Gov¡¯t sets deposit insurance ceiling at 50 mil. won; to launch new system next Jan.

The government Tuesday raised the ceiling of the partial deposit insurance scheme to 50 million won ($44,000) per depositor from the originally planned 20 million won. The government and the ruling party agreed to implement the new formula aimed at protecting depositors in case their banks collapse. In an exception, the government will keep non-interest bearing checking accounts fully insured for three years until 2003.

The partial deposit insurance plan was confirmed during a policy coordination meeting between the Ministry of Finance and Economy and the Millennium Democratic Party, Tuesday.

Finance-Economy Minister Jin Nyum said that the government and the ruling party reached a final agreement to implement the system beginning next January in order to prevent the moral hazard of financial institutions and to secure credibility for investors at home and abroad.

He said that to minimize the uneasiness of the financial market, the government decided to sharply raise the limit of the maximum amount to be covered under the system and to work out supplementary devices to guarantee the entire amount of some checking account deposits.

But Minister Jin said the government is not currently considering a plan to lower the ceiling that has been raised to 50 million won.

The government and the ruling party also decided to form a task force comprising officials from the Ministry of Finance and Economy, the Financial Supervisory Commission, the Bank of Korea and the Korea Deposit Insurance Corp. to deal with any problems that may arise from the implementation of the plan and to prepare necessary measures.

They further agreed to grant loans to financial institutions which suffer temporary money troubles when the scheme takes off and to seek ways to increase the upper limit of loans, if necessary.

A ministry official said the upward adjustment of the ceiling to 50 million won would protect most individual deposits and would lessen the uneasiness in the financial market.

But some experts claim that despite the raise in the ceiling, there is a high possibility that the system may bring about instability in the financial market by making the rich banks richer and poor ones poorer due to the massive exodus of deposits from unhealthy banks to sound ones.

The Cabinet is expected to approve an amendment to the enforcement decree of the Depositor Protection Law in its Oct. 24 session, at the earliest, to put the scheme into effect from next January.