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Restructuring of the public enterprise after the crisis : The case of deposit insurance fund

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Frame of Image ects for the KDIC. More specifically, this paper examines the current financial status of the Korean deposit insurance fund, the optimal size of the deposit insurance fund, a design of the deposit insurance system to minimize any excessive risk taking, and investment strategies to enhance the fund stability. Briefly, this paper finds that the deposit insurance fund is not viable and the KDIC has no hope of making a full redemption by itself. A loss sharing rule between the government and the KDIC should be resolved as soon as possible to enhance the stability of the deposit insurance system. As a basic strategy for fund management, KDIC should adopt a target zone with feedback. This will reduce the volatility of premiums. To minimize excessive risk taking, KDIC should adopt a risk based premium system, a premium structure that reflects the different risks impose on the KDIC. The premiums may be based on CAMELS ratings as well as some m rket a signals. Finally, the KDIC should reinsure a portion of insurance funds using domestic and foreign financial market instruments in order to hedge against catastrophic losses resulting from mega bank failures and/or financial crises.
1
I. Introduction
To enhance macroeconomic and financial stability, the Korean government enacted the Depositor Protection Act in December 1995, and established the Korea Deposit Insurance Corporation (KDIC) accordingly in June 1996. The primary aim of the Korea Deposit Insurance Corporation (KDIC) lies in th


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Title Restructuring of the public enterprise after the crisis
Similar Titles
Sub Title

The case of deposit insurance fund

Material Type Reports
Author(English)

Hahm, Sang-Moon

Publisher

[Seoul]:KDI school of Public Policy and Management

Date 2002
Series Title; No Working paper series / 02-01
Pages 24
Subject Country South Korea(Asia and Pacific)
Language English
File Type Documents
Original Format pdf
Subject Economy < Financial Policy
Industry and Technology < Entrepreneurship
Holding KDI school of Public Policy and Management

Abstract

This paper studies the issues concerning fund management aspects for the KDIC. More
specifically, this paper examines the current financial status of the Korean deposit insurance fund, the optimal size of the deposit insurance fund, a design of the deposit insurance system to minimize any excessive risk taking, and investment strategies to enhance the fund stability.
Briefly, this paper finds that the deposit insurance fund is not viable and the KDIC has
no hope of making a full redemption by itself. A loss sharing rule between the government and the KDIC should be resolved as soon as possible to enhance the stability of the deposit insurance system. As a basic strategy for fund management, KDIC should adopt a target zone with feedback. This will reduce the volatility of premiums. To minimize excessive risk taking, KDIC should adopt a risk based premium system, a premium structure that reflects the different risks impose on the KDIC. The premiums may be based on CAMELS ratings as well as some market signals. Finally, the KDIC should reinsure a portion of insurance funds using domestic and foreign financial market instruments in order to hedge against catastrophic losses resulting from mega bank failures
and/or financial crises.