Impact of the partial deposit insurance system

Once the ceiling of the partial deposit insurance system gets upward-adjusted to 50 million won, the impact on the market is expected to be alleviated. However, as the emphasis would be shifted to the types of business in the finance industry, banks and credit cooperatives would not suffer as much as mutual financing companies and merchant banks where capital flight is deemed inevitable. Credit cooperatives would not be significantly affected by the partial deposit insurance system as 97.4% of their depositors (92.6% of the amount) would be covered once the ceiling gets upward-adjusted to 50 million won. Moreover, as demand deposits such as temporary deposits and current deposits would be covered in full until 2002 for banks, it would most likely serve as a buffer.

An official of the Housing & Commercial Bank of Korea forecasted that most of the capital flight for individuals has already taken place in lieu of the implementation of the system and capital flight for corporate clients would not be easy because of their business relations with prime banks.

On the other hand, the merchant banking industry and the mutual financing industry would be greatly influenced by the partial deposit insurance system, as 96.5% of their deposits, which are mostly from corporate clients, exceed 50 million won and would not be covered by the system. Consequently, capital flight is expected to speed up even further.

An official of a merchant bank asserted that the partial deposit insurance system would accelerate the restructuring in merchant banks that remain unconverted even after many requests by the government.