Vol 13 (2016) - Issue 2

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State Bank Insolvency in China: The Changes Brought About by the Establishment of the Deposit Insurance System

On 17 February 2015, China’s State Council made public the long-awaited Deposit Insurance Regulation ('DIR'), with effect from 1 May 2015. Formalising broad parameters of China’s deposit insurance system ('DIS'), the Regulation aims to protect depositors’ interests and further strengthen China’s financial safety net. Since the DIS generally mitigates the deregulation risks in times of commercial bank insolvency, it is widely believed that China’s adoption of the DIS paves the way for the market exit path for the non-viable commercial banks. However, neither the newly introduced the DIS, nor China’s existing bank insolvency regime is sound enough to counter the systemic crises that may occur if the failing banks are free to declare bankruptcy. Chinese people have long held the belief that deposits in commercial banks, especially those in the state owned ones, carry implicit guarantee against financial risks, and therefore are immune from financial defaults. The heavy reliance on deposits and the preoccupied negative perception against bank insolvency are even more difficult to remove than the structural loophole or legislative lacuna in China’s bank insolvency regime.

I. Introduction
China’s bank insolvency regime is implanted in its corporate insolvency framework. Considering the relatively short history of the country’s insolvency law as a whole, such an analogous application is the most politic choice to make. Meanwhile, making rules on a legal regime whose real-life practice is rare is a waste of legislative or administrative resources. To date, there are few instances of China’s banking financial institutions undergoing insolvency proceedings, let alone those for commercial banks. In 1998, an administrative bailout relieved the Hainan Development Bank crisis, and the liquidation process of the Bank lasted for more than ten years. The insolvency proceedings for Shang Village Rural Credit Cooperative in Su’ning County of Hebei Province can hardly be of substantial significance for the present discussion either, because long before the bankruptcy declaration in 2012, the Credit Cooperative had been a financial institution with no operational business, and the unsettled indebtedness during the liquidation proceeding only concerned four other financial institutions.