The $100,000 compensation limit is appropriate as it can protect more than 80% of depositors, Deposit Protection Board Chief Executive Officer Raymond Li says, adding the cap will be kept under review.

Speaking on a radio talk show today, Mr Li said licensed banks, unless otherwise exempted by the board, have to partake in the Deposit Protection Scheme, which will start operation Monday. Scheme members will display a membership sign prominently at their places of business.

Under the scheme, both Hong Kong dollar and foreign currency deposits are protected. However, deposits with a maturity longer than five years, structured deposits, secured deposits, bearer instruments, off-shore deposits and non-deposit products such as bonds, stocks, warrants, mutual funds, unit trusts and insurance policies will not be covered. Customers will be informed if a financial product described as a deposit does not fall within the scheme's scope. For non-protected deposits made before the launch of the scheme on September 25, holders will be informed in 60 days. 

$1.3b fund
Mr Li said a deposit protection scheme fund with a target fund size of 0.3% of the total amount of relevant deposits, translating into a fund size of approximately $1.3 billion, will be built through contributions from scheme members. Differential contributions will be assessed based on the supervisory ratings of individual scheme members.

If a bank failure does occur, eligible deposits will automatically come under the scheme's protection and depositors need not to apply for protection or compensation. The compensation limit is set at $100,000 per depositor per scheme member. Compensation will be calculated on a net basis and will be paid within six weeks. An interim payment of 25% to 50% of the compensation amount will be made if necessary.

The board has secured a standby credit facility from the Exchange Fund to meet any liquidity requirements arising from a need to pay compensation to depositors. The payments will be recoverable from the liquidation of the failed scheme member.

Mr Li stressed the scheme is a preventive measure aiming to better protect depositors. The board will monitor the scheme's effectiveness, taking into account latest market developments. Relevant systems and processes will also be reviewed to ensure efficient handling of payouts in the event of a bank failure.