HONG KONG: The government is proposing to raise five-fold to HK$500,000 from the current HK$100,000 the maximum amount insured under its bank deposit guarantee program.

Hong Kong Deposit Protection Board (HKDPB) Chief Executive Officer Raymond Li yesterday said the proposal is aimed to bolster confidence in the local financial system amid a global recession, among other goals.

The move will also bring Hong Kong at par with the world's other major financial centers which raised the level of government protection for bank deposits following shocks to the global financial sector.

An HKDPB report said the proposed increase will result in some 90.9 percent of all bank depositors in Hong Kong enjoying an insurance cover from a government-sponsored safety scheme.

Under the proposal, all bank depositors are to be compensated up to HK$500,000 each in about two weeks in the event of a collapse of a local banking institution.

Li said the proposal to raise the level of deposit insurance protection came up following a statistical review late last year which showed that the current level of protection approached the minimum limit of 80 percent in 2007.

The board said in a report that a substantial increase in the insurance cover for deposits will help significantly in avoiding the collapse of a bank, caused by rumor-driven bank runs.

If bank deposits are fully covered by an insurance scheme, depositors will be less likely to react adversely to rumors and pull their bank deposits.

Li said the board came up with the proposed increase in the level of insurance protection after considering various factors, including the cost-effectiveness of the proposed hike, moral hazards and the prevailing insurance cover provided in other international jurisdictions.

The outbreak of the global financial crisis last year has prompted many major financial centers to raise further the level of their bank deposit insurance cover to stabilize their banking systems.

The US raised the level of bank deposit insurance cover to $250,000 from $100,000, while the UK lifted the insurance cover to 50,000 pounds from 35,000 pounds.

Hong Kong's banking system was subjected to an acid test last September when Bank of East Asia (BEA) branches across the city were hit by panic withdrawals by depositors.

The run was triggered by unfounded allegations about financial difficulties at BEA, spread through text messages.

The HKDPB has invited members of the public to submit by June 26 their views and comments to the proposed changes to the bank deposit insurance protection scheme.

(HK Edition 04/28/2009 page16)