F unding of Deposit Insurance Systems and the KDIC

1. Fundingof Deposit Insurance Systems and theKDIC January 19,2010 Jae-Soon Park Director General Department of Fund Management 1

2. TableofContents I. IADI’s Guidance Points 1. Deposit Insurance Funding Method 2. Deposit Insurance Assessments 3. Type of Deposit Insurance Reserve 4. Deposit Insurance Funds 5. Management of Deposit Insurance Funds II. Funding of the KDIC 1. Outline 2. Target Fund System 3. Differential Premium System

3. I. IADI’s Guidance Points 1

4. Three funding approaches Hybrid Failure Ex-post Ex-ante • Special premiums • Levies • Loans • Premiums 1. Deposit Insurance Funding (DIF) Methods 2

5. 1. DIF Methods (Continued) Advantages of ex-ante funding • Pool of funds – readily available • Equitable – all member institutions, including failed institutions, contribute • Avoids pro-cyclical effect – reduces market volatility and systemic risk • Increases public confidence 3

6. 2. Deposit Insurance Assessments = × Assessmentbase Premiums Premiumrate • Ex-ante or • Ex-post • Paid by member • institution • Given time • period • Flat-rated • - Same rate • - Easy to • implement • Risk-adjusted • - Incorporates • a risk factor • - More equitable • Deposits • on which premiums are assessed Clear assessment base and assessment criteria 4

7. No Yes 3. Type of Deposit Insurance Reserve Target Reserve Yes / No • Target reserve ratio / range • Sufficient to cover losses under normal circumstances • Steady premium rate • Long period of time 5

8. 4. Target-Reserve Ratio Approach Factors to take into account • Composition of the banking sector • Liabilities of member banks • Risk exposure • Probability of failures • Characteristics of typical losses, e.g. concentration 6

9. 4. Target-Reserve Ratio Approach (Continued) Disbursements, rebates Accumulated funds Funds Target reserve Member institutions 7

10. 5. Deposit Insurance Funds Different types of financial institutions One fund Separate funds 8

11. Deposit insurance fund • Well-managed • Readily available 6. Management of Deposit Insurance Funds Sound internal controls Appropriate investment policies & procedures Risk mitigating practices Disclosure Reporting systems 9

12. II. Funding of the KDIC 10

13. 1. Outline Integrated deposit insurer • Banks, financial investment companies, life & non-life insurance companies, merchant banks, MSBs Receipt of premium in advance • Application of premiums to insured products • Premium with uniform rates Financial assistance • Use of funds collected from insurance premiums • Other sources of funds if the fund is insufficient • - Borrowing from government, the bank of korea, • -insured financial institutions and others • - Issuance of deposit insurance fund bonds 11

14. 2. Target Fund System Target size of accumulation • Assessment base: insured deposits • - Banks, financial investment companies, non-lifeinsurance companies: 1.5% ~ 2.0% • - Life insurancecompanies: 1.2% ~ 1.7% • - Mutual savings banks: 3.0% ~ 3.5% When target is reached • Reaching target floor: reduction of funds • Reaching target cap: exemption or refund of premiums • Effective date: January 2009 • Rates of accumulation as of June 2009:0.58% (Amount of accumulated funds:5,649.9 billion won) 12

15. 3. Differential Premium Systems Expected outcomes • Enhancement of fairness, prevention of moral hazard, promotion of sound management Major timeline of adoption • Amendment of Depositor Protection Act: February 2009 • Year of introduction: 2014 Future implementation (plan) • Method of differentiation: different classes • Range of difference: ±10% • Period of assessment: one year • Disclosure: not disclosed to the general public, etc. 13

16. Thank you for your attention! 14