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FSC to raise deposit insurance limit, stick to lending rule rollout

Published: 07 May. 2025, 18:32 Updated: 07 May. 2025, 20:27

Financial Services Commission Chairman Kim Byung-hwan speaks during a press briefing at the Seoul Government Complex in Jongno District, central Seoul, on May 7. [YONHAP]

Korea plans to raise its deposit insurance limit to 100 million won ($72,000) from the current 50 million won starting in September, according to Financial Services Commission (FSC) Chairman Kim Byung-hwan on Wednesday. The move marks the first increase in 24 years and aims to bring Korea’s protection level in line with global standards.

Kim also confirmed that the third phase of the stricter debt service ratio (DSR) rules will go into effect as scheduled in July, despite the upcoming presidential election in June.

“Even with the political calendar, some decisions must be made in May,” Kim said during a press briefing Wednesday. “Consistency in household debt policy is especially critical, so we’ll announce the implementation plan for the third-stage stress DSR later this month.”

Deposit protection to match global norms

The FSC has been holding a series of task force meetings with relevant agencies and is targeting Sept. 1 for the implementation of the new deposit insurance cap.

The increase will apply across the financial sector, including mutual financial institutions such as credit unions and agricultural cooperatives, through amendments to respective laws.

The FSC will defer discussions on whether to raise deposit insurance premiums, which banks pay to sustain the system, until after the cap is raised.

Korea’s deposit insurance system guarantees a portion of deposits in case of bank failure. The current limit has remained unchanged since 2001. At 50 million won, it covers only 1.2 times the country’s per capita GDP, far below the United States’ 3.1-fold, Britain’s 2.2-fold and Japan’s 2.1-fold.

The increased ceiling is expected to bring Korea closer to advanced economies in terms of depositor protection.

The policy change is also expected to ease longstanding limitations faced by cautious depositors. In the past, even when savings banks offered higher interest rates, many individuals kept their deposits below 50 million won to stay within the insured limit due to concerns over potential bankruptcies.

Pedestrians pass by ATM machines for Korea's major banks in Seoul on May 5. [YONHAP]

Concerns over interest rates

Some experts caution that the higher limit could drive more funds into second-tier financial institutions, such as savings banks, where interest rates are higher.

A government-commissioned study estimates deposits at savings banks could rise by 16 to 25 percent following the cap increase.

However, this influx might reduce the interest rates offered.

“We seek deposits to fund loans, but demand for loans is currently weak,” said a savings bank official. “If deposits increase due to the higher protection limit, we won’t have much reason to offer high rates.”

Stricter lending rules with regional variations

The third phase of the stress DSR rules will begin in July, with distinctions between the greater Seoul area and noncapital regions. Stress DSR calculates borrowing limits by factoring in higher assumed interest rates, even though actual loan rates remain unchanged. This effectively tightens borrowing capacity.

“We will strengthen regulation across the board, but apply different speeds in different regions,” Kim said, explaining that housing market dynamics vary between capital and noncapital areas.

Currently, the stress interest rate is 1.2 percentage points in Seoul and 0.75 percentage points elsewhere. The new plan could raise Seoul’s rate to 1.5 percentage points while keeping the level in other areas lower.

Specific figures will be finalized and released later this month after a further housing market analysis.

Financial Services Commission Chairman Kim Byung-hwan speaks during a press briefing at the Seoul Government Complex in Jongno District, central Seoul, on May 7. [YONHAP]

MG Insurance fallout and interagency tensions

On the unresolved sale of MG Non-Life Insurance, Kim said the government is exploring all possible options to protect policyholders and maintain market stability.

“Establishing a bridge insurer is one of the options on the table,” he said. “We aim to alleviate policyholders’ concerns and could announce a resolution within the month if a consensus is reached.”

Kim also addressed recent friction with Financial Supervisory Service Gov. Lee Bok-hyun, particularly over proposed revisions to corporate law.

“I had plenty to say, but felt strongly that the financial authorities should not be part of the political noise, especially when many ministries are operating under interim leadership,” he said. “The FSC continues to show leadership as an organization. If it seemed I worsened the situation, I take responsibility for that as the head of the agency.”

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY JEONG JIN-HO [[email protected]]