BEIJING, Aug. 4 (Xinhua) -- Sheila C. Bair, chairman of Federal Deposit Insurance Corporation (FDIC), has encouraged China to set up a deposit insurance system to ensure the stable development of the country's banking system.

"Chinese banking industry is developing into the market-based banking system and this transition requires China to set up a deposit insurance system, which helps promote market discipline," Bair said during his recent China visit.

According to Bair, the market-based banking industry is a stable system that can protect depositors' money, and in particular, help strengthen the ability of smaller and medium sized as well as rural financial institutions to attract more deposit and funding.

China shall set up strong independent agencies, create additional supervisory tools to keep banks safe and sound, Bair said.

The deposit insurance system, which involves setting up deposit insurance institutions, aims to protect depositors against financial losses caused by bankruptcy of financial institutions through a risk compensation mechanism.

Bair met with Chinese financial and political leaders over the past two weeks, and stop in Beijing and Shanghai, and Hunan and Shanxi provinces.

Zhou Xiaochuan, governor of the People's Bank of China, and Bair signed a memo on strengthening cooperation in financial service and deposit insurance, promoting the sound operation of China's banking sector, and enhancing the exchanges of personnel and information.