The Korea Herald


[Editorial] Folly or posturing?

By 최남현

Published : July 29, 2011 - 19:27

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Savings banks’ depositors are protected by deposit insurance, not in full but in part, from losses caused by the inability of the non-banking institutions to pay their liabilities when they are due. Deposit insurance is designed to promote financial stability by protecting depositors and, by doing so, forestalling bank runs.

But the downside is the moral hazard it causes. It encourages depositors and banks to take greater risks than they would in its absence. To limit the moral hazard, deposit insurance provides depositors with partial, not full, protection. In Korea, payment of up to 50 million is guaranteed under the law on depositor protection.

But both the ruling Grand National Party and the opposition Democratic Party are proposing to the government to pay in full all deposits with savings banks that have turned insolvent. Are they engaging in an act of folly or simply posturing as patrons of the ill-fated depositors that demand full payment? Either day, they are deceiving the depositors because their demands cannot be met in any way.

On Wednesday, the Grand National Party proposed to the financial authorities to expand deposit insurance coverage by revising the law on depositor protection or enact a separate special law to make it possible to pay out more than 50 million won. It also proposed to create a special fund for depositors of Busan Savings Bank with its hidden assets when recovered and fines and penalties slapped on its managers and large shareholders.

None of the proposals, however, were acceptable, given the moral hazard they would cause. Nor is there any reason why deposits with savings banks, which are actually non-banking financial institutions, should be better protected than those with commercial and state-run banks. Moreover, their yields are greater than those offered by banking institutions.

The portions of deposits that are protected from losses total 8.8 trillion won, including 3.3 trillion won for those with Busan Savings Bank. But assets recoverable from Busan Savings Bank, however, are reportedly worth no more than 1 trillion won. The unprotected portions amount to 330 billion won.

Not to be outdone by the ruling party, the Democratic Party demands the government pay back the uncovered portions with taxpayers’ money in advance and make up for them when hidden assets are recovered. Such a demand is bad for financial stability, though it may be good for posturing ahead of the April general elections.