKMA was well suited to administer the guarantee, given its depositor databases and its regular audits of banks, which contributed to the program’s success (FSB 2012). The financial secretary, as the ex-officio head of the HKMA Exchange Fund Advisory Committee, was also responsible for administering the program (Legislative Council 1935, 2).

The HKDPB was a statutory body under the DPS Ordinance of 2004. This ordinance stipulated the governance of the HKDPB’s fund (Legislative Council 2004, articles 18-20). The financial secretary appointed the eight members of the board. It included two ex-officio members representing the HKMA and the secretary for financial services and the treasury. The other members served two-year terms and had broad backgrounds in accounting, banking, consumer protection, insolvency law, investment, information technology, and public administration (HKDPB 2009c).

Pursuant to the ordinance, the HKDPB was required to maintain records of all transactions and publish a year-end report, which was submitted to the financial secretary (Legislative Council 2004, articles 18, 20). Article 19 also allowed the financial secretary to appoint an auditor to audit the HKDPB (Legislative Council 2004, article 19).

The financial secretary controlled the Exchange Fund and exercised it “in consultation with an Exchange Fund Advisory Committee” (Legislative Council 1935, 2). The financial secretary served as the Exchange Fund Advisory Committee’s ex officio chairman and appointed the committee’s other members (HKMA 2008d). The committee advised the financial secretary with respect to the Exchange Fund, along with the HKMA’s annual budget (HKMA 2008d).

On October 14, 2008, Hong Kong’s financial secretary announced “two new precautionary measures to further strengthen confidence in Hong Kong's banking system,” including the Full Deposit Guarantee (Tsang 2008). He stressed that these measures were solely preemptive (HKMA 2008a; Tsang 2008).

Following the announcement of the Full Deposit Guarantee, the HKMA required all Authorized Institutions to inform their depositors about the guarantee (HKMA 2008d). The HKMA monitored whether Authorized Institutions complied with this requirement (HKMA 2008d).

The HKMA also conducted a widespread publicity and educational campaign, which promoted awareness of the Full Deposit Guarantee and ensured that depositors knew when the program would be phased out (HKDPB 2009c; HKMA 2008d; HKMA 2010a; IADI 2012). For instance, Hong Kong released press releases to promote awareness of the program (HKDPB 2009a). The HKMA built upon previous publicity campaigns, which advertised on television, newspapers, radio, and the Internet (IADI 2012). By conducting such campaigns, the HKMA hoped to bolster confidence and thereby ensure financial stability (IADI 2012). Moreover, the HKMA addressed questions regarding the program’s implementation and its effect on specific accounts (HKMA 2009b).

After the Global Financial Crisis (GFC), the HKMA and the HKDPB conducted a review of the pre-crisis DPS (HKDPB 2009b). The review included public consultations and resulted in an increase in the deposit cap from HKD 100,000 to HKD 500,000, beginning in 2011 (HKDPB 2009b; Li 2009).

The existing DPS, which the HKDPB launched in 2006, guaranteed all deposits in licensed banks up to HKD 100,000 (HKDPB n.d.a). The HKMA, through the Full Deposit Guarantee, covered eligible accounts in Authorized Institutions of more than HKD 100,000 with an unlimited guarantee (HKDPB n.d.a). The HKMA also covered certain non-Authorized Institutions with an unlimited guarantee, using the Exchange Fund.

In the case of an Authorized Institution’s failure, the HKDPB covered the first HKD 100,000 and the Exchange Fund, administered by the HKMA, then immediately covered any amounts above HKD 100,000 (HKDPB n.d.a).

Hong Kong’s government created the HKDPB in 2004, and it began building the DPS Fund in 2006 through the collection of fees paid by Authorized Institutions (HKDPB 2010; Legislative Council 2004, articles 14-15). The HKDPB targeted a fund size of 0.3% of total insured deposits, which in 2008 would have been about HKD 1.5 billion; in March 2009, the DPS Fund had accumulated total assets of HKD 963 million through those fees (HKDPB 2009c).

