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More protection for bank deposits

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image The Monetary Authority has already sent a proposal to the government to set up a banking deposit protection scheme but no timeframe was disclosed

Money in local banks will soon be better protected with the implementation of a formal deposit protection scheme. The relevant legislation is “currently under review by the government,” the local financial regulator told Macau Daily Times.
In a report released last week, and brought to public attention by Macau Business newsletter, the International Monetary Fund (IMF) stressed there is “no formal deposit protection scheme” in the territory although local banks “rely heavily on retail deposits as a source of funding”.
Such a scheme “would also help assure a timely and stable resolution of a bank in difficulty,” says the report on the observance by Macau of the Basel Core Principles for banking supervision, prepared by a staff team of the IMF in 2009.
“Any boost to the protection of banking customers – especially the small and medium ones, which are most affected – should of course be seen as a positive step forward,” economist José Sales Marques told MDTimes.
There is “an explicit government protection scheme in force since October 2008,” the Monetary Authority (AMCM) said.
The measure was enforced after the global financial crisis and the collapse of US investment bank Lehman Brothers created rumours about the stability of the local banking sector.
The directive was last renewed in December 2010 with no expiry date. As such, in case a Macau-licensed bank flounders its clients would be able to be compensated up to a limit of MOP 500,000 for each deposit account.
But “obviously there is a difference between a one-off measure and a formal protection scheme that, from its implementation, will hopefully be part of an increasingly better and broader deposit protection regime,” said Sales Marques.

No timeframe

AMCM “has drafted the relevant laws in relation to the establishment of [a permanent] deposit protection scheme,” which were then sent to the government.
MDTimes asked the office of secretary for Economy and Finance whether there was a timeframe for the enactment of the scheme but received no reply by the closing of this edition.

The legislation was drawn up “in collaboration with the banking industry and taking into account the actual operational environment of Macau,” AMCM said.
It also makes reference to the Basel Core Principles for banking supervision and “the relevant protection arrangements of neighbouring jurisdictions,” AMCM added.
For instance all licensed banks in Hong Kong are members of a similar scheme. In January the maximum compensation for deposits was raised from HKD 100,000 to 500,000.
The introduction of a formal protection scheme would represent a turnaround for AMCM president Anselmo Teng.
In November 2008 he said at the Legislative Assembly that such a scheme was “unnecessary” and had “disadvantages,” though he gave no further details.
“I see more pros than cons,” said Sales Marques. “The only disadvantage I might anticipate is the costs it might involve,” he added.
In Hong Kong the deposit protection scheme is funded by bank contributions. Each institution has to pay a percentage – up to 0.14 percent – of the amount of protected deposits held, according to the bank’s confidential rating assigned by the financial regulator.

Better supervision

The IMF report praised Macau’s body of laws, rules and regulations as “comprehensive and well developed, and provide a solid framework for banking supervision”.
“There has been significant improvement in a number of areas since the 2002 Offshore Financial Centre assessment.”
This second assessment was conducted based upon the “newly revised” 2006 Basel Core Principles for Effective Banking Supervision, AMCM said.
Although the requirements for banking supervision “have been raised, the results of this second-round assessment are better than the last one,” the institution stressed.
AMCM receives considerable balance sheet and income information from the banks but that alone might not be enough to prevent problems in the financial sector, IFM warned.
The regulator “does not have a systematic approach to detecting trends and indicators” that could point to problems emerging in the banking system as a whole, the international body explained.

‘I see more pros than cons [in a bank deposit protection scheme]. The only disadvantage I might anticipate is the costs it might involve’

Sales Marques

Thus, the document suggests that the “AMCM enhance its offsite analysis” to deepen the trend analysis it undertakes for individual banks and collate this into a systemic risk analysis framework for the overall banking sector.
“This analysis can serve as the basis for the development of an early warning system.”
It also says that macroeconomic management in the territory has traditionally been carried out “in a prudent and conservative manner”. “This has helped provide stability to Macau SAR’s financial system.”
However, the way the Macau Government classifies its spending is out-of-date, says the IMF report drafted in 2009. “To enhance the transparency and credibility of its accounting system, Macau SAR should adopt the International Financial Reporting Statements system in full.”
The Legislative Assembly’s first standing committee issued a similar warning last month over an injection of MOP 3.62 billion to the 2011 public budget.
The budget “is not fully reflecting the government’s action in boosting the social area,” the committee said, because the accounting framework is lagging.

Lack of autonomy

There are “shortcomings in the operational independence” of AMCM, the IMF report added. The lack of independence “remains an outstanding issue”.
The previous assessment recommended that AMCM be granted independence from the government of Macau SAR.
“This would have required an amendment of the laws, and no such change has occurred,” says the report.
“The issue remains a significant shortcoming,” the report points out, adding that the AMCM “continues to have inadequate legal independence and lacks final decision authority over critical supervisory issues”.
According to the report, this was the only area that received a materially non-compliant rating, and it relates to the power granted under the law to the Chief Executive.
“For important supervisory matters – such as licensing and revocation of licences, approving the AMCM’s budget, appointing the chairman and other members of the board of directors, and dismissing the chairman – the law gives the Chief Executive the final authority and decision making power,” says the IMF.
In a reply to MDTimes AMCM downplayed the concerns, claiming its independence is “implied”. “The Chief Executive and the secretary for Economy and Finance have never interfered with the supervisory duties of AMCM,” the institution emphasised.
IMF acknowledged there is no evidence of political interference but added that  “the possibility exists (…), thereby threatening the ability of the AMCM to achieve its objective of assuring financial stability”.
As such, the report suggests that the current legal framework should be amended and Macau’s financial regulator should have full licensing authority.
Furthermore, it adds, a broader body, such as the Legislative Assembly, should confirm the appointment of the chairman.
In the supervision field, Macau’s de facto central back should also have “full legal powers,” recommends the IMF, “including corrective and remedial measures that can be taken when a bank is in difficulty”.
Currently it is the Chief Executive who takes the decision on any remedial measures when a bank encounters difficulties, on the advice of the AMCM.
In addition “to undermining” the AMCM’s independence, “valuable time will have been lost” due to this extra step, in a situation where timely action is critical, says the report.

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Responsible Right of Expression — In the interest of freedom of expression, coupled with a true sense of responsibility to encourage community dialogue, the Macau Daily Times offers its readers the opportunity to express their opinions on new-related matters through this website. All opinions are welcome. However, we reserve the right to remove comments that are deemed to be obscene, or are merely insults written under the cloak of anonymity. MDT