Chairman Gwak Bum-gook of the Korea Deposit Insurance Corp. (KDIC) warned that it is about time for financial authorities to get their act together to control household debt, which has been risen over the past few years to a dangerous level.
Gwak recalled the enormous damage from the foreign exchange crisis that occurred nearly two decades ago, including some 730 financial institutions big and small going out of business, not counting the individual losses and the pain they suffered. The Bank of Seoul, and the Korea First Bank, considered large enough to withstand any kind of financial crises, had to close their doors, unable to cope with the liquidity problems unleashed by the financial crisis which sent one/third of the financial institutions to go down the drain.
In 2011, the similar financial crisis, although not as extensive as the foreign exchange crisis of 1978, hit the country again delivering an extensive damage to the financial industry in particular, with some 30 small savings banks going belly up, with heavy blows to individual depositors.
“The repeated financial crises bombed the financial industry the banks in particular hard and we should do every thing to prevent the crises from reccurring and if they do come, we should be able to minimize the damages with the systems we have on our hands,” Gwak said.
Some 120 countries around the world have the deposit insurance systems to provide the protection for depositors in case a crisis occurs. But even the system is not free from moral hazards. The financial institutions, too, can go too far in seeking higher profits despite dangers, which are certainly morally hazardous moves, he said.
Such morally hazardous moves tend to be committed more often under the fixed premium insurance system, in particular by the financial institutions with higher potential danger levels, the KDIC chairman noted.
Gwak said the Graded Insurance Premium System may be able to control some risky moves to seek higher profits, while charging just insurance premiums to insured firms to lead sound management based on the fair study of risks.
The U.S. Federal Deposit Insurance Corp. (FDIC) for the first time in the world introduced the Graded Insurance Premium System in 1993 to control the rampant activities of the financial firms to seek higher profits. Many countries followed the FDIC to take up the system including Canada, France and Germany.
The KDIC, from 1997 to 2011, collected fixed insurance premiums from financial firms and saved them to be ready for financial crises and take care of the damaged financial firms in the crises.
But from 2014, the deposit insurance firm started to collect non-fixed premiums after finding out that fixed premium collection cannot take care of the problems.
The KDIC graded the premium into three grades based on a study on the insured firms’ capacities to meet the crises, the ability to come back from the crises, the abilities to take care of the financial as well as non-financial crises.
The KDIC found out that the tendency to seek financial problems to take care of them before they grow has gone down. One of the major reasons for the decline was that the insured firms prepared to take care of crises before they occurred.
But it takes time before graded insurance premiums can become a perfect system, Gwak said. The KDIC will continue to work on the premium collection system, closely watching the changing financial environment and the financial industry, the KDIC chairman said.
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A view of the building in downtown Seoul where KDIC is located.
