This Chapter will consider how:

(i) premiums should be collected; and (ii) the DIS Fund should be invested.

Premium collection

6.2 Premium collection is an important aspect of the work of any DIS. In keeping with the principle of maintaining a lean management structure for the Board, it is proposed that the Board should have the power to appoint an agent to collect insurance premiums. However, given the sensitivity of premium information, which would reflect the risk ratings of individual participating banks, it would not be appropriate for the Board to collect premiums through ordinary bank accounts. Accordingly, it is proposed that the Board should appoint the HKMA as its agent to collect insurance premiums from participating banks via the RTGS system.³⁴ The relevant HKMA staff would be subject to the secrecy provisions in the DIS legislation.

6.3 To ensure punctual payment of premiums, the Board could serve assessment notices on participating banks requiring them to credit premium payments to the HKMA for the account of the DIS by a specified date. The DIS legislation should empower the Board to specify the manner and timing in which premium payments should be made. The legislation should also specify the penalty for late or non-payment of premiums.

6.4 A related issue is whether premiums should be paid by instalments.³⁵ Considering that the proposed premium level would not be unduly high, payment by instalments does not seem necessary and would impose unnecessary administrative costs on both participating banks and the DIS. It is therefore proposed that the full annual premium should be collected in one payment.

Refund of premium

6.5 As the premium would be paid in advance, it would be reasonable to refund part of the premium payment made by a participating bank in the year in which it ceases to be a participating bank. Paragraph 2.8 in Schedule 2 of the Rules suggests how the

34 As proposed in Chapter 1 above, the Board should have the power to appoint an agent to discharge any of its functions on its behalf. In practice, the arrangements could be effected by the Board instructing banks to credit its account maintained with the HKMA via the RTGS.

35 For example, the FDIC and CDIC collect premium on a semi-annual basis.

amount of refund should be determined. Like premium collection, the premium refund could be effected by the Board instructing the HKMA to credit the settlement account of the bank concerned via the RTGS.

Fund investment

6.6 In its Final Report, the FSF Working Group on Deposit Insurance advised that deposit insurers should ensure that funds were well managed and readily available to cover losses as they arose. This emphasises the need for capital preservation and liquidity in the investment of deposit insurance funds.

6.7 A deposit insurer typically only has a limited investment mandate.

According to the IMF survey of 67 deposit insurance schemes, about one-third (including the US and UK) invest in only government securities, typically short-term. Several DISs invest in central bank securities or place funds with their own central banks. Some DISs are allowed greater investment choice, but they must have regard to liquidity, risks and returns. Only a small proportion of the 67 DISs are allowed to invest in foreign securities or currencies.

6.8 In keeping with the need for capital preservation and liquidity, it is proposed that the DIS Fund should be allowed to invest in one or more of the following:

(i) deposits with the Exchange Fund (“EF”);³⁶

(ii) EF bills (i.e. short-term EF paper with maturity of one year or less);

(iii) US Treasury bills (i.e. short-term US government paper with maturity of one year or less);

(iv) foreign exchange contracts , including derivative products, which are necessary for hedging purposes³⁷; and

(v) any other investment that may be approved by the FS.³⁸

6.9 These options can all meet the two primary investment objectives of the DIS as stated above. Investment in US Treasury bills seems necessary in order to provide

36 Since the DIS is to protect depositors against bank failures, the DIS Fund should not be placed with a bank for investment purposes. The DIS should however be permitted to maintain a commercial bank account to make and receive payments in connection with its operational needs.

37This is to enable the Board to hedge its foreign exchange risks in relation to compensation payment made in respect of foreign currency deposits. Please refer to para. 3.26 above.

38 This is to provide flexibility. A similar provision can be found in the Protection of Wages on Insolvency Ordinance.

a wide enough pool of potential investments and should be acceptable as the exchange rate risk is limited under the linked exchange rate system in Hong Kong. As each investment option has its relative merits, it seems inappropriate to specify that the DIS Fund should only be invested only in one instrument.

6.10 The HKMA believes that the limited investment mandate proposed for the DIS would not require it to maintain a large team of people to manage the DIS Fund.

Most of the work could be done through a custodian bank (e.g. purchase and settlement of government securities). Alternatively, the HKMA could be empowered to manage the DIS Fund on the Board’s behalf.³⁹

39 As noted in Chapter 1 above, it is proposed that the Board should have the power to appoint an agent to perform any of the functions of the Board under the DIS legislation.