Bahrain is to set up a safety-net fund to guarantee bank customers' deposits in the event of a collapse. Banks will pay into a fund, which will in turn pay out to customers should any bank collapsem, said a top banking official.

The plan has been drawn up by the Central Bank of Bahrain (CBB). Officials stressed yesterday that the country's banking system was sound.

The fund would mean depositors would have rapid access to the cash they were owed, CBB Governor Rasheed Al Maraj told delegates at a seminar in Bahrain on the effects of the global economic crisis.

However, he emphasised that regulations already in place meant that the kingdom's banking system remained robust with no liquidity problems.

"Depositors are a special category of a bank's creditors for two main reasons," he said. "Bank deposits are the main form of savings for many people, especially the less wealthy."

"Bank deposits are also money, and the insolvency of a bank - especially a large one - can have serious economic side effects by sharply reducing the supply of money and credit to the economy."

"Because of their importance to both individual savers and to the wider economy, bank deposits are subject to a special form of protection in the event that a bank becomes insolvent. This protection is usually referred to as deposit insurance.

"In Bahrain, we have had a deposit insurance system for some years," said Al Maraj.

"Until now this has protected deposits up to a maximum of 75 per cent of BD15,000. It is what is known as an ex-post funded scheme, in that the required funds can be collected from the other banks only after a bank has already failed.

"This takes time, and it is important that depositors should be compensated promptly after their bank fails."

"Reflecting on the lessons of the financial crisis, and also the recent development of international best practice standards on deposit insurance, the CBB is in the process of finalising a new regulation on reform of the existing deposit protection arrangements," he added.

He said the purpose of all the measures the CBB had taken were to ensure that Bahrain's financial system remains sound, stable and able to provide the credit that the domestic economy needs.

"Sometimes these measures might lead to complaints from particular sectors or groups that their access to credit is being impeded, but as a central bank we need to take a broader view of the overall stability of the system," he said.

"It would be in no one's interest to allow banks in Bahrain to take excessive risks.

"A sound banking system is one in which firms are well-diversified, have many different revenue sources, and do not concentrate their risks in one particular economic sector. "This is one of the most important lessons we can draw from the financial crisis," Al Maraj added.-TradeArabia News Service