[Q&A] '10% High Interest' Cooperative Finance Popularity... What About My Money in Emergencies?

Amid High-Interest Special Sales 'Open Run'... Growing Anxiety Over Mixed Financial Market Conditions

[Image source=Yonhap News]

[Asia Economy Reporters Yu Je-hoon and Bu Ae-ri] Kwon Ye-eun (34, female), who has lived in Seoul for seven years, recently woke up early to sign up for a credit cooperative's savings product offering a 10% annual interest rate, which had become a hot topic online, but ultimately failed. The sales limit of 35 billion KRW was exhausted in just six minutes. She said, "It felt like booking tickets for an idol concert," adding, "I understand deposits up to 50 million KRW are protected, so I think it's okay."

Park Jae-ik (36), a commuter living in the metropolitan area, recently opened a demand deposit account (parking account) at a mutual savings bank offering high interest rates, deposited 40 million KRW, and then redeposited it into a commercial bank account. This was because recent financial market trends reminded him of the 2011 'Savings Bank Crisis.' He said, "It's healthier than back then, and I know there is a deposit protection limit, but isn't there a risk of funds being locked up?"

With the onset of a full-fledged interest rate hike period, so-called 'interest rate nomads' are turning their attention to mutual financial institutions such as mutual savings banks, local agricultural and fisheries cooperatives, Saemaeul Geumgo, and credit cooperatives. As asset prices decline, financial consumers are increasingly interested in safe assets like deposits and savings, and these institutions are consecutively offering high-interest products that far exceed those of commercial banks.

However, recently, with frequent negative factors in the financial sector such as bond market tightening and concerns over real estate project financing (PF) defaults, more financial consumers are recalling the 2011 savings bank crisis that triggered a large-scale bank run. In response, we have summarized in a Q&A format how deposits entrusted to mutual financial institutions are handled in emergencies.

- How much can you receive if a savings bank goes bankrupt?

▲ According to the current Deposit Protection Act, in the event of bankruptcy of financial institutions (banks, securities firms, insurance companies, savings banks, etc.), insurance payouts are limited by a presidential decree considering factors such as the country's gross domestic product (GDP) and the scale of protected deposits. The insurance payout limit is 50 million KRW per person, including principal and interest. Here, the interest refers to the lower of the contracted interest rate with the savings bank or the interest rate determined by the Deposit Insurance Corporation based on the average interest rate of one-year fixed deposits at commercial banks. The political and financial authorities are currently reviewing raising the insurance payout limit, which has been set at 50 million KRW for 21 years since 2001.

- How long does it take to receive insurance payouts?

▲ It is difficult to explain uniformly. In cases where a third-party sale proceeds smoothly, allowing the bank to suspend operations after business hours on Friday, transfer contracts over the weekend, and resume operations on Monday without interruption, the time to receive insurance payouts is about 3 to 4 days, including the weekend. However, if a suitable acquirer is not found or liquidation occurs, it has taken as little as 2 to 3 months and as long as 6 to 12 months or more in past cases.

- What if urgent funds are needed?

▲ In such cases, the 'advance payment' system can be utilized. According to the current Deposit Protection Act, the Deposit Insurance Corporation can pay part of the depositor's claims in advance. The exact amount of insurance payouts available as advance payments is not specifically defined. The enforcement decree states that "the amount determined by the Deposit Insurance Committee can be paid in advance." A Deposit Insurance Corporation official said, "During the savings bank crisis starting in 2011, advance payments ranged from 10 million KRW, 15 million KRW, 30 million KRW, up to the limit of 50 million KRW," adding, "However, if you receive advance payments, you will not receive interest paid at the maturity of the deposit product, so careful consideration is needed."

- What happens to amounts exceeding the deposit protection limit?

▲ For uninsured deposits, partial compensation is made through bankruptcy dividends after the resolution process of the insolvent financial institution is completed. According to recent research based on the case of 87 insolvent savings bank bankruptcy estates during the savings bank crisis, the average dividend rate was about 55.45%, and the time required for the first and second dividend payments averaged 2.04 years and 3.49 years, respectively, from the date of business suspension.

- If large sums are locked up, could liquidity problems arise?

▲ For this reason, the Deposit Protection Act also stipulates the 'estimated payment' system. This is a system designed to alleviate liquidity difficulties faced by depositors holding uninsured deposits by paying part of the uninsured deposits in advance based on the expected recovery rate of the insolvent financial institution.

- Are my funds safe if entrusted to Nonghyup, Shinhan Credit Union, or Saemaeul Geumgo?

▲ Deposits entrusted to mutual financial institutions are also protected up to 50 million KRW, including principal and interest, just like commercial banks. However, unlike commercial banks where the Deposit Insurance Corporation pays, mutual financial institutions separately establish and operate deposit protection funds under individual laws. For example, in the case of Shinhan Credit Union, depositors are protected up to 50 million KRW by a fund created from premiums paid by each local credit union. Saemaeul Geumgo, Nonghyup, and Suhyup operate similarly. When the Deposit Insurance Corporation raised the deposit protection limit in 2001, mutual financial institutions also raised their protection limits accordingly.

- What is the size of the deposit insurance funds established by mutual financial institutions?

▲ Mutual financial institutions contribute a certain percentage of their asset size to the fund. The central association collects reserves from member organizations and operates the deposit protection fund. Nonghyup currently holds reserves of 4.9479 trillion KRW, Suhyup holds 512.2 billion KRW, Saemaeul Geumgo has 2.3 trillion KRW, and Shinhan Credit Union's reserves are about 1.8133 trillion KRW.

- What happens if the Saemaeul Geumgo, Shinhan Credit Union, or Nonghyup in my region disappears?

▲ Typically, Saemaeul Geumgo, Shinhan Credit Union, and Nonghyup operate independently by region like individual business entities but receive management from their central associations. If they disappear due to financial difficulties or operational issues, the central association usually undertakes mergers or transfers deposits to cooperatives in other regions, so the likelihood of a serious problem arising is low.

This content was produced with the assistance of AI translation services.