[Inside Chodong] Deposit Insurance Limit Needs to Be Raised After 20 Years

Deposit Insurance Limit Unchanged Despite Economic Growth and Inflation
Legislation Proposed After SVB Crisis Spurs Political Debate

Recently, the bankruptcy of Silicon Valley Bank (SVB) in the United States has revived fears of a financial crisis. This is because the 2008 Lehman Brothers incident already demonstrated how much impact the bankruptcy of financial companies can have. After the emergence of banking risks originating in the U.S., problems also arose in Europe. Credit Suisse (CS), ranked 45th in global bank assets, faced liquidity issues after significant accounting weaknesses were discovered and its largest shareholder was no longer able to provide financial support. Not stopping there, Germany's largest bank, Deutsche Bank, was also engulfed in crisis rumors as its credit default swap (CDS) premiums surged. As problems erupted one after another in banks across the U.S. and Europe, the term "Bankdemic" (bank + pandemic) emerged, meaning that banking risks are spreading like a pandemic.

Although concerns about banking risks have not been completely resolved, governments around the world have responded swiftly, gradually restoring stability. The U.S. government has guaranteed all deposits exceeding the deposit insurance limit for SVB and Signature Bank, which also went bankrupt afterward, and is currently discussing raising the deposit insurance limit, which stands at $250,000 (about 330 million KRW). As the U.S. government took measures such as full deposit guarantees to resolve the SVB crisis, interest in deposit insurance limits has increased domestically as well. The deposit insurance system is a scheme where the Deposit Insurance Corporation returns part or all of deposits to customers when financial companies cannot pay deposits or financial assets due to bankruptcy, based on the Deposit Insurance Act. South Korea introduced the deposit insurance system in 1996 with the establishment of the Deposit Insurance Corporation.

Currently, the maximum amount protected per person is 50 million KRW. This deposit insurance limit has not changed since it was raised from 20 million KRW in 2001, maintaining the same level for over 20 years. There have been many criticisms that changes in economic scale, inflation, and deposit sizes have not been reflected at all during this period. Compared to major countries, South Korea’s deposit insurance limit is significantly lower. According to the International Monetary Fund (IMF), the U.S. protects $250,000, the U.K. protects ?85,000 (about 135 million KRW), Germany protects €100,000 (about 140 million KRW), and Japan protects ?10 million (100 million KRW). Based on 2021 estimates, South Korea’s deposit insurance limit relative to per capita GDP is 1.25 times, while the U.S. is 3.6 times, and Japan and the U.K. are 2.3 times higher than South Korea. Since 2001, per capita GDP has increased about threefold, and the amount of insured deposits (deposits protected by the deposit insurance) has increased about fivefold. The amount of domestic deposits exceeding the deposit insurance limit is also on the rise, growing from 976 trillion KRW in 2018 to 1,504 trillion KRW last year.

Following the SVB incident, voices calling for an increase in the deposit insurance limit have grown louder in the political arena. This month, both ruling and opposition parties have proposed bills to raise the current 50 million KRW deposit insurance limit to 100 million KRW.

There are also negative views regarding raising the deposit insurance limit. Concerns exist that if the limit is raised, financial companies will have to pay higher deposit insurance premiums to the Deposit Insurance Corporation, and ultimately, this burden will be passed on to consumers. There are also criticisms that raising the limit benefits only high-net-worth individuals.

The fundamental reason for bank runs (massive deposit withdrawals) is distrust. Anxiety that deposits entrusted to banks may not be safe causes bank runs. Raising the deposit insurance limit can provide consumers with confidence that their deposits are sufficiently protected, so it seems necessary to discuss and decide on this matter promptly.