Korea mulls raising deposit protection limit for first time in 23 years

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The South Korean government is discussing a plan to raise the country’s deposit protection limit that has been capped at 50 million won ($38,197) for 23 years, which is expected to face a setback from the financial players.

According to financial authorities and industry sources on Monday, the Korea Deposit Insurance Corp. (KDIC) held closed-door meetings with the Korea Federation of Banks, the Korea Federation of Savings Banks, the Korea Life Insurance Association, and the General Insurance Association of Korea last week and discussed raising the rate of deposit insurance premiums.

The meetings were held to examine interim reports and take questions on the results of a study commissioned by a joint public-private taskforce operated by the Financial Services Commission and the KDIC to overhaul the deposit protection scheme.

A deposit insurance premium refers to reserves collected by the KDIC from financial institutions to be set aside for any insolvency of a financial institution that cannot return deposits to customers.

Under the current depositor protection act, the deposit insurance premium rate is 0.08 percent of deposits for banks, 0.15 percent for securities and insurance companies, and 0.4 percent for savings banks. Premium income from the KDIC’s deposit insurance fund was 2.21 trillion won last year.

The report of the study is known to include changes in the premium rate under various scenarios, such as keeping the deposit protection limit unchanged or increasing it by 100 million won.

Politicians and depositors have been in favor of raising the deposit protection limit to 100 million won from 50 million won that has been in place since 2001.

The view has gained further ground as some overseas banks recently experienced bank runs triggered by incidents such as the collapse of Silicon Valley Bank (SVB). Some also call for the limit to be raised to 200 million won.

The financial sector, however, is uncomfortable with the limit rise.

Financial authorities also say that the impact on the market should be carefully examined, sources said, as the increased burden on financial institutions can be passed on the consumers.

The financial authorities and the KDIC will finalize the plan to improve the deposit protection scheme by August based on the report.

“Raising the limit can only be done by increasing the size of the deposit insurance fund, which is linked to raising the deposit premium,” said a financial authority official. “The final direction will be determined when the results of the taskforce review are reported to the National Assembly in September or October.”