An act governing bankrupt banks in China has entered the legislation process and is expected to be passed soon, said the banking regulator.

The Bankruptcy Act for Banking Institutions provides more specific guidance than the existing "general" bankruptcy law on handling of bankruptcy cases in the banking industry, said the China Banking Regulatory Commission (CBRC).

The Law of the People's Republic of China on Bankruptcy, the relatively new general bankruptcy law promulgated in June last year, regulates the financial sector in absence of specific market exit rules for the sector, CBRC said. It also required a separate bankruptcy act for the banking sector.

Analysts said with the opening-up of China's banking industry, a market exit mechanism is indispensable. Supporting financial institutions burdened with highly risky assets, huge debts or operating difficulties will keep risks from spilling. By locking up individual losses, financial security is better protected, they believe.

The banking regulator will also strengthen banking security by introducing a deposit insurance system. A special team of officials from the central bank, CBRC, the State Council and the National Development and Reform Commission is currently working on a plan and a new law establishing the deposit insurance scheme.

The sequence will be to first develop a deposit insurance plan, then set up a deposit insurance fund and finally incorporate an independent insurance deposit company. In the meantime, a strategic coordination mechanism between the central bank and supervisory authorities will be formed to ensure a smooth process for initiating and maintaining the deposit insurance system.

In fact, a protection scheme for depositors against risks from bankruptcy or insolvency of financial institutions has been studied for years. As early as in April 2004, the People's Bank of China set up a deposit insurance division at its financial safety bureau. In August that year, the draft of a law for deposit insurance was brought to the work schedule. In December, the drafting began, but the discussions and study are still going on today.

(Chinadaily.com.cn February 14, 2008)