Deposit Insurance Limit to be Raised to 100 Million Won from Tomorrow... Watching for Fund Transfers to Second-Tier Financial Institutions

Quiet for Now... Possibility of Year-End Money Moves and Intense Interest Rate Competition as Deposits Mature

Bank Deposits (CG) [Provided by Yonhap News TV]

Ahead of the increase in the deposit insurance limit starting tomorrow, financial institutions are keenly observing the situation, as there have been no significant changes in deposit balances yet, but the approaching year-end, when many deposits mature, raises the possibility of intense interest rate competition to attract funds.

According to the financial sector on the 31st, from September 1st, depositors will be protected up to 100 million won for principal and interest in the event of payment difficulties due to the bankruptcy of financial companies, mutual finance cooperatives, or credit unions.

Principal-protected products such as savings and installment savings accounts are all covered, regardless of their subscription date.

Retirement pensions, pension savings, and accident insurance claims, which are protected separately from deposits, will also be covered up to 100 million won.

This marks the first increase in the deposit protection limit, from 50 million won per financial institution, in 24 years since 2001.

This is expected to increase the convenience for depositors who previously distributed their funds across different financial institutions with 50 million won each, and will serve as a stronger safety net during times of market instability.

Concerns have also been raised that an increased deposit insurance limit could lead to a significant outflow of funds to second-tier financial institutions, which offer higher interest rates than major commercial banks.

However, according to real-time monitoring of balances and trends in second-tier financial institutions since the financial authorities announced the increase in the deposit insurance limit, the feared fund concentration has not yet occurred.

As of the end of July, savings banks' deposit balances stood at 100.9 trillion won. While this is a slight increase since the announcement of the limit hike in May, it is a small figure compared to the end of last year (102.2 trillion won).

Deposit balances in mutual finance cooperatives, such as credit unions and agricultural and fisheries cooperatives, are also steadily increasing, but this is within the average growth rate. The total deposit balances of commercial banks, where fund outflows were a concern, have not deviated significantly from the average for the past five years.

Interest rate competition is also not yet visible.

This is attributed to the reduced incentive for financial companies to attract deposits, as they have limited avenues for fund management due to low interest rates, government loan regulations, and a worsening real estate market.

The average interest rate on one-year fixed deposits in mutual finance cooperatives, which offered rates above 3% at the end of last year, has continued to fall this year, dropping below 3% in July.

The average interest rate on one-year fixed deposits at savings banks in July was 3.02%, a slight increase from 2.98% in May. The industry views this as a measure by savings banks to secure liquidity in preparation for deposit maturities at the end of the year, rather than an aggressive interest rate competition to expand deposits.

Savings banks secured deposits at high interest rates during the Legoland crisis at the end of 2022, and the maturities of 3-year revolving deposits and other products subscribed to at that time are largely due in the year-end.

Bankbook [Provided by Yonhap News TV]

There remains a possibility of fund movements and interest rate competition as deposit maturities occur sequentially.

In the medium to long term, if the interest rate gap between first and second-tier financial institutions widens and consumer anxiety about second-tier institutions eases, funds could move to savings banks offering higher interest rates.

Within the savings bank industry, there is also a high possibility that deposits previously spread across various institutions could concentrate in large companies, potentially impacting smaller and medium-sized savings banks.

A representative from the savings bank industry stated, "Deposits that were previously distributed at 50 million won per institution to receive deposit insurance will now flow into one large savings bank, making it difficult for smaller and medium-sized savings banks."

An official from the Financial Supervisory Service said, "We are preparing in advance to provide financial support through the Korea Federation of Savings Banks and other channels if smaller and medium-sized savings banks encounter difficulties in raising deposits."

The increase in the deposit insurance limit could also be a variable in managing the soundness of mutual finance cooperatives, whose first-quarter performance was significantly weakened by the fallout from non-performing real estate project financing (PF) loans.

As mutual finance institutions previously hastily invested in high-risk products such as real estate PF loans in their search for expanded fund management opportunities, leading to recent defaults, financial authorities are wary of a situation where deposits flock to mutual finance institutions, causing them to expand their scale.

A representative from a mutual finance central cooperative said, "This year, it is difficult to manage both corporate and household loans, so there is not much incentive for individual cooperatives to attract deposits. We are managing fund situations through continuous interest rate guidance and monitoring." Yonhap News