The Korea Herald


[Editorial] Raise deposit insurance limits

Ruling and opposition parties favor hike in deposit insurance limits after SVB collapse

By Korea Herald

Published : March 23, 2023 - 05:31

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It is fairly rare for rival parties in South Korea to agree on any single policy. Quite surprisingly, politicians from both the ruling and opposition parties have put forth the same proposal: a hike of deposit insurance limits.

“South Korea needs a new deposit insurance limit suitable for its stature as a nation with expanding economic power,” Sung Il-jong, the top policymaker of the ruling People Power Party, said Tuesday.

Sung said Korea should reconsider the current deposit insurance limit given what happened to Silicon Valley Bank. The 16th-biggest bank in the US collapsed on March 10 following a failure to raise capital and a run on its deposits.

On Monday, 10 lawmakers of the People Power Party, led by Floor Leader Rep. Joo Ho-young, proposed a revision bill aimed at raising the deposit insurance limit from the current 50 million won ($38,200) to 100 million won.

Lee Jae-myung, leader of the main opposition Democratic Party of Korea, also made the same move Wednesday, pledging to increase the deposit insurance limit to 100 million won.

“The collapse of SVB is intensifying concerns on the market,” Lee said. “We will seek to introduce a system to fully protect deposits in case an emergency situation like the failure of SVB takes place.”

The unusual move by both parties came as the flameout of SVB reverberates around the world. The demise of SVB set off a chain of events that spooked depositors. New York-based Signature Bank shuttered on March 12 after its depositors had withdrawn billions of dollars following the collapse of SVB. And Zurich-based Credit Suisse, long dogged by concerns about its financial health and a slew of scandals, was sold to UBS on Sunday.

As the developments sent shocks through investors and regulators around the world, some raised the possibility of a full-blown banking crisis. The problem with SVB also highlighted the potential danger for Korean depositors, who could face losses if their funds go beyond the limit of the deposit insurance scheme.

Under the Depositor Protection Act, the Korea Deposit Insurance Corp. protects deposits up to 50 million won, principal and interest combined, per depositor, per financial institution. That was raised from 20 million won in January 2001.

Policymakers and experts alike point out that the limit has been fixed at 50 million won for 23 years, even as the country’s gross domestic product tripled during the period.

The country’s deposit insurance limit is far lower than other advanced countries. The US protects up to $250,000, while EU members offer a limit of around $110,000. Even Japan has its limit at around $93,000.

As both parties voice views in favor of a hike in the limit, financial regulators are expected to come up with specific measures. A task force in charge of reviewing the change in the limit was launched in March last year, and a formal policy proposal is set to be announced in August.

But there are a handful of issues before the limit will be raised. First, the insurance fees banks pay to the KDIC must be raised if the insurance limit for deposits goes up; a key reason that commercial banks are strongly opposed to an increase in the limit.

Another factor to consider is the limited benefit that an increase would bring about. According to data from the Financial Services Commission, 98.1 percent of bank customers held deposits of less than 50 million won as of September last year.

Critics say that commercial banks do not favor the increased limit mainly because they fear an outflow of deposits to second-tier savings banks offering higher interest rates. Separately, if more funds on the back of a higher deposit insurance limit are channeled to such savings banks with lower credit ratings, there could also be a problem of moral hazards for regulators to tackle.

Given heightened concerns of banks and depositors across the world, the Korean government should strengthen protective measures by raising the deposit insurance limit, while proactively taking steps to prevent possible side effects.