The Korea Deposit Insurance Corporation (KDIC) had decided to secure dollar asset such as U.S. Government Bonds equal to 10% of the entire depositor protection fund by 2027 to respond to increasing foreign-currency deposits, but as market uncertainty grew with a sharp rise in the exchange rate, it decided to delay the plan by one year.
According to the financial sector on the 3rd, the KDIC revised the depositor protection fund asset management guidelines at the Deposit Insurance Committee held on Feb. 29. It changed the overseas bond ratio, which it had originally planned to set at 10% by 2027, to 7.38% in 2027 and 9.79% in 2028. The KDIC holds a review by the Deposit Insurance Committee, the decision-making body for fund management and operations, on a yearly basis, and as volatility in the won-dollar exchange rate has recently increased, it changed its mid- to long-term strategic asset allocation plan.
As foreign-currency deposits protected by the government (foreign-currency covered deposits) increased, the KDIC decided in 2023, for the first time ever, to include dollar asset in the form of U.S. Government Bonds. Foreign-currency covered deposits at banks stood at 164.2 trillion won at the end of last year, up 21 trillion won from a year earlier.
Foreign-currency covered deposits had hovered around 140 trillion won last year, but as the exchange rate rose, they surged by more than 20 trillion won in the fourth quarter alone. The won-dollar exchange rate, which was in the 1,300-won range in midyear last year, topped 1,400 won on Sept. 21 last year and has recently climbed into the 1,500-won range.
When the exchange rate rises and foreign-currency deposit balances increase, the KDIC's guarantee burden also grows. Foreign-currency covered deposits are accumulated in foreign currencies such as dollar deposits at commercial banks, and because the KDIC must protect them in won terms, a rise in the exchange rate and an increase in balances double the KDIC's burden. Meanwhile, premium income is slow to immediately reflect the pace of foreign-currency deposit growth, which could widen the gap between guarantee obligations and funding.
Accordingly, the KDIC set a plan in May last year to include 10% of the depositor protection fund in dollar asset by 2027, but as the exchange rate rose rapidly from late last year, it was unable to purchase enough U.S. bonds.
Recently, demand for dollar deposits has paused. As the exchange rate climbed rapidly due to the Middle East war, more investors moved to take profits. At the end of last month, dollar deposits fell by about $6 billion (about 9 trillion won) from the previous month.