[이용우의 공정경제] A uniform increase in the deposit protection limit to 100 million won? Financial market stability must not be harmed

<img alt="Lee Yong-woo, former National Assembly member” height=”640″ id=”imgs_2586277″ photo_no=”2586277″ src=”https://image.ajunews.com/content/image/2024/10/21/20241021100735646770.jpg” width=”640″/>

[이용우 전 국회의원]

A dark shadow is casting over our economy. Last June, the Bank of Korea’s financial stability report said that the country’s financial stability situation was relatively stable, but “in the short term, external factors such as the accumulation of debt repayment burden in vulnerable sectors, concerns about real estate PF insolvency, decline in asset soundness of financial institutions, and monetary policy stance of major countries, etc. “Risk factors such as increased uncertainty related to conditions are continuing,” he said, adding, “In the mid- to long-term, with private credit leverage still at a high level, there is a risk that financial vulnerabilities will increase in the future, such as the resumption of household debt accumulation.” Looking at recently announced indicators, we can see that in addition to high household debt, the bad and delinquency rates of real estate PF loans, and the repayment ability of small and medium-sized businesses are weakening, and that reflecting this, the management indicators of securities companies, savings banks, and mutual financial institutions are worsening. there is. The financial authorities gave the Bank of Korea’s signature that it was necessary to lower the base interest rate, and the Bank of Korea also reduced the base interest rate from 3.5% to 3.25%. However, the Bank of Korea is showing differences of opinion with the government due to increasing anxiety factors such as rising real estate prices.

The goal of financial stability policy is to prepare in advance for risk factors that may become visible in the future and minimize their impact. This goal belongs to the Bank of Korea and the financial supervisory authorities. Two years ago, when Silicon Valley Bank (SVB) faced a crisis, the U.S. government increased the deposit protection limit to prevent a bank run, leading to calls for increasing Korea’s limit from the current 50 million won to 100 million won. It has been done. The amendment to the Deposit Insurance Corporation Act was also discussed in the 21st National Assembly to 1) increase the insurance limit to 100 million won and 2) establish a financial stabilization account to respond to crises.

[보호한도 변경 연혁]

First, let’s look at raising the deposit protection limit to 100 million won. Banks essentially have a maturity conversion function by accepting short-term deposits from depositors and lending funds to borrowers’ mid- to long-term businesses. If many depositors attempt to withdraw funds at the same time, the bank cannot respond to their payment requests and will inevitably fall into a state of insolvency. Guaranteing payment of a certain amount of deposits can reduce banking instability. This was pointed out in a 1982 paper by professors Douglas Diamond and Philip Dibwig, who won the 2022 Nobel Prize in Economics. Ben Bernanke, who received the same award with the two professors, analyzed the Great Depression of the 1930s and concluded that bank failures or insolvencies accelerated the economic downturn, so bank failures should be prevented and fund intermediation should be facilitated to prevent the financial crisis from spreading to the real world. In this sense, the deposit protection system has important implications for financial stability.

According to the Deposit Insurance Corporation, as of the end of September 2023, the ratio of protected depositors in the banking sector is 97.8% with a protection limit of 50 million won. This means that currently, only 2 to 3 out of 100 depositors have more than 50 million won. If the protection limit is raised, the benefits will be enjoyed by a small number (2.2% of depositors), but the burden of increasing the deposit insurance premium rate for financial companies may be passed on to all consumers.

Uniformly raising the deposit protection limit to 100 million won may result in harming the financial stability that this system aims for. Since deposit protection is provided at each financial institution, high-net-worth individuals have an incentive to receive protection by dividing their deposits by 50 million won each and depositing them at various financial institutions. In general, savings banks offer deposit interest rates that are slightly higher than commercial banks, for example, about 0.5 percentage points higher. This means that savings bank deposits are decided without regard to their management or asset soundness. Banks and savings banks are entities that make profits by managing deposits through loans. Because savings banks offer higher deposit interest rates than banks, they must provide loans at a higher interest rate than banks in their credit operations. This means that savings banks have lower credit ratings or higher risk transactions than banks. This is why savings banks and mutual finance companies provide loans with a focus on the construction and real estate industries. This is why the delinquency rate has risen due to the recent real estate recession and concerns about real estate project financing (PF) insolvency, which is pointed out as a factor hindering financial stability. The cause of the savings bank crisis, which started at Busan Savings Bank in 2011 and expanded into a bank run of 16 savings banks, was the expansion of risky PF loans based on deposits secured by easily offering high interest rates. To deal with this, Korea’s deposit ‘insurance’ fund deviated from the traditional deposit insurance system. Deposit insurance is also a type of insurance, so it has a structure that charges insurance premiums based on the accident rate and uses regional accounts as insurance money to deal with accidents. Due to the savings bank incident in 2011, a special account was created and managed using forecast fees from banks and other financial sectors. Although 27 trillion won of public funds were invested, 14 trillion won was withdrawn as of 2024, and savings bank accounts are still in deficit. It is clear that the government’s plan to normalize this by 2026 will not be achieved.

[예금보험기금 체계]

So what are the ways to normalize the function of deposit insurance and contribute to financial stability? Deposit protection works based on insurance principles, so you just have to let that principle work. Insurance premium rates are applied according to the accident rate of each financial sector. Since the accident rate of savings banks is high, the insurance premiums should be increased or the insurance coverage amount should be reduced. It is a basic prescription to prevent moral hazard. Each financial sector must be able to respond to risks by considering its own risk tolerance and deposit costs. If other regions take on the risk as they do now, it will result in undermining financial stability. According to the Bank of Korea, as of the end of the third quarter of last year, construction and real estate-related loans at savings banks accounted for 50% of the entire industry. Savings banks’ real estate PF delinquency rate, which was around 1% in 2021, rose to 5.56% as of the end of the third quarter of last year. This is classic moral hazard. This is one of the reasons why the supervisory authorities recently began inspecting insolvent savings banks for restructuring. Increasing the deposit protection limit without resolving this problem would shake the foundation of the forecasting system. A paradox arises where the deposit protection system introduced for financial stability harms financial stability. This is why advanced countries such as the United States have different deposit protection limits and different insurance premium rates for each region. The mutual savings bank industry argues that the accident rate is a thing of the past and that it is not appropriate for current savings banks to bear the burden, but this ignores the basic principle that insurance originally sets insurance premiums by reflecting the past accident rate.

