gettyimagesbank

The government-led deposit insurance coverage will double to 100 million won ($71,464), marking the first increase since the policy's introduction 23 years ago. If the revised law passes the Assembly as planned, significant capital flows are predicted, market insiders said Friday.

Both the ruling People Power Party and the main opposition Democratic Party of Korea recently agreed to revise the law, raising the deposit coverage cap from 50 million won to 100 million won. The bill is widely expected to pass the National Assembly without major changes as early as Nov. 28.

Deposit insurance coverage ensures that the Korea Deposit Insurance Corp. (KDIC) can reimburse deposits of up to 50 million won per person at each financial institution in cases of bankruptcy or business suspension.

The decision to raise the cap comes amid criticism that the current limit lags behind Korea's economic growth, as it was originally set in 2001. As of 2023, Korea's deposit protection limit is roughly 1.2 times the country's per capita GDP — lower than major economies such as the U.S. (3.1 times), the U.K. (2.2 times) and Japan (2.1 times).

Calls to raise the coverage cap gained traction after the collapse of Silicon Valley Bank last year.

Both parties anticipate that the increase will provide greater security for depositors, allowing more customers' funds to be protected.

However, opinions remain divided on the timing of the implementation, as the rise in deposits is not without its drawbacks.

Many expect the revised cap to drive capital into secondary financial sectors, such as savings banks. They traditionally attract customers by offering higher interest rates in deposits, but are considered more vulnerable to insolvency. The Korea Money and Finance Association forecast that the amount of deposits would increase by up to 40 percent following the implementation of the policy change.

Increasing the amount of deposits is not entirely good news for secondary financial institutions. An increase in deposits is also expected to intensify the cost burden, which means more interest to pay.

Additionally, insurance fees paid to the KDIC will also rise, as the KDIC imposes fees that vary by industry. Savings banks, for example, face the highest rate at 0.4 percent. Some experts warn that these increased costs may ultimately be passed on to consumers in the form of higher loan interest rates or service fees.

Based on the awareness, financial authorities have been saying consistently that adjusting the timing of implementation is important while advocating raising the limit.

"There are risks associated with fund movements. And an influx of money into the secondary financial sector at a time when financial soundness must be ensured due to real estate project financing issues could cause significant disruptions," Financial Services Commission Chairman Kim Byoung-hwan said at last month's National Assembly audit.