South Korea’s financial authorities are expected to extend the current depositor protection to financial products with strong social security characteristics, such as pension savings. But despite discussions to double the depositor protection limit, it is likely to remain at the current 50 million won ($38,000).

On Thursday, a joint task force (TF) composed of government and private sector experts held its final meeting to discuss improvements to the country’s deposit protection system. The TF plans to gather further feedback from the financial industry and present its final proposal to the National Assembly in October.

In the financial industry, the prevalent view is that the government will opt to retain the current 50 million won limit. Significant changes to the deposit protection system, which the industry has anticipated for 23 years, are thus unlikely to materialize. This shift in sentiment stands in contrast to the momentum for increasing the protection limit that emerged following the SVB collapse in the United States earlier this year. The concern is that raising the protection limit could lead to a concentration of funds in savings banks and other second-tier financial institutions.

However, the Financial Services Commission (FSC) is pushing for a separate deposit protection limit for pension savings products, as previously proposed in its regulatory briefing for 2023. Currently, defined contribution (DC) and individual retirement pension plans (IRP) are subject to a protection limit of 50 million won, separate from general deposits held by depositors in the same financial institution. The FSC plans to extend this protection to pension savings, accident insurance funds, and SME retirement funds.

Authorities believe that applying separate limits for certain financial products can minimize the potential problems associated with fund concentration, moral hazards, and increased deposit insurance premiums, while also enhancing depositor protection.

Furthermore, as these financial products play a crucial role in providing social security benefits, such as post-retirement income and protection against physical and property damage, regulatory improvements are deemed necessary to enhance their utility for financial consumers. The FSC is expected to revise the Depositor Protection Act Enforcement Decree next month to incorporate these changes.

By Chae Jong-won and Minu Kim

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