No consumer deposit insurance puts extra imperative on NBC

Content image - Phnom Penh Post
Stephen Higgins, managing partner at Mekong Strategic Partners, says deposit insurance is not compulsory.​ Photo supplied

No consumer deposit insurance puts extra imperative on NBC

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.”

MOST VIEWED

  • Angkor Wat named as the top landmark for the second year

    Travel website TripAdvisor has named Cambodia’s ancient wonder Angkor Wat as the top landmark in the world for the second year running in their Travelers’ Choice Award 2018, an achievement Cambodian tourism operators expect will attract more tourists to the Kingdom. The website uses traveller

  • Hun Sen detractors ‘will die’

    Prime Minister Hun Sen on Wednesday said those who curse or insult him would eventually die without a plot of land to bury their bodies after being killed by lightning, suffering the same fate as those who recently died in Thmar Baing district in Koh

  • Monks given ‘Samdech’ title for contributions

    Three senior monks on Thursday were given the highest-ranking title “samdech”, with Prime Minister Hun Sen saying that the promotions were due to their contributions to Buddhism. The three distinguished monks were promoted on Thursday morning at Botum Vatey pagoda in Phnom Penh, at a

  • Facing possible sanctions, PM criticises Washington’s rights record

    While United States congressmen are discussing the Cambodia Democracy Act and an amendment that could impose more sanctions against Cambodia’s government, Prime Minister Hun Sen on Tuesday counterattacked by questioning the respect of human rights and democracy under the US-backed Lon Nol regime, and