Hong Kong, Singapore and New Zealand move to beef up bank-funded deposit insurance regulations, with more Asian countries likely to follow suit, after alarming rapid bank runs in the US.

In the past month alone, three key financial watchdogs in Singapore, Hong Kong and New Zealand have announced proposals to strengthen their deposit insurance schemes.

Hong Kong’s deposit insurance scheme could change substantially for the first time in 12 years, with banks footing the bill. On 13 July, the Hong Kong Deposit Protection Board (HKPD) proposed widening depositors’ safety net by three-fifths to HK$800,000 ($102,400), which would protect 92% of depositors.

The 150 banks that contribute to the HKPD would pay an increased annual fee of around HK$153m. The HKPD said that the failure of several US regional banks, including Silvergate Bank, Silicon Valley Bank, Signature Bank and First Republic Bank, prompted it to “identify [the] lessons learnt”. 

Key takeaways: Asia-Pacific regulators step up deposit insurance rules

• This year’s US bank runs are pushing regulators in the Asia-Pacific (APAC) region to act
• Regulators in Hong Kong and Singapore want to increase deposit insurance protection by three-fifths and a third, respectively
• 150 banks in Hong Kong would stump up an extra HK$153m
• New Zealand has passed a law to create the country’s first deposit insurance scheme, to go live in 2024
• South Korean lawmakers are in talks to beef up rules, but yet to issue a formal proposal
• Rising inflation and Fed rate hikes are likely to prompt further scrutiny of deposit insurance schemes in APAC

“The [Hong Kong] authorities should have considered the relevancy of the recent failure of the US banks, as deposit protection is one of the core parts to maintain banking sector stability,” says Savio Fan, associate director at Fitch Ratings in Hong Kong. “The proposals should also enhance financial stability against a severe bank run.”

Savio Fan, associate director at Fitch Ratings in Hong Kong

US bank runs push APAC regulators to take action

Silicon Valley Bank was slammed with $42bn of deposit withdrawal requests in a day, while other failed lenders suffered rapid and large deposit outflows. In comparison, Hong Kong has not experienced a severe bank run since 2008, when depositors swarmed the Bank of East Asia amid the panic of the US’s financial meltdown.

Hong Kong’s move follows Singapore’s proposals to increase its insurance coverage on bank deposits by a third from S$75,000 (US$56,700) to S$100,000 on 22 June. Singapore’s deposit insurance scheme is funded by banks’ mandatory annual premiums. 

The Monetary Authority of Singapore (MAS) intends to protect up to 91% of depositors bringing it in line with the International Association of Deposit Insurers’ standard of 90%. While the MAS has stated that the move is not a direct response to the stresses faced by US banks earlier this year, experts believe there are still links to it. 

“With what happened in the US, it was about time countries examined to see if their deposit insurance schemes are sufficient,” says Glenn Thum, senior research analyst at Phillip Securities Research, the research arm of investment and wealth management firm PhillipCapital, headquartered in Singapore.

“Although, this has been brewing for some time, so I wouldn’t say the MAS’s decision was a knee-jerk reaction to the banking collapse, but it may have accelerated its implementation,” adds Thum.

New Zealand sets up first-ever deposit insurance scheme

The third Asia Pacific country to strengthen customer protection is New Zealand, which approved a law on 29 June to set up its first-ever deposit insurance scheme. The country’s parliament passed the Deposit Taker Bill, which will guarantee deposits up to NZ$100,000 ($63,000) for eligible institutions in the event of a failure. New Zealand’s central bank said that it will prioritise setting up the depositor compensation scheme ahead of the rest of the act, and expects it to be fully operational by late 2024.

South Korean authorities have also been mulling whether to improve deposit insurance schemes since March. Lee Jae-Myung, leader of the main opposition Democratic Party of Korea, reportedly said, “the collapse of SVB is intensifying concerns on the market … we will seek to introduce a system to fully protect deposits in case an emergency situation like the failure of SVB takes place.”

However, since the immediate aftermath of the US regional banking collapse, Korean regulators have yet to issue a formal proposal to enhance its bank deposit schemes. 

Despite the increased scrutiny of deposit protection schemes, US bank collapses have had little direct impact on Asia Pacific’s financial markets. Macroeconomic factors, such as rising inflation and US interest rate hikes, are more likely to influence regulators to increase deposit insurance. 

Helen Fok, partner at international law firm Simmons & Simmons in Hong Kong, says: “The failure of regional banks in the US has minor ramifications on the banking system in Asia. What would further prompt Asian regulators to increase coverage levels is to ensure that the coverage provided is proportionate to inflation.”