Depositors Face Loss of Principal

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Depositors Face Loss of Principal

"What kind of sudden calamity is this? We placed our money in the bank's trust accounts believing that it would yield more interest than a savings account."

Many customers protested in this manner at the windows of the Korea Development Bank (KDB) on May 3, for they were about to loose part of their principal investment in the KDB Growth Fund No.4, a 'Unit Type Money Trust' product that expires this month.

Prior to this, another KDB financial product, which expired on April 21, also brought a loss to investors' principal. This occurence marked the first time that a financial product offered by a bank had incurred a loss of principal. Moreover, these types of losses are not confined to KDB. Many 'Unit Type Money Trust' products at other banks that are set to expire in May have already brought losses to the principal entrusted by customers to the bank.

Until now, customers were guaranteed not to lose their principal--even if the bank went out of business. Banks returned the principal investment even in the event of a loss.

However, last year the government decreed that banks must seperate their trust and savings accoounts from one another. In the past, if a bank suffered a loss in its trust accounts the bank would divert funds from the savings accounts of the individual to cover the loss.

The conventional idea that 'It is safe to entrust your money to a bank' is no longer accepted. However, customers are still questioning how this could happe--not at an investment trust company or a securities compan--but at a bank.

The loss in the principal of trust products mentioned above is just the beginning. Next year, customer deposits will be guranteed for only 20 million won in case of a bank failure. This implies that customers of poor financial institutions will no longer be protected by the law in case of a bank closing. Therefore, customers should keep in mind the basic principle that they should make investments wisely.

by Shin Yae-lee

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