Before the GFC, the Exchange Fund provided the HKDPB with a HKD 40 billion standby credit facility, to be drawn upon in the case of an eligible institution’s failure (HKDPB 2009c; HKMA 2009c). That standby facility remained in place when the HKMA announced that it would use the Exchange Fund to back deposit insurance for accounts in excess of HKD 100,000. The Exchange Fund was funded by the government of Hong Kong (Marks and Yao 2008; Tsang 2008). At the time of the announcement of the Full Deposit Guarantee, the Exchange Fund had a balance of HKD 2.1 trillion (Li 2010).

The Exchange Fund was established in 1935 by the Exchange Fund Ordinance and funded by the government (Legislative Council 1935, 1–2). The Exchange Fund’s purpose was to affect the exchange value of Hong Kong’s currency and to maintain “Hong Kong as an international financial centre” (Legislative Council 1935, 2). The financial secretary controlled the Exchange Fund and exercised it “in consultation with an Exchange Fund Advisory Committee” (Legislative Council 1935, 2).

If the Exchange Fund were insufficient, the HKMA could levy additional fees to repay the Exchange Fund and could use the DPS Fund to cover such payments (HKMA 2004).

The Full Deposit Guarantee had two classes of eligibility. The first class included Authorized Institutions in Hong Kong (Tsang 2008). Under the DPS Ordinance, Cap. 581, of 2004, all institutions with banking licenses were automatically enrolled as Authorized Institutions and covered under the pre-crisis DPS (Legislative Council 2004, article 12). Article 13 of the DPS Ordinance set out exemption criteria for institutions, including whether a bank was incorporated outside Hong Kong and whether the deposits were protected by another guarantee scheme (Legislative Council 2004, article 13). These institutions were covered by the pre-2008 DPS up to HKD 100,000; the Exchange Fund covered balances of more than HKD 100,000 (HKDPB n.d.a). The HKMA required these Authorized Institutions to write to depositors about the Full Deposit Guarantee’s expiry (Datwani 2010a).

The second category included “Restricted-License Banks and Deposit-Taking Companies as well as Licensed Banks” (Tsang 2008).^FN“Restricted-License Banks” refer to institutions that are engaged in merchant banking or capital market activities and can take deposits of HKD 500,000 and above of any maturity (HKMA 2008b). “Deposit-Taking Companies” refer to institutions that, while associated with banks, engage in specialized activities—such as consumer finance and commercial lending—and can take deposits of HKD 100,000 and above with an original term maturity of three months (HKMA 2008b). “Licensed Banks,” as defined by the HKMA, refer to institutions that operate current and savings accounts, accept deposits of any size or maturity, pay or collect checks for customers, and use the title “bank” without restriction (HKMA 2008b). These institutions were fully covered by the Exchange Fund, as opposed to the Hong Kong DPS Fund (HKDPB n.d.a).

The Full Deposit Guarantee also applied to deposits held in HKD and other currencies, which had been covered under the pre-crisis DPS, along with deposits “held with Hong Kong branches of overseas institutions” (HKDPB 2009c; Tsang 2008). These institutions were all automatically enrolled in the Full Deposit Guarantee (Tsang 2008).

At the end of 2009, the Full Deposit Guarantee covered 140 Authorized Institutions (HKDPB 2009c). This included 23 locally incorporated banks and 117 foreign bank branches (HKDPB 2009c).

The Full Deposit Guarantee guaranteed most deposits held in approved institutions (HKMA 2009a; HKMA 2010b). However, several deposit-like accounts were excluded from the program, including secured deposits, structured deposits (a type of derivative linked to currencies or equities), bearer instruments, and offshore deposits (HKMA 2009a). Some deposits, like time deposits exceeding a maturity of five years, were also excluded from the Full Deposit Guarantee because they were viewed as less liquid than other types of deposits (HKMA 2009b). Hong Kong did not guarantee such deposits in its pre-crisis DPS (HKMA 2009b). The government also did not guarantee any “offshore deposits” collected by foreign offices of Authorized Institutions (Datwani 2010b).

