[Seungseop Song's Financial Light] Why Does the Korea Deposit Insurance Corporation Have a Special Account for Savings Banks?

Finance is difficult. It is filled with confusing terms and complex backstories intertwined. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, a foundation of financial knowledge is essential. Accordingly, Asia Economy selects one financial term each week and explains it in very simple language. Even those who know nothing about finance can immediately understand these ‘light’ stories that turn on the ‘light’ of financial insight.

[Asia Economy Reporter Song Seungseop] The Korea Deposit Insurance Corporation (KDIC) has a special account. It is called the ‘Savings Bank Special Account.’ The newly appointed President Kim Taehyun recently mentioned in his inaugural speech, “We must prepare in advance for the termination of the Savings Bank Special Account and the KDIC Bond Redemption Fund.” Why does the corporation responsible for deposit-related tasks have a Savings Bank Special Account?

The exact name of this special account is the ‘Mutual Savings Bank Restructuring Special Account.’ It was established in 2011. To understand its origin, you need to know about the 2011 Savings Bank Crisis. The Savings Bank Crisis refers to a series of events where 16 savings banks were consecutively suspended from operations and went bankrupt. Severe chaos ensued, including bank runs where depositors rushed to withdraw their money.

The KDIC dispatched personnel to savings banks and introduced a resolution method that avoided interruption of financial transactions to protect deposits and depositors. It was at this time that the special account was created. The account was established to smoothly raise large-scale funds necessary for restructuring. By 2020, a total of 31 insolvent savings banks had been resolved.

The Deposit Protection Act includes provisions regarding the special account. According to the regulations, the account funds were sourced from insurance premiums paid by financial companies, bond issuance, various borrowings, and recovered funds. Among these, the amount injected during the Savings Bank Crisis reached approximately 27.2 trillion KRW.

What happens to the money raised and supported through the special account? The KDIC directly recovers or repays it. This is to minimize losses that may occur in the special account due to the provision of funds. The recovery method varies depending on how the funds were provided. In the case of bridge savings banks that took over insolvent savings banks before contracts, funds are recovered by selling equity shares. If support was provided through deposit payouts or contributions, recovery is done by participating in the bankruptcy proceedings of the savings banks and receiving dividends.

The KDIC must repay borrowings and various funds based on the recovered funds from bankruptcy dividends or equity shares and the insurance premiums paid by financial companies. When the special account is abolished after its operational period ends, any remaining assets are paid into the national treasury up to the amount contributed by the government according to current law. The rest is transferred to other accounts within the KDIC.

Post-management of the special account is also one of the KDIC’s duties. This includes managing the bankruptcy estates of savings banks where funds were injected and holding related parties responsible for civil and criminal liabilities that caused insolvency. Efforts to maximize future recovery of support funds are also included.

According to the ‘2020 Mutual Savings Bank Restructuring Special Account Management White Paper’ published this March, the unrecovered amount of funds injected for restructuring during the insolvency crisis is 11.1 trillion KRW. This decreased by 1.2 trillion KRW from 12.3 trillion KRW at the end of 2019 to 11.1 trillion KRW at the end of last year. Since the establishment of the special account in 2011 until the end of last year, a total of 13.2 trillion KRW has been recovered. Considering the COVID-19 situation, the KDIC introduced non-face-to-face sales methods such as producing asset videos using drones.