The Legislative Council has passed the Deposit Protection Scheme Ordinance, which provides for the establishment of a fund to compensate depositors in the event of a bank failure.

This scheme will enhance deposit protection in Hong Kong, the Hong Kong Monetary Authority said, adding that it will also contribute to the stability of the city's financial system.

An independent deposit protection board will manage the scheme. The board's functions will be confined to the assessment and collection of contributions, investment of funds and paying compensation to depositors in  the event of a bank failure.

The Monetary Authority will carry out the scheme's day-to-day administration on the board's behalf.

Licensed banks must participate in the scheme but overseas-incorporated banks may apply for exemption if the deposits their Hong Kong offices take are already covered by a comparable scheme in their home jurisdiction.

Contributions from banks will create fund

Under the scheme, the coverage limit is $100,000 per depositor per bank. A Deposit Protection Scheme Fund with a target fund size of 0.3% of the total amount of protected deposits will be built up through collection of contributions from banks.

A differential rate system based on the supervisory ratings of individual banks will be used to assess contributions.