Report on the Impact of Raising the Deposit Insurance Limit on the Financial Sector
With the deposit insurance limit set to increase from 50 million won to 100 million won starting in September, there are projections that a "money move" from banks to savings banks will occur in the mid- to long-term. For the banking sector, concerns have been raised regarding the risks of capital outflows and rising funding costs, while for the savings bank sector, worries center on the concentration of funds in large institutions and a potential decline in profitability.
On August 5, NICE Credit Rating published a report titled "The Impact of Raising the Deposit Insurance Limit on the Financial Sector," stating, "There is a possibility that the increase in the deposit insurance limit will trigger a redistribution of funds (money move) not only between different financial sectors but also within the same sector. It is expected to have a significant impact on the competitive landscape among financial institutions going forward." Previously, in June 2024, the financial authorities amended the Depositor Protection Act and decided to raise the protection limit to 100 million won starting in September.
The report first noted, "In the short term, the increase in the deposit insurance limit is unlikely to trigger a large-scale movement of funds between banks and savings banks," and added, "Since 2024, the average monthly interest rate difference for time deposits between banks and savings banks has been only about 0.21 percentage points, which does not provide a strong enough incentive for depositors to move their funds."
However, the report projected that, as the interest rate gap between sectors widens in the future, there will be a movement of funds from banks to savings banks in the mid- to long-term. The report explained, "This is because raising the deposit insurance limit alleviates psychological anxiety among consumers, thereby increasing their preference for savings banks that offer higher interest rates." The financial authorities also presented an analysis indicating that, if the protection limit is raised to 100 million won, deposits in savings banks could increase by 16% to 25%.
The possibility of a money move within the same sector was also raised. The report noted, "Within the savings bank sector, this could lead to a polarization of deposit bases," and explained, "As the need for depositors to disperse their deposits is reduced, funds are likely to be concentrated in top-tier savings banks with advantages in financial stability, brand recognition, and digital accessibility."
Regarding the impact on each sector, the report diagnosed, "For the banking sector, the short-term impact is limited, but in the mid- to long-term, there are risks of capital outflows and rising funding costs." It continued, "For the savings bank sector, the concentration of funds in large institutions is expected to intensify," and analyzed, "There are concerns about declining asset management efficiency and worsening profitability due to increased deposit insurance premiums." In particular, it explained that small and medium-sized savings banks are likely to rely on high-interest policies to attract deposits, which could increase funding cost burdens regardless of their asset management capabilities. In this case, apart from securing short-term liquidity, it could lead to a reduction in margins and a decline in the capital adequacy ratio in the mid- to long-term.
The report concluded, "Ultimately, the expansion of the deposit insurance limit will serve as an opportunity to further differentiate the impact of each financial institution's management capabilities on their credit ratings," and emphasized, "Going forward, the direction of credit ratings will be determined not simply by whether funds are flowing in, but by whether the incoming funds can be established as a stable funding base and lead to a virtuous cycle of operational efficiency and profitability."
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