This report does not constitute a rating action.
Korea's banking system should become more stable on higher protection limits for deposits. The move is likely to strengthen customer confidence and reduce the risk of a deposit-run in a stress scenario. That said, we believe nonbank deposit-takers could fuel competition with banks by offering higher rates to entice depositors.
What's Happening
Korea's deposit protection limit is doubling. The Financial Services Commission announced today that it will raise the deposit protection amount to Korean won (KRW) 100 million from KRW 50 million, effective September 2025, after the notification of legislation. The government will also revise the credit cooperative acts to increase depositors' protection by their respective federations, which operate as a de-facto central bank for them.
Why It Matters
Domestic customer deposits will become stickier. The higher portion of insured deposits will strengthen the confidence of retail customers, in our view. This should underpin the funding stability of banks and nonbank deposit-takers, such as mutual savings banks (MSBs) and credit cooperatives.
Deposit runs will be less likely. Higher protection would also lower the risk of deposit outflows, especially from weak nonbank deposit-takers under stress conditions. We believe Korean households have a strong preference for deposits, which accounted for about 45% of their financial assets at end-2024.
A major shift in deposits to nonbanks is unlikely over the next one to two years . We expect nonbank deposit-takers will continue to prioritize the cleaning-up of balance sheets, and their funding needs will remain low. In our view, their asset quality will still be at risk, given the nonbanks have sizable lons to the construction and real estate industry (25%-30% of their total loans). The property market in Korea remains stagnant.
At end-2024, the regulatory nonperforming loan ratios of MSBs (10.7%) and credit cooperatives (6.3%) were much higher than that of banks (0.5%). These nonbanks made small net losses in 2024.
Banks have a moderate growth appetite. While banks are better positioned to manage asset quality than nonbank deposit-takers, they will also focus on risk management and adequate capitalization amid heightened macroeconomic uncertainties.
Additionally, in our view, retail deposits at banks tend to be sticky, backed by their established franchise, branch networks, longstanding relationships, and customer services (including cross-selling opportunities with nonbank affiliates).
What Comes Next
Deposit competition could rise. This could happen once the growth appetite of nonbank deposit-takers accelerates. The interest rate differentials on deposits between banks and nonbank deposit-takers is narrow, at around 30 basis point (bps) on average, based on 1-year term deposits, vs. about 60bps in 2020. This doesn't seem to give much incentive for depositors to move to nonbank deposit-takers.
That said, if nonbank deposit-takers aggressively offer high deposit rates to fuel growth, it could ignite competition and further strain banks' funding costs. MSBs are fairly small and not likely to threaten banks, but credit cooperatives are sizable, accounting for about 25% of the deposits in the system, based on all the deposit-taking institutions.
Regulatory oversight will increase for nonbank deposit-takers. We believe financial regulators will closely monitor the growth and risk appetite of MSBs and credit cooperatives to ensure that they will not rapidly grow risky assets. Regulatory requirements include loan-to-deposit ratios and stricter debt servicing to income ratios for household loans. This is in view of these nonbanks' record of high growth, led by property exposure, and a substantial deterioration in asset quality as a result, which is a lingering risk.
Background In Brief
Why is Korea raising the deposit insurance limit now? Korea has kept its deposit protection limit at KRW50 million since 2001, while the country's per capita GDP has nearly tripled during the period. Korea's ratio of deposit protection limit to per capita GDP is relatively low at about 1.2x compared with the U.S. (2.9x), the U.K. (2.1x), and Japan (2.0x).
Various credit cooperatives in Korea include agricultural/fisheries/forestry cooperatives, credit unions and MG community credit cooperatives, which are established and regulated by respective acts. Depositors at credit cooperatives are protected for the same amount as depositor protection reserves under their federations.
Of note, deposits at postal savings are fully protected by the government regardless of amount.
Related Research
- Korea 'AA/A-1+' Ratings Affirmed; Outlook Stable, April 15, 2025
- Korea's High Household Debt Will Test Policy Effectiveness And Bank Resilience, March 9, 2025
- Shindongah E&C Woes Highlight Increased Risks For Korea's Nonbank Lenders, Jan. 7, 2025
- Korean Banks Face Volatile Near-Term Financial Markets, Dec. 5, 2024
- Effects Of Korea's Brush With Martial Law May Linger, Dec. 4, 2024
- Banking Industry Country Risk Assessment: Korea, Nov. 29, 2024
| Primary Contact: | Daehyun Kim, CFA, Hong Kong 852-2533-3508; daehyun.kim@spglobal.com |
| Secondary Contacts: | HongTaik Chung, CFA, Hong Kong 852-2533-3597; hongtaik.chung@spglobal.com |
| Sunghyun Park, Hong Kong 852-2533-3527; sunghyun.park@spglobal.com | |
| Andrew Park, Hong Kong 852-2912-3071; andrew.park@spglobal.com |
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