Raised depositor protection limit, good news for savings banks? Will the concentration of funds become a reality?
Protection limit increased from 50 million won to 100 million won
2. Interested in whether a ‘money move’ will occur in the financial sector
[더팩트ㅣ이선영 기자] As the depositor protection limit is scheduled to be raised from 50 million won to 100 million won for the first time in 24 years, interest inside and outside the financial sector is growing. There is also speculation that a ‘money move’ will occur in secondary financial institutions with high interest rates. However, the savings bank industry believes that the possibility of fund concentration is low. In a situation where the difference in deposit interest rates between savings banks and commercial banks is not large, the analysis is that there will not be a significant change, and there is a possibility that funds in mutual finance will temporarily flow to savings banks. The interpretation is that this is also temporary and there will be no major tectonic changes.
According to the financial sector on the 20th, the National Assembly will process a revision to the Depositor Protection Act to raise the depositor protection limit at the plenary session on the 28th. If the amendment is passed, the protection limit is expected to be raised starting in April next year, six months later.
The Depositor Protection System has been in operation since 2001 under which the Deposit Insurance Corporation pays deposits on behalf of financial companies when the financial company is unable to pay deposits due to business suspension or bankruptcy. The Korea Deposit Insurance Corporation normally collects insurance premiums (deposit insurance premiums) from financial companies, accumulates funds (deposit insurance fund), and then pays deposits (deposit insurance money) on behalf of the financial company when the financial company is unable to pay deposits. It is operated. Currently, only up to 50 million won per person, including principal and interest, is protected. When the amendment goes into effect, the limit will increase to 100 million won.
Meanwhile, there have been criticisms, both inside and outside the financial sector, that the protection limit is too low compared to major overseas countries. For example, the United States protects up to $250,000 (about 325.75 million won) per person, the United Kingdom protects up to 85,000 pounds (about 141 million won), and Japan protects up to 10 million yen (about 90.83 million won).
As the protection limit increases, there is also talk of the possibility that funds will flow to places with relatively higher deposit interest rates than first-tier financial institutions such as savings banks. Financial authorities also estimated that if the deposit protection limit is raised to 100 million won, savings bank deposits will increase by 16-25%.
Regarding the plan to raise the depositor protection limit to 100 million won at the ‘Forecast Year-End Press Conference’ on the 18th, Deposit Insurance Corporation President Yoo Jae-hoon said, “We will closely consult with the government to analyze the action plans or pros and cons of each alternative and implement the optimal plan.” It was also revealed that
President Yoo seemed to be aware of the possibility of a sudden money move in the banking and mutual savings bank industry, saying, “It seems that the skepticism about whether it is necessary to raise the limit to 100 million won or the concern that there will be negative effects has not been completely eliminated.” “We will explain in detail the (limit) 100 million won needed, what its significance is, and how the so-called side effects will be resolved,” he said.
However, the savings bank industry predicts that the possibility of a concentration of funds is low. As the difference in deposit interest rates between savings banks and commercial banks is not large, the analysis is that it is unlikely that existing commercial bank customers will flock to savings banks. In fact, the current difference in the highest interest rate for individual products between savings banks and commercial banks is only 0.2% points, so even if you move your deposit, you can only receive a small amount of additional interest.
Rather, there is a possibility that funds from mutual finance will temporarily flow into savings banks. The interpretation is that this is also temporary and there will be no major tectonic changes.
Among mutual financial institutions, Saemaul Geumgo is not subject to the Depositor Protection Act, but the Saemaul Geumgo Federation protects deposits in accordance with the Saemaul Geumgo Act. The central association protects up to 50 million won. Deposits of local agricultural and cooperative cooperatives and credit unions are also protected according to their own funds in accordance with relevant laws. Therefore, even if the depositor protection system is revised and the limit is raised, mutual financial institutions will not be affected. As the system changes, mutual financial institutions are also likely to raise their own protection limits, so funds flowing into savings banks may move to mutual financial institutions in the future.
An official in the savings bank industry said, “The difference in deposit interest rates between savings banks and commercial banks is not large, so it is unlikely that a major money move will occur. Even if the limit is raised by revising the depositor protection system, the mutual financial sector will not be affected, so the mutual financial sector will not be affected.” “There is a possibility that funds will temporarily flow into savings banks,” he said. “If mutual financial institutions also raise their own protection limits, there is a possibility that funds that would otherwise flow into savings banks will be divided among mutual financial institutions.”
Another savings bank industry official also said, “Currently, the difference in deposit interest rates between commercial banks and savings banks is not large, and the operating environment for savings banks has not fully recovered, so I think there is a possibility of an interest rate cut when the limit is raised.” “Since savings banks also account for a certain portion of large depositors, it is not expected that there will be a significant change in the money movement toward savings banks due to the increase in depositor protection limits,” he explained.
Among these, there are concerns about the burden of deposit insurance premiums (hereinafter referred to as forecast fees) in the savings bank industry. Forecast fees are funds that the Korea Deposit Insurance Corporation receives from financial companies to operate the deposit insurance system. Currently, the deposit rate for savings banks under the Depositor Protection Act is 0.4% of the deposit balance, which is overwhelmingly high compared to other industries. The forecast rate of commercial banks is around 0.08%. The reason savings bank forecast rates are high is connected to the ‘savings bank crisis’ in 2011. At the time, a large number of insolvent savings banks were being liquidated, resulting in large-scale restructuring costs, putting them under greater burden in preparation for risks in the financial sector.
According to the Financial Supervisory Service, the total forecast fees paid by 79 savings banks to the Korea Deposit Insurance Corporation last year amounted to 555 billion won, an increase of about 17.4% compared to the previous year.
If the protection limit increases, the burden of forecast fees for the additional protected amount also increases. Accordingly, if the forecast fee rises, consumers may also suffer damage. There is a possibility that financial institutions will take measures such as lowering deposit interest rates or raising loan interest rates.
A savings bank official said, “If the same forecast rate as the current rate is applied, it is likely to be a burden for savings banks.”
seonyeong@tf.co.kr
1. What are the possible implications of increasing the depositor protection limit from 50 million won to 100 million won on the banking and mutual savings bank industry, particularly in terms of potential fund concentration and changes in deposit interest rates?
2. Do you think the likelihood of a significant money move from first-tier financial institutions to savings banks is high, given the small difference in deposit interest rates? Why or why not?
3. How do you anticipate the effect of this policy change on mutual financial institutions, such as Saemaul Geumgo and credit unions, which are not directly affected by the Depositor Protection Act but may experience changes in their own protection limits in response?
4. Are there any concerns about the potential burden of increased deposit insurance premiums on savings banks as a result of this policy change, and how might this affect consumers and financial institutions?
5. How does the experience of the savings bank crisis in 2011 impact the current discussion around depositor protection limits and the associated financial risks?
