US Bank Fails in 36 Hours... Will Deposit Insurance Limit Increase for the First Time in 23 Years?

Differences Between Ruling and Opposition Parties on Deposit Protection Limits
Careful Design Needed for Industry Differences and Limits

Amid growing calls to expand the deposit insurance limit, which has remained at 50 million won for 23 years following the bankruptcy of the U.S. Silicon Valley Bank (SVB), there are noticeable differences in the ruling and opposition parties' views on the necessity of legislation. Even if discussions on amendments begin, careful institutional review is required, considering the differing circumstances between the primary and secondary financial sectors and how far the protection limit should be extended.

According to political circles on the 16th, the case of SVB, which went bankrupt in just 36 hours due to a bank run linked to changes in the financial environment through smartphones, has highlighted the need to expand deposit insurance measures. Kim Jong-min, the Democratic Party's ranking member of the National Assembly's Financial Services Committee, told this publication, "There is a need to raise the deposit insurance limit," adding, "We must quickly start discussions."

[Image source=Reuters Yonhap News]

Currently, four bills proposing an increase in the deposit insurance limit have been submitted to the National Assembly (by Park Sung-joong of the People Power Party, Shin Young-dae of the Democratic Party, Hong Seok-joon of the People Power Party, and Cho Kyung-tae of the People Power Party). While the details vary?from calls for periodic adjustments to raising the limit above 100 million won?all share the common point that the current 50 million won limit should be significantly increased.

The Financial Services Committee's review report also mentions the need for legislation, noting that the 50 million won deposit insurance limit set in 2001 has been maintained for 23 years without reflecting increased income levels and other realities. In particular, it points out that, as of 2022, foreign countries provide deposit insurance amounts relative to GDP per capita that are much higher?2.3 times in the UK and Japan, and 3.3 times in the U.S.?while the domestic standard is only 1.2 times.

Kim Byung-wook, senior deputy chairman of the Democratic Party's Policy Committee, referred to the SVB incident at a party strategy meeting on the 14th, stating, "A 'super-fast digital bank run' could very well happen in South Korea. Such a rapid digital bank run does not allow financial authorities time to intervene, causing banks to fail within a day or two." He argued, "To alleviate financial consumers' anxiety, reflect recent inflation, and allow people to conduct banking with peace of mind, it is necessary to raise the deposit insurance amount from 50 million won to about 100 million won."

The ruling party has taken a cautious stance on amending the Deposit Protection Act, fearing it could stir financial market instability. Yoon Han-hong, the People Power Party's ranking member of the Financial Services Committee, told this publication, "We are watching the government's stance on expanding the deposit insurance limit," adding, "The government believes the domestic impact of the SVB incident is not significant, so there is no reason to create anxiety in advance when there is no effect on the domestic financial sector."

However, some within the ruling party have voiced the need for a swift increase in the deposit insurance limit. Kim Hee-gon, a People Power Party member of the Financial Services Committee, cited data on insured deposits and net excess deposits submitted by the Korea Deposit Insurance Corporation (KDIC), stating, "The proportion of deposits exceeding the 50 million won protection limit under the Deposit Protection Act increased from 61.8% (724.3 trillion won) in 2017 to 65.7% (1,152.7 trillion won) as of June 2022." He added, "To reduce financial consumers' anxiety, discussions on expanding the deposit insurance limit and other practical improvements to deposit protection are necessary."

The key issue is that raising the deposit insurance limit would require the Deposit Insurance Corporation to guarantee additional payments, leading to increased insurance premium burdens. These additional burdens may vary across financial sectors. Kim Jong-min said, "If the deposit insurance limit is raised, the effectiveness would be greater in the secondary financial sector than in the primary financial sector," but he also noted, "The problem is that mutual finance sectors may not have the capacity to bear the increased premiums, which could cause polarization." If the currently uniform deposit insurance limit is applied differently by sector, there is a risk that funds could massively move from secondary financial sectors like mutual finance to primary financial sector banks.

The scale of the deposit insurance limit also needs to be reviewed. Kim Ki-sik, director of The Future Institute, said, "Since the standard has been in place for 20 years, revision can be considered, but the average deposit size should be examined when considering raising the limit." He added, "Insurance premium rates will rise, and these costs will be passed on to depositors. There is no reason to increase premiums for high-net-worth individuals. Whether the deposit insurance limit remains at the current level, 70 million won, or 100 million won should be reviewed based on the scale of deposits covered by protection."

Meanwhile, financial authorities and the KDIC plan to compile opinions through a task force (TF) discussing improvements to the deposit insurance system and submit proposals to the National Assembly before August. The proposals are expected to include plans to improve the scale of deposit insurance and the premium rate system paid by each company.

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