The HKDPB reported that in 2008, deposits in Authorized Institutions expanded by 2% from 2007 (HKDPB 2009c). It noted that this growth was “benign” compared to the 7% growth between 2006 and 2007 (HKDPB 2009c). The HKDPB also noted that large and retail banks comprised the majority of deposits (HKDPB 2009c).

No additional fees were associated with the Full Deposit Guarantee; instead, Hong Kong used the Exchange Fund to expand its deposit guarantee (Tsang 2008).

The fees associated with the HKDPB’s guarantee for Authorized Institutions were determined by an institution’s “amount of protected deposits” and the “supervisory rating assigned to the Scheme member by the HKMA,” according to Article 15 the DPS Ordinance (HKDPB n.d.b; Legislative Council 2004, article 15, schedule 4). These fees maintained the DPS Fund (Legislative Council 2004, articles 14-15). Authorized Institutions were required to submit an annual return with this information, which the HKDPB then used to calculate their fees (HKDPB 2009c).

In 2008, the HKDPB collected HKD 328 million in fees from Authorized Institutions, which funded the DPS Fund (HKDPB 2009c). In 2009, it collected HKD 340 million in fees (HKDPB 2009c). By March 2009, the DPS Fund had total assets amounting to HKD 963 million (HKDPB 2009c). In 2010, the HKDPB collected HKD 377 million in fees from Authorized Institutions (HKDPB 2010). Ninety-five percent of these fees were collected from the 20 largest Authorized Institutions (HKDPB 2009c; HKDPB 2010).

If an institution were to fail, its administrators would alert the HKDPB and the HKMA. For Authorized Institutions in Hong Kong, compensation would be triggered in response to either a court order or consultation from the HKMA, which would direct the HKDPB to pay depositors (HKDPB 2009c; Legislative Council 2004, article 22). The HKDPB would set up an operation team, obtain depositor information, and cover the first HKD 100,000, using the DPS Fund (HKDPB n.d.a; HKDPB 2009c). The Exchange Fund, administered by the HKMA, would then immediately cover any amounts above HKD 100,000 (HKDPB n.d.a).

If the failed institution were a Restricted-License Bank or Deposit-Taking Company, the HKMA would use the Exchange Fund to cover all losses (HKDPB n.d.a). Pursuant to Article 32 of the DPS Ordinance, the HKDPB would become the bank’s receiver and insurer, with the proceeds from liquidation covering losses (Legislative Council 2004, article 32).

Institutions participating in the Full Deposit Guarantee were subject to heightened surveillance (HKMA 2008c; HKMA 2008e). The HKMA increased its monitoring to limit moral hazard concerns (HKMA 2008c; HKMA 2008e).

The program ended as scheduled on December 31, 2010 (Datwani 2010a; HKMA 2010a). This coincided with the termination of similar guarantees in Singapore and Malaysia (IADI 2012; Tripartite Working Group 2009).

In light of global financial conditions, and the run on the United Kingdom’s Northern Rock, the HKDPB initiated a review of the pre-crisis DPS (HKDPB 2009c). The review found that the pre-crisis cap of HKD 100,000 covered less than 80% of depositors (HKDPB 2009c). The review also recommended extending the pre-crisis DPS’s protections to additional deposits (HKDPB 2009c).

As such, the DPS was replaced by the enhanced DPS, which became a permanent feature of Hong Kong’s financial landscape (HKMA 2010a). The enhanced DPS was administered by the HKDPB (HKMA 2010a). To formulate this enhanced scheme, the HKDPB worked to publicly review the previous scheme and worked alongside the Department of Justice to develop the bill (HKDPB 2010). The enhanced DPS went into effect on January 1, 2011, and guaranteed HKD 500,000 (HKMA 2010a). It covered deposit accounts and “deposits pledged as securities” (HKMA 2010a). These protections, the HKMA said, would cover about 90% of all bank deposits (HKMA 2010a).