‘KDIC to Ramp Up Function of Protecting Depositors’

Chairman Yoo Jae-hoon of Korea Deposit Insurance Corp. (KDIC) stressed efforts to ramp up intrinsic functions related to a deposit insurance scheme and expand financial products whose depositors are protected.

Financial companies should pay attention to protecting financial consumers even though they are not in a situation of bankruptcy. KDIC Chairman Yoo made the remarks while delivering a commemorative speech at a ceremony to mark the 27th anniversary on June 1.

Chairman Yoo said, “The financial market is in a situation in which our KDIC is required to play more roles, and as for realizing a future vision, KDIC should pursue toward its development as an institution responsible for protecting financial contractors to safeguard financial consumer extensively beyond the sole function of resolving insolvencies.”

Chairman Yoo also emphasized the importance of ramping up its intrinsic functions related to a deposit insurance scheme.

He stressed the need for establishing an optimal funding scheme to secure depositors’ trust through in-depth discussions on core matters of a deposit insurance scheme, such as a cap on deposit insurance coverage and insurance premium rates of target funds, plus a separate cap on insurance coverage on registered saving plans.

Chairman Yoo Jae-hoon of the Korea Deposit Insurance Corporation (KDIC) exchanges views on the development of a deposit insurance scheme with Prof. Philip H. Dybvig of Washington University, a 2022 Nobel laureate in economics, at Shilla Hotel Seoul on May 18. (Photo: KDIC)

KDIC Chairman Meets with World-Renowned Scholar Philip Dybvig

Chairman Yoo Jae-hoon of the Korea Deposit Insurance Corporation (KDIC) met with Professor Philip H. Dybvig of Washington University at Shilla Hotel Seoul on May 18.

Prof. Dybvig, a 2022 Nobel laureate in economics, is a world-renowned scholar for his work in economics, finance and deposit insurance. He shared the prize with Professors Ben S. Bernake and Douglas W. Diamond for their research on banks and financial crises.

The two shared views on a variety of topics, including the significance of deposit insurance and its role in preserving financial stability; responses to the recent collapse of Silicon Valley Bank; and the direction for future development of deposit insurance.

Chairman Yoo said that even though deposit insurance was created as early as 1933 with the establishment of the US Federal Deposit Insurance Corporation, the theoretical grounds for deposit insurance began to emerge 50 years later with research by Professor Dybvig and other academics.

He added that as such, the literature on deposit insurance remains limited and the recent regional banking turmoil including the demise of SVB should be an impetus for more research in this area.

In response, Professor Dybvig compared the benefits and disadvantages of the central bank’s lender of last resort function and the deposit insurance system, which are the two most prominent tools for managing a financial crisis.

While the lender of last resort function is discretionary and thus limited in ensuring depositor confidence in the banking system, deposit insurance is not. He also stressed that maintaining public trust in the financial system requires a steady build-up of the Deposit Insurance Fund.

Regarding the US government’s response to the failures of SVB and other banks, which offered a blanket guarantee to all depositors, Chairman Yoo said that it risked going against the principles of deposit insurance aimed at reducing moral hazard such as limited coverage and depositor discipline.

Chairman Yoo asked Professor Dybvig if the US government’s action signified a change in the traditional thinking behind the basic principles of deposit insurance.

In reply, Professor Dybvig stated that he saw the SVB incident as an example of the cracks in the limited coverage system showing up.

Furthermore, Professor Dybvig addressed the criticism that expanding coverage might remove the incentives for depositors to discipline the banks.

He argued that depositor discipline can act as a trigger for bank runs in a crisis situation, highlighting the need to raise the coverage limit and in connection to that, to assess deposit insurance premiums in a fair and equitable manner.

Lastly, when asked for advice on how the deposit insurance system in Korea should be run, Professor Dybvig said that what is most important is the ability to accurately measure and evaluate risk levels at member institutions and that it is critical for the deposit insurance system to have adequate funding to ensure depositor confidence in the system.

Chairman Yoo said the meeting provided a valuable opportunity to get the insights of an eminent scholar at a time when deposit insurers around the world were facing an unprecedented challenge from new types of bank runs.