Insurance is all about protecting oneself, but insurance extends far beyond life and health insurance.
For example, who would protect the banking sector if it went into freefall?
Government administration of financial safety nets for banks has been a mainstay of policy responses to past financial crises. Deposit insurance is a well-known financial safety net implemented to combat possible financial turbulence and help keep safe deposits in banking and savings institutions.
Typically, the main purpose of a customer deposit insurance scheme is to support confidence in deposit-taking banks, and to minimise the risks of a bank run, which occurs when a large number of customers withdraw their bank deposits simultaneously due to concerns about a bank’s solvency.
“With deposit insurance, the run on the bank will be tempered as they know that someone else, generally the government, will pay their deposit, and this will often stop the bank from collapsing,” Stephen Higgins, managing partner of Cambodia-based investment firm Mekong Strategic Partners, said.
“Demonstrating the success of such schemes, during the Global Financial Crisis (GFC) the world did not experience bank runs on insured deposits (Kane et al, 2008).”
Deposit insurance has been adopted by more than 100 countries around the world; however Cambodia, alongside Myanmar, remains one of the only two ASEAN nations that have not implemented a deposit insurance scheme in the banking sector.
While a proper financial safety net is necessary to reduce the risk of severe financial crises, Higgins said the fact Cambodia was lacking in deposit insurance measures was not alarming.
“A highly developed market like Australia didn’t have any sort of deposit insurance scheme until the GFC, so it is not as if Cambodia is that late to the party here,” he said.
“One of the challenges that Cambodia faces is the high level of dollarization in the banking system. Even if they were to implement deposit insurance today, it couldn’t effectively cover USD deposits as the central bank can’t print USD if they need to,” he added.
As such, Higgins said this meant a strong prudential regulator like the National Bank of Cambodia (NBC) is “far more important than a deposit insurance scheme”.
While ANZ Royal CEO Leonie Lethbridge said the lack of a deposit insurance scheme could be viewed as risky, she suggested Cambodia’s financial institutions could mitigate the risk by being well capitalised.
“Many jurisdictions don’t have deposit insurance,” Lethbridge said.
“There’s not a universal law that says all markets need to have deposit insurance. So, ultimately what depositors are relying on is the level of capitalisation of the financial institutions that they are banking with and that’s particularly the case when there isn’t deposit insurance.”
Despite this, Higgins believes it is highly likely the NBC will introduce a deposit insurance scheme in the next couple of years.
“[NBC] will need to do it with the support of the Ministry of Economy and Finance,” he said.
“It will take many years for the scheme to build up sufficient premiums to be able to pay out if a bank gets into trouble, so in the early years it will rely on government support if something goes wrong.”