The Korea Deposit Insurance Corporation (KDIC) is expected to be unable to recover and repay about 2 trillion won of the public funds of 27.2 trillion won that were injected to resolve the large-scale insolvency crisis of savings banks that occurred in 2011. The remaining liability of 2 trillion won will be repaid with insurance premiums that need to be used for deposit protection. This is more than 10% of the reserve fund amounting to 18.5 trillion won. A KDIC official noted, "Currently, we are not considering funding through sources other than deposit insurance premiums." If the deposit insurance premiums are used for repaying liabilities, the burden of deposit insurance premiums on savings banks will increase.
According to the KDIC on the 25th, the corporation injected 27.2 trillion won through a special account created to address the insolvency of savings banks and used that amount for insurance payouts to resolve 31 insolvent savings banks.
In this process, the KDIC recovered funds by selling acquired real estate assets and invested stocks. The KDIC also used 45% of the insurance premiums paid by insured financial institutions, including banks, insurance companies, and securities firms, to repay liabilities. Financial institutions are required to deposit part of their deposits with the KDIC to prepare for business suspension or bankruptcy. Since this funding was used for liability repayment, financial institutions had to pay more in deposit insurance premiums.
The funds recovered and repaid by the KDIC up until last year amount to 21.5 trillion won. Of this, the amount directly recovered by the KDIC is only 14.1 trillion won (recovery rate 51%). The remaining 7.4 trillion won was repaid with deposit insurance premiums and others. This means that part of the costs incurred from the savings banks' insolvency crisis was shared across the entire financial sector.
The KDIC must recover and repay the remaining liability of 5.7 trillion won by the end of 2026 when the special account expires. Last year's funds recovered and repaid were 1.5 trillion won. Unless there are significant changes in the next two years, the liability will remain at 2.7 trillion won.
The remaining liability must be repaid with deposit insurance premiums. According to current law, when the operation of the special account ends, it will transfer to the savings bank account. This means that the savings bank sector must repay 2.7 trillion won in deposit insurance premiums. The only option left for savings banks is to pay more in deposit insurance premiums than they do now.
The deposit insurance premium rate for the savings bank sector is 0.4%, which is higher than those of the mutual finance (0.2%) and banks (0.08%). Considering that the burden of deposit insurance premiums will increase with the rise in the deposit protection limit, the desired decrease in the deposit insurance premium rate for the savings bank sector seems distant.
The KDIC reported that it will repay the liabilities with deposit insurance premiums, but no specific plan has been established. There is also a possibility of repaying liabilities with deposit insurance premiums from banks, insurance, and securities sectors in addition to those from savings banks.
The burden of deposit insurance premiums is likely to be ultimately passed onto customers. In fact, some banks have previously raised loan interest rates to cover the costs of deposit insurance premiums. According to the results of a regular audit by the Board of Audit and Inspection targeting the Financial Supervisory Service (FSS) in 2022, some banks imposed 3.4 trillion won as interest on loan rates in the name of deposit insurance premiums over a five-year period starting in 2017. The FSS was found to have established 'standard loan interest rates' in 2012, the year after the savings bank crisis, recognizing deposit insurance premiums as a legal cost of loan add-on rates. The FSS improved the system following the Board of Audit and Inspection's observations.