On May 16, 2025, the Financial Services Commission (the “FSC”) issued a legislative notice regarding the “Proposed Partial Amendment to the Presidential Decree of Six Laws[1] to Raise the Maximum Deposit Protection Amount” (collectively, the “Proposed Legislative Amendments”). The Proposed Legislative Amendments will raise the maximum deposit protection amount, which has remained unchanged for 24 years, from KRW 50 million to KRW 100 million. The Proposed Legislative Amendments are expected to have a significant impact on the financial industry, warranting careful examination of the regulators’ positions and their future actions.
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Increase of Maximum Deposit Protection Amount – Background and Development
During the 1997 financial crisis, all deposits were given full protection in Korea. However, since 2001, Korea has reverted to a partial protection regime, under which the maximum deposit protection amount has been set at KRW 50 million for all financial sub-sectors. This limit has not changed over the past 24 years.
While financial regulators have been cautious about raising the maximum deposit protection amount, the need to raise the ceiling has been steadily discussed and was revisited during the 22nd session of the National Assembly because of: (i) the significant growth of the Korean economy and deposit assets,[2] and (ii) Korea’s relatively weaker deposit protection regime compared to other major developed countries.[3]
As a result, the proposed amendment to the Depositor Protection Act was enacted early this year, stipulating that the maximum deposit protection amount will be set by Presidential Decree at KRW 100 million or higher (to take effect on a date to be determined by Presidential Decree but no later than one year from the date of promulgation of the aforementioned act, which is January 21, 2025). As a follow-up measure to this amendment, the Proposed Legislative Amendments were notified in advance to increase the maximum deposit protection amount to KRW 100 million, effective from September 1, 2025.
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Summary of Proposed Legislative Amendments
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A.
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Maximum Protection Amount
Once the Proposed Legislative Amendments take effect, the maximum deposit protection amount applicable to (i) financial companies whose deposits are protected by the Korea Deposit Insurance Corporation (e.g., banks and mutual savings banks), and (ii) mutual finance institutions whose individual central associations protect deposits (credit unions, agricultural cooperatives, fishery cooperatives, forestry cooperatives and new community finance associations) will be increased from the current KRW 50 million to KRW 100 million. In other words, if a financial company, a mutual finance association or a mutual savings and finance company is unable to pay out a deposit due to bankruptcy or similar incidents after the Proposed Legislative Amendments take effect, the depositor will be protected for up to KRW 100 million per financial institution.
Although there were initial discussions about setting different ceilings for each financial sub-sector, regulators ultimately decided to apply the same ceiling across all sub-sectors because it aligns with global standards, and also because setting different ceilings may cause confusion amongst consumers.
In addition, the maximum protection amount for retirement pensions (DC-type and IRP), pension savings and accident insurance, which are protected separately from general deposits, will also be increased from the current KRW 50 million to KRW 100 million.
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B.
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Effective Date
The Proposed Legislative Amendments provide that the amendments, including the amendment to the Enforcement Decree of the Depositor Protection Act, will become effective as of September 1, 2025.
Regulators chose the above mentioned effective date because the increase in the maximum deposit protection amount will likely have a significant impact on the financial market (e.g., causing deposits to move from banks to mutual savings banks or mutual finance institutions that offer higher interest rates, or causing banks to raise additional funding by issuing more bank bonds). By setting the effective date to September 1, 2025, financial companies (i) will be able to avoid drastic changes during the end or beginning of the year, when a large number of time deposits mature or terminate and when there is a higher volatility in the bond market, and (ii) will have more time to prepare for customer guidance and update deposit insurance notices.
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Impact of Increase in Maximum Deposit Protection Amount on Financial Industry
The increase in the maximum deposit protection amount is expected to have the following effects on the financial sector:
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Enhanced Protection and Greater Convenience for Depositors
With the maximum deposit protection amount rising to a level comparable to major countries overseas based on GDP per capita, depositors will have greater protection for their assets. Additionally, a depositor’s burden to spread his/her deposits across multiple financial companies (so the amount deposited at each financial institution stays within the maximum deposit protection amount) will be alleviated to some extent.
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B.
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Reallocation of Deposits for Higher Interest Rates and Stability
Depositors will likely reallocate their funds to financial companies that provide relatively higher interest rates and greater stability. In this process, some financial companies may face liquidity issues or financial soundness issues.
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Financial Stability Account to Support Liquidity and Financial Soundness of Financial Companies
To address potential liquidity and financial soundness problems that may arise after the Proposed Legislative Amendments come into effect, the FSC is expected to introduce a “financial stability account” within the Deposit Insurance Fund (managed by the by the Korea Deposit Insurance Corporation), which is currently under review by the National Policy Committee of the National Assembly.
A financial stability account is an account that provides preemptive financial support to a normal financial company facing liquidity issues or having difficulty raising capital. Instead of creating public funds to pay off the costs incurred to address financial distress arising from a financial crisis on an ex post facto basis, a financial stability account aims to provide financial assistance to financial companies before the financial distress arises, thereby resolving such issues early on and averting wider financial crises.
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Adjustment to Deposit Insurance Premium Rates
With the increase of the maximum deposit protection amount, deposit insurance premiums paid by financial companies are also expected to increase. However, given that the financial industry is already bearing the costs of resolving past financial distress,[4] the FSC is expected to adjust the deposit insurance premium rate starting from 2028. Financial companies should closely follow the FSC’s future position and guidance on this issue.
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[1] Six Laws: (i) “Enforcement Decree of the Depositor Protection Act,” (ii) “Enforcement Decree of the Credit Unions Act,”(iii) “Enforcement Decree of the Agricultural Cooperatives Structural Improvement Act,” (iv) “Enforcement Decree of the Fisheries Cooperatives Structural Improvement Act,” (v) “Enforcement Decree of the Forestry Cooperatives Improvement Act,” and (vi) “Enforcement Decree of the Community Credit Cooperatives Act.”
[2] Compared to 2001 figures, the GDP per capita has increased by about 3.1 fold, and deposits protected by deposit insurance have risen by about 5.6 fold.
[3] As of 2023, the maximum deposit protection amount relative to per capita GDP was 1.0 in Korea, 2.9 in the US, 2.1 in the UK and 2.0 in Japan.
[4] Until 2026, 45% of deposit insurance premiums will be paid to a special account for the restructuring of mutual savings banks for the repayment of public funds used during the mutual savings bank crisis. Until 2027, special contributions for the redemption of Deposit Insurance Fund Bonds issued to cover public funds used during the 1997 financial crisis will be paid.
[Korean Version]
