🚨 Deposit Protection Fund Includes Foreign Currency Assets: Strengthening the Financial Safety Net
Today Korean Economic News | 2025.05.20
📌 Korea Deposit Insurance Corporation to Convert 10% of Deposit Protection Fund to Dollar Assets by 2027
💬 The Korea Deposit Insurance Corporation has decided to convert 10% of its entire Deposit Protection Fund into dollar assets by 2027. This marks a significant change, as it's the first time in the 30-year history of the deposit insurance system that foreign currency assets will be included in the fund. The Corporation stated that this measure, aimed at responding to the increase in foreign currency deposits and exchange rate volatility, will strengthen the financial safety net. Additionally, to improve the fund's efficiency, they are also switching from bank deposits to high-quality bonds as the main investment method.
1️⃣ Easy Understanding
The Korea Deposit Insurance Corporation has decided to make a big change in how it manages the Deposit Protection Fund. Until now, they kept all money in Korean won, but soon they will hold some money in dollars.
The Korea Deposit Insurance Corporation has the job of returning money to depositors when a bank goes bankrupt. To do this, they collect insurance fees from financial companies and build up a "Deposit Protection Fund." Until now, this fund has been managed entirely in Korean won.
Recently, more Koreans have been saving money in dollars and other foreign currencies. Foreign currency deposits have more than doubled compared to five years ago, and exchange rates have become more volatile. If a financial crisis happens, foreign currency deposits would also need protection, but using only Korean won could be risky due to exchange rate changes.
Because of this, the Korea Deposit Insurance Corporation has decided to convert 10% of the total fund (about 5 trillion won) to dollar assets by 2027. This way, even if exchange rates jump suddenly, they can still safely protect foreign currency deposits. Holding foreign currency assets also helps reduce exchange rate risk.
Another important change is in how they manage the fund. Until now, they kept more than half of the fund in bank deposits, but now they plan to mainly invest in high-quality bonds. This approach will increase returns while still managing assets safely.
This decision is an effort to strengthen the deposit protection system in response to changes in the global financial environment. For ordinary citizens, it means that even if financial companies have problems, their deposits will be better protected.
2️⃣ Economic Terms
📕 Deposit Protection Fund
The Deposit Protection Fund is money set aside to protect depositors when financial companies go bankrupt.
- It's created from insurance fees paid by financial companies.
- It's managed by the Korea Deposit Insurance Corporation and protects deposits up to 50 million won per person when a financial company fails.
- The current fund size is about 50 trillion won.
📕 Foreign Currency Deposits
Foreign currency deposits are savings in currencies other than Korean won, such as US dollars, euros, or Japanese yen.
- Their value in Korean won changes with exchange rates.
- Foreign currency deposits in Korea are mainly in US dollars, and their amount keeps growing.
- Foreign currency deposits in Korea have more than doubled in the last five years.
📕 Exchange Rate Risk
Exchange rate risk is the potential financial loss that can occur due to changes in exchange rates.
- For example, if you hold dollar assets and the dollar's value falls, you experience a loss.
- Companies and financial institutions use various hedging strategies to manage exchange rate risk.
- Including foreign currency assets in the Deposit Protection Fund helps spread exchange rate risk.
📕 Financial Safety Net
A financial safety net refers to institutional measures that protect the financial system and depositors during a financial crisis.
- It includes deposit protection systems, central bank lender-of-last-resort functions, and financial supervision.
- A stronger financial safety net helps minimize the impact of financial crises.
- Financial safety nets worldwide were strengthened after the 2008 global financial crisis.
3️⃣ Principles and Economic Outlook
✅ The Role and Importance of the Deposit Insurance System
Let's look at what role the deposit insurance system plays in the financial system.
First, the deposit insurance system is a safety device that prevents financial panic. When a financial company faces bankruptcy, depositors might try to withdraw their money all at once, causing a "bank run." A bank run that starts at one bank can quickly spread to others, potentially leading to the collapse of the entire financial system. The deposit insurance system helps prevent bank runs by promising to protect deposits up to a certain amount even if a financial company fails, reducing depositors' anxiety. Korea avoided serious bank runs during the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis because of the deposit insurance system.
Second, the Deposit Protection Fund is the last line of defense for financial consumers. Regular citizens find it difficult to accurately assess the soundness of financial companies. Therefore, it's unreasonable to make ordinary depositors bear all losses when a financial company fails. Currently, Korea protects deposits up to 50 million won per person, which covers most household deposits. According to the Korea Deposit Insurance Corporation, about 95% of all depositors can be fully protected within this limit. This way, the deposit insurance system maintains trust in the financial system by protecting financial consumers, especially small depositors.
Third, the deposit insurance system also includes mechanisms to prevent moral hazard by financial companies. If the deposit insurance system covered all risks, financial companies might be tempted to take excessive risks. To prevent this, insurance premiums are charged differently depending on the risk level of financial companies, and the Korea Deposit Insurance Corporation monitors their financial condition and can demand corrective measures when necessary. It also quickly resolves failing financial companies to maintain the soundness of the financial system. These functions encourage financial companies to maintain sound management.
The deposit insurance system is a key institution for maintaining financial system stability. Its importance becomes even more apparent during financial crises. Therefore, it's necessary to continuously improve the deposit insurance system to match changes in the financial environment.
