Lower-ceiling deposit guarantees could have given people inc

Lower-ceiling deposit guarantees could have given people incentive to be more careful

It has recently been decided that the new deposit insurance scheme will indeed be effective January 1 next year, but with the maximum guaranteed amount set at 50 million won per account. That means anyone with more money than 50 million won on deposit in one account will not be protected for the difference if the bank goes bankrupt.


The original plan called for a ceiling of 20 million won, but financial authorities had to go through a lengthy process of bickering among interested parties before finally raising the limit two and a half times over the initial scheme.


The implications are wide-ranging. Rich individuals with a lot to lose from the new deposit insurance system now have to think hard where to put their money. In a sense, they are in a position to choose between high returns and safety. Some people, meanwhile, are worried that the policy change may also cause a massive shift of money among depository financial institutions, shaking up the already wobbly financial sector currently undergoing a major restructuring.


Once the insurance scheme only partially covering the deposit balance kicks in, starting in January, they figure the money will herd toward blue-chip banks while unhealthy banks will have to raise their deposit rates to attract or retain customers. This drives up the bank's operating expense, which would deteriorate the bottom line further.


That's not all. Merchant banks, most of them on the brink of closure or subject to reorganization, will be hit hardest by the change. According to Korea Deposit Insurance Corp., more than 90 percent of these merchant banks' clientele consists of big accounts with more than 50 million won. In contrast, the portion of 50 million-plus accounts in all financial institutions is only 5.1 percent.


That means merchant bank customers will grab their money, draining merchant bank vaults in no time, rendering useless the ongoing and expensive effort to restructure the frail segment.


There are, however, others who say the new scheme will not be so disruptive as it might seem. The finance ministry, for one, says individual account holders will not shift their money around looking for a safe haven, because a bulk of the account holders, 99.3 percent to be exact, have balances of less than 50 million won. Large corporate accounts would not move either, the ministry says, because their deposits are in many cases linked to loan accounts, narrowing the possibility of massive withdrawal.


So the impact of the deposit guarantees on the financial sector and the economy at large is ambiguous.


There is, though, one thing that is clear from all this. The original plan protecting only 20 million won could have made a big difference in terms of giving account owners a strong incentive to be prudent when parking their money. Of course, it could have given greater incentive for depository institutions to avoid being morally hazardous because they will be held accountable more for their mistakes.


If people realize that banks and other institutions traditionally considered 'too big to fail' are capable of going belly up at anytime, and that their money is no longer safe with the institutions, they might more likely make investments in stocks, whether directly or not. Thus. the lower guarantee could have been a major boost to the nation's stock markets now languishing for more than six months and counting.


Maybe the change of plan to a higher ceiling was the product of partisan politicking, under the pretext of protecting innocent savers while it was really about catering to interests of the rich. This single instance shows how the government is going against aligning incentive schemes that encourage people to become more market savvy.


The whole point of going through painful restructuring lies not in cosmetic changes under pressure of overseas lenders and credit rating agencies, but in embracing fully the way the market system works. In that sense, the government has a long way to go to learn the lesson.