Different Dreams on Raising Deposit Protection Limit to 100 Million... "Should Apply Differently by Industry"

Different Levels of Default Risk Across Financial Sectors
“Uniform Application Is Unreasonable”
Growing Calls for Caution from Political Circles and Financial Authorities

Following the Silicon Valley Bank (SVB) bankruptcy incident, discussions around raising the domestic deposit insurance coverage limit to 100 million KRW have reignited. The intention is to prevent bank runs (massive withdrawals) in advance, but interests within the industry are sharply divided. Critics question whether it is appropriate to apply a uniform protection limit despite varying risks of insolvency across financial sectors. Consequently, there are calls to differentiate coverage limits by sector when determining the guarantee amount.

[Image source=Yonhap News]

Different Perspectives Within the Financial Sector

The savings bank industry generally welcomes the increase in the deposit insurance coverage limit. Raising the limit from the current 50 million KRW to 100 million KRW could lead to funds moving to savings banks, which offer higher deposit interest rates compared to commercial banks. Savings banks expect to expand their deposit base through this. According to a financial authority research report from last October, raising the limit to 100 million KRW could increase savings bank deposits by up to 40%. Additionally, the industry believes this could improve the negative perception consumers have toward savings banks.

Among small and medium-sized savings banks, concerns about an increase in deposit insurance premiums have emerged. If the deposit insurance limit rises, the Korea Deposit Insurance Corporation is likely to demand higher insurance premium rates. Currently, the deposit insurance premium rate for savings banks is 0.4%, five times higher than that of banks (0.08%), and there are already calls for a reduction. A representative from a small savings bank expressed concern, saying, “The worst-case scenario is that only the insurance premium rates increase while funds concentrate in large savings banks.” It is also possible that savings banks, feeling the burden of higher premiums, might raise loan interest rates and pass the cost onto consumers. The financial sector includes deposit insurance premiums in the loan interest rate’s risk premium component.

Among commercial banks, a negative sentiment is detected. Since the practical benefits of a 'money move' to savings banks are limited, they would only bear additional deposit insurance premium costs. Some question whether applying the 100 million KRW limit uniformly to savings banks and other sectors is appropriate. A banking sector official pointed out, “Even looking at financial bond yields, it is clear that the market perceives the default risk of each financial company very differently, so applying a uniform guarantee amount overlooks reality.” Since commercial banks have relatively lower default risks, raising the protection limit is not necessarily essential.

[Image source=Yonhap News]

Cautious Views Spread Among Authorities and Politicians

In the political arena, both ruling and opposition parties are united in pushing to raise the deposit insurance coverage limit. From February to March, a total of five related bills were proposed (by Democratic Party lawmakers Shin Young-dae, Kim Han-gyu, Yang Ki-dae, Kim Byung-wook, and People Power Party lawmaker Joo Ho-young). All propose raising the coverage limit to 100 million KRW with similar content. Among these, the bills by Shin Young-dae, Joo Ho-young, and Yang Ki-dae include provisions to apply differentiated protection limits by financial sector. A staff member from one lawmaker’s office explained, “The bill was proposed reflecting ongoing demands within the industry for differentiated application, and specific criteria will be discussed in the plenary session.”

However, cautious stances are spreading among the ruling party and financial authorities. On the 3rd, Park Dae-chul, the Policy Committee Chair of the People Power Party, told Asia Economy in a phone interview, “This is not an issue to be decided immediately with a yes or no.” He added, “We will make a judgment after comprehensively reviewing opinions from the financial industry and issues related to insurance premium rates.” Financial Services Commission Chairman Kim Ju-hyun also said on the 31st, “If the protection limit increases, deposit insurance premiums will also rise, and certain phenomena (such as consumer loan interest rate hikes) may occur. There are questions about whether this is appropriate at this time, so we are internally deliberating.”

Financial Services Commission Chairman Kim Ju-hyun is speaking at the Financial Holding Companies Chairmen Meeting held at the Press Center in Jung-gu, Seoul on the 31st. The meeting was attended by Financial Services Commission Chairman Kim Ju-hyun, Financial Supervisory Service Governor Lee Bok-hyun, Shinhan Financial Group Chairman Jin Ok-dong, Woori Financial Group Chairman Lim Jong-ryong, Hana Financial Group Chairman Ham Young-joo, NH Nonghyup Financial Group Chairman Lee Seok-jun, KB Financial Group Vice Chairman Yang Jong-hee, and Korea Federation of Banks Chairman Kim Kwang-soo. Photo by Yoon Dong-joo doso7@

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