1. Issuance of Deposit Insurance Fund Bonds
The KDIC is allowed to issue Deposit Insurance Fund Bonds (“DIF Bonds”) in order to procure public funds for its use. In Korea, the KDIC did not have adequate resources to cover the costs of implementing the financial restructuring and to protect depositors.
The government and the KDIC suffered from the shortfall of public funds in late 1999. However, timely funding had been postponed due to political and bureaucratic interests and consideration in mobilizing the second-round public funds. Belatedly, the second-round public funds were mobilized by issuing 40 trillion won of DIF bonds during the period from December 2000 to December 2001.
The KDIC mobilized 81.6 trillion won of public funds during the period from November 1997 to June 2011 by issuing Deposit Insurance Fund (DIF) bonds guaranteed by the government. The total volume of outstanding DIF Bonds amounted to 87.2 trillion won at the end of 2002. ##3D_LAYER##[Note]##3D_TEXT:Moon-Soo Kang, Knowledge Sharing program 2012 Modularization of Korea’s Development Experience: Deposit Insurance System in Korea, 2013.##3D_LINK:https://www.kdevelopedia.org/Resources/economy/deposit-insurance-system-korea--04201306130126677.do##3D_LAYER_END## The majority of DIF Bonds issued during 1998 and 1999 had maturities of five to seven years, with either fixed or floating interest rates.
2. Deposit Insurance Fund Bond Redemption Fund
Based upon the amended Depositor Protection Act (DPA) on Public Fund Repayment Measures approved in 2002, the funds in the KDIC have been divided into the Deposit Insurance Fund (DIF) Bond Repayment Fund and the (New) Deposit Insurance Fund. ##MORE_LAYER_BOX##
[Separation of the DIF (January 2003)]
The deposit insurance premiums received until 2002 were allocated to the DIF Redemption Fund while insurance premiums collected since 2003 have been placed in the new Deposit Insurance Fund (DIF). The amount of insurance premiums collected from insured financial institutions and paid into the DIF recorded 1.223 trillion won in 2011.
From the 1997 financial crisis until the end of August 2009, a total of 112.5 trillion won of public funds was injected into 517 failed financial institutions. Of this financial support, 44.3 trillion won was recovered by disposing of equity stocks and receiving dividends.
The KDIC’s borrowings from the government’s Special Account for Treasury Loan, especially for interest payments for DIF Bonds and foreign loans, reached a total of 18.6 trillion won at the end of 2002. In accordance with the government’s public fund redemption plan, the KDIC has been exempted from its repayment obligation of these loans from 2003.
4. Special Assessment Payments
Insured financial institutions are required to pay a given ratio of their deposit balances (deposit balances for life insurance companies would be the arithmetic average of policy reserves and premiums earned) to the KDIC, as Special Assessment Payments (SAPs) for the period from 2003 to 2027. In 2010, the KDIC received 987.1 billion won of SAPs from six insured financial sectors.
5. Financial Assistance
Since the financial crisis of 1997, the KDIC has extended 102.5 trillion won of public funds for the restructuring of financial institutions. The total financial assistance included 45.7 trillion won in equity participation (44.6%) for management rehabilitation, 16.6 trillion won in contributions (16.2%) for purchase and assumptions (P&A), 28.1 trillion won (27.5%) for payments of insurance claims and 12.1 trillion won (11.8%) for purchases of assets and loans.
6. Recovery of Public Funds
By the end of 2002, the KDIC has recovered 18,756.4 trillion won of total public fund support it had provided to financial institutions. The KDIC has developed a variety of recovery methods, relying on the form of support given to the financial institutions.
Such methods include:
• Recovering funds by selling equity stakes in financial institutions in which it invested;
• Collecting bankruptcy dividends by participating in the bankruptcy procedure; and
• Collecting loans it extended to financial institutions.
7. Target Fund System
The KDIC decided to set target fund levels for each financial sector. As of September 2009, a Target Fund System has been implemented for five sectors including the banking sector. At the end of March 2011, the target fund size per financial sector was reduced to 55 percent of the previous target fund size per financial sector.
At the end of 2011, the reserve fund size of banks recorded just 0.613 percent, which is less than the minimum target (0.825%). The reserve fund sizes of financial investment companies and life insurance companies reached 1.474 percent and 1.136 percent respectively, and exceeded their maximum targets of 1.100% and 0.935%, respectively. On the other hand, the reserve fund size of mutual savings banks (MSBs) recorded negative (-) 3.619 percent.
8. Threat to Financial Health of the DIF
Insufficient funds in the MSB account of the Deposit Insurance Fund (DIF) may have been one of the factors that led to forbearance of failing mutual savings banks and then resulted in a huge increase in the cost of resolving insolvent mutual savings banks in the 2010s in Korea.
The government and the KDIC had to create a special account for restructuring mutual savings banks (MSBs) as a part of measures to reinstate the financial health of the MSB sector account and the Deposit Insurance Fund (DIF), because the MSB sector account of the DIF recorded large deficits due to continuous failures of the MSBs. ##MORE_LAYER_BOX##
[State of the Deposit Insurance Fund (Cash Basis, As of the end of 2010)]
Source: KDIC (2011)
[State of the Deposit Insurance Fund]
[Public Funds Recovered by the KDIC (As of December 31, 2002)]
(Unit: billion won)
Source: KDIC (2002) ##MORE_LAYER_BOX_END##