✅ The Meaning and Effects of Including Foreign Currency Assets
Let's examine what meaning and effects including foreign currency assets in the Deposit Protection Fund has.
First, including foreign currency assets is a safeguard against exchange rate fluctuation risks. Recently, uncertainty in global financial markets has increased, leading to greater exchange rate volatility. During financial crises, the Korean won typically plummets in value. During the 1997 Foreign Exchange Crisis, the won lost more than half its value against the dollar, and during the 2008 Global Financial Crisis, it fell by more than 30%. In such situations, more won would be needed to protect foreign currency deposits. By holding part of the Deposit Protection Fund in dollars, they can prepare for such exchange rate shocks. Foreign currency assets increase in value when the won weakens, helping preserve the fund's real value.
Second, this is a policy change that reflects the trend of increasing foreign currency deposits. Foreign currency deposits in Korea have grown rapidly since 2020, now reaching about 90 trillion won. This is more than double the amount from five years ago. Especially with global interest rate increases and the weakening won, personal dollar deposits have significantly increased. If the Deposit Protection Fund were managed only in won, it could have a structural vulnerability in protecting foreign currency deposits. Holding part of the fund in dollars increases its ability to respond to foreign currency deposit protection. Especially during financial crises, foreign currency liquidity is important, and by directly holding dollar assets, the Deposit Insurance Corporation can respond quickly.
Third, diversifying fund management improves both stability and returns. According to portfolio theory, investing in assets with different characteristics can reduce overall risk while maintaining returns. The won and dollar tend to move in opposite directions, so managing funds in both currencies increases portfolio stability. Additionally, dollar assets are considered safe in global markets and tend to maintain their value even during crises. The Korea Deposit Insurance Corporation expects this decision to simultaneously increase the efficiency and stability of fund management. Of course, initially, they plan to invest mainly in safe assets like US Treasury bonds.
Including foreign currency assets can be seen as a preemptive measure to respond to changes in the global financial environment. Through this, the effectiveness of the deposit protection system can be improved, and the financial safety net can be further strengthened.
✅ Background and Outlook on Switching to High-Quality Bond-Centered Management
Let's examine the background and outlook for the Deposit Protection Fund's shift from bank deposit-centered to high-quality bond-centered management.
First, improving fund management efficiency is the main purpose. Until now, the Deposit Protection Fund has managed more than 50% of its assets as bank deposits. This was a result of prioritizing safety, but the low interest rates limited returns. According to the Korea Deposit Insurance Corporation, the fund's average return over the past five years was 2.5%, which means the real return was very low considering inflation. In contrast, high-quality bonds like government bonds can provide higher returns while maintaining safety. This change in management approach is expected to increase the fund's return by about 0.5-1 percentage points, meaning additional annual returns of 250-500 billion won. As the fund grows larger, such return differences become even more important.
Second, this decision reflects the development of financial markets and advances in financial engineering. In the past, safe asset management options were limited, but recently, various financial products and risk management techniques have developed. The size and liquidity of the domestic bond market have also greatly increased, providing sufficient depth for managing large funds. Additionally, advances in financial engineering have made sophisticated management techniques like Asset-Liability Management (ALM) possible. The Korea Deposit Insurance Corporation is modernizing fund management to reflect these changes in the financial environment. They say they've especially upgraded their risk management systems and reinforced expert staff for more systematic asset management.
Third, this is an improvement in management approach that reflects global trends. Deposit insurance agencies in major countries like the United States, Japan, and Canada already manage their funds with bond-centered portfolios. The US Federal Deposit Insurance Corporation (FDIC) invests more than 80% of its assets in government bonds and high-quality corporate bonds, and the Japan Deposit Insurance Corporation manages more than 70% in bonds. These countries' deposit insurance funds maintain stability while recording higher returns than Korea. The International Association of Deposit Insurers (IADI) also provides guidelines for efficient fund management, and Korea's changes align with these international standards.
The shift in the Deposit Protection Fund's management approach can be considered a balanced approach that maintains safety while increasing efficiency. However, as the proportion of bond investments increases, the risk from interest rate fluctuations may also increase, making sophisticated risk management even more important.
4️⃣ In Conclusion
The Korea Deposit Insurance Corporation's decision includes two major changes: including foreign currency assets and switching to high-quality bond-centered management. This can be evaluated as a preemptive measure to strengthen the financial safety net in response to changes in the global financial environment.
In particular, including foreign currency assets reflects the reality of increasing foreign currency deposits and growing exchange rate volatility, contributing to improving the effectiveness of the deposit protection system. This establishes a foundation for safely protecting foreign currency deposits even in financial crisis situations where exchange rates surge.
Additionally, the shift to high-quality bond-centered management to improve fund efficiency will have the effect of strengthening the fund's soundness in the long term. Through higher returns, the fund can increase in size more quickly, ultimately leading to enhanced financial consumer protection capabilities.
However, for these changes to successfully take root, there are several tasks ahead. These include strengthening expertise in foreign currency asset management and bond investment, building sophisticated risk management systems, and establishing transparent management frameworks. Flexibility to continuously check and improve management strategies according to changes in the financial environment is also important.
From the perspective of ordinary citizens, this decision means their deposits will be more securely protected. Even if financial companies have problems, deposits, whether in foreign currency or Korean won, can be more certainly protected. Strengthening the financial safety net ultimately increases the stability and credibility of the entire financial system, which is a positive change for all economic actors.