[22대 국회 발의 예금자보호법 개정안]

Now let’s look at the introduction of the financial stability account. Financial stability is the most basic goal of monetary policy and financial supervision policy. After experiencing the subprime crisis in 2008, Paragraph 2 was newly established in Article 1 of the Bank of Korea Act, giving the Bank of Korea the responsibility of financial stability in addition to price stability, and the Korea Deposit Insurance Corporation (Yebo) was also responsible for the stability of the financial system in accordance with Article 1 of the Depositor Protection Act. This is why maintenance responsibilities were given. Under current law, the Bank of Korea has the function of supporting financial institutions facing a liquidity crisis. If a crisis has not yet been reached but there are concerns that it may, it may be necessary to take proactive measures. The existing forecast’s financial support is limited to insolvent (concern) financial institutions, but financial support through the financial stability account is provided to financial institutions that are not insolvent but have the potential to become insolvent. The Financial Services Commission can take action as long as it is recognized that “liquidity is tight or capital expansion is necessary.” The problem is who will make that judgment and who will be responsible for it. The Financial Stability Account is a benchmark of the debt guarantee program of the Dodd-Frank Act, which was established due to the subprime crisis, and is stipulated in Article 1105 of the Dodd-Frank Act. To apply this debt guarantee program, the Secretary of the Treasury must first order the Federal Deposit Insurance Corporation and the Federal Reserve to determine whether a liquidity crisis sufficient to warrant mobilizing this program under current conditions exists, and then the boards of both organizations must vote with a two-thirds vote each. The resolution must be made in writing that there is a liquidity crisis. In this case, the debt guarantee program can be used, but it cannot be used to expand capital, and borrowing from the deposit insurance fund is prohibited. The Minister of Finance sets the upper limit of debt guarantees in consultation with the President. All such decisions are notified to the U.S. Congress. The core of this measure is that there is governance (public-private cooperation, cooperation) to check the decisions of financial authorities from the Ministry of Finance and Congress. In contrast, this is unclear in Korea. Here, the ‘West Annex Meeting’ during the sale of Lone Star by Korea Exchange Bank comes to mind. This is an example of a decision made by administrative officials at a meeting in a separate room without any legal basis. Consultation between economic ministries is necessary, but governance must be made clear by examining what the basis is, what data the decision is based on, and how much of the people’s tax money is invested in it. In particular, the financial sector that is likely to become a problem in the future will be Saemaeul Geumgo, which is not supervised by the Financial Services Commission, but there is a problem in which the role of the Bank of Korea, which is responsible for providing liquidity support, is not revealed. The author pointed this out at the 21st National Assembly, and the Bank of Korea signed a memorandum of understanding on sharing financial information of non-bank financial institutions (October 30, 2023) to expand information sharing related to savings banks, credit unions, agricultural cooperatives, fisheries cooperatives, and forest cooperatives. and mutual agreement to strengthen monitoring functions for policy coordination, and procedures and monitoring for prior judgment were strengthened.

The financial stabilization mechanism needs to be overhauled. It is better to prepare in advance before a crisis. Governance reform, such as creating an organization tentatively named the Financial Stability Council composed of the Minister of Strategy and Finance, the President of Korea Meteorological Administration, the Governor of the Bank of Korea, heads of financial supervisory organizations, and private experts, to discuss crisis judgment and response methods and clarify responsibilities, must be preceded. Do it. The president’s responsibility and the National Assembly’s oversight must also be made clear. The Financial Stability Fund, which is equally stipulated in the Financial Industry Act, must be integrated into the Financial Stability Account.

In the process of overcoming the subprime crisis, then-Federal Reserve Chairman Ben Bernanke used quantitative easing and support policies for financial companies based on his research results showing that when banks fail during a financial crisis, a funding crunch occurs, which rapidly spreads to the real economy and further aggravates the crisis. As a result, the parties who caused the financial crisis suffered no damage and enjoyed high salaries and performance bonuses upon recovery from the crisis, while the real economy suffered job losses and income damage. This is because although the Dodd-Frank Act had a governance structure such as the President, the Treasury, and the Federal Reserve, it did not extend to Congressional control and responsibility for the investment of public taxes. If we do not pay attention to this aspect, finance can become an uncontrolled sanctuary for some experts and cause social inequality and conflict, such as the ‘Occupy Wall Street’ movement.

Unpredictable economic uncertainty and resulting financial instability cause great suffering to the economic lives of all citizens. Our people suffered a lot during the IMF crisis. Therefore, it is essential to create and prepare systems in advance for financial stability. Increasing the deposit protection ceiling and establishing a financial stability account are also issues worthy of consideration. However, because uniformly raising the deposit protection upper limit can cause moral hazard and harm financial stability, complementary measures, including differentiating insurance rates and coverage limits, must be established. The financial stability account is necessary, but it is necessary to clarify the governance device that determines where public funds will be invested and establish a control device by the National Assembly.

Author Lee Yong-woo’s main history

▷Ph.D. in Economics from Seoul National University ▷Member of the 21st National Assembly ▷Co-CEO of Kakao Bank ▷Chief Investment Officer of Korea Investment Trust Management