South Korean financial regulators announced plans on Thursday to raise the deposit protection limit from 50 million won to 100 million won ($714) from September 2025 onwards, prompting speculation that the change could trigger a large-scale cash flow from commercial banks to non-banking financial institutions, or a money move.

On the surface, it is possible that funds will flow into savings banks and mutual finance companies that offer relatively higher interest rates than commercial banks that have lowered interest rates. The Korea Federation of Banks said that the base interest rate for one-year term deposits at the country’s five major commercial banks, including KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup averaged 2.4%. On the other hand, the average interest rate for one-year term deposits at 79 savings banks was relatively high at 2.96%.

Analysts warn that the shift could lead to a substantial inflow of deposits into savings banks, with estimates ranging from 16 trillion to 40 trillion won. However, with deposit balances at savings banks already in decline due to real estate project financing (PF) risks and rising delinquency rates, the actual movement of funds could fall short of initial projections.

The Korea Deposit Insurance Corporation initially estimated that raising the protection limit could increase savings bank deposits by 16 to 25% and the Korea Finance Association also analyzed that it could increase by up to 40%. Based on the savings bank deposit balance (approximately 100 trillion won) as of the end of February 2025, it is estimated to be 16 to 40 trillion won. However, considering the recent trend of decreasing savings bank deposit balances, the actual scale of fund movement is likely to be smaller than the estimate.

Authorities are particularly wary of a herding effect, where funds flood into specific larger savings banks, potentially triggering liquidity issues for smaller, more vulnerable institutions. To mitigate these risks, the Financial Services Commission (FSC) formed a monitoring task force (TF) whose members include the Bank of Korea and the Financial Supervisory Service (FSS). The team will oversee financial stability, particularly in the non-bank financial sector, and respond preemptively to any stress. It also decided to introduce a financial stabilization account to preemptively provide funds to financial institutions experiencing difficulties in increasing capital, and to tighten the reins on sound management such as reorganizing real estate project financing (PF) in the second financial sector.

However, the non-banking financial institutions’ view on the money move theory is complicated as the real estate PF loan default rate and delinquency rate have already worsened, and there is a high possibility that asset soundness will worsen further if competition for deposits such as high-interest specials intensifies.

Small and medium-sized financial institutions with poor financial structures are on high alert, and the increase in the deposit premium that must be paid for the deposit premium is also a burden. The deposit premium rate currently applied to savings banks is 0.4 percent, which is significantly higher than that of securities and insurance companies (0.15 percent) and commercial banks (0.08 percent). If the deposits subject to protection increase, the deposit premium rate will also increase, and the financial burden will inevitably increase.

Authorities plan to conduct a research service on how much the deposit premium rate will increase after the limit expansion and then apply the changed deposit premium rate starting in 2028. “As commercial banks and savings banks have different customer bases, it is uncetain how many customers will actually make this money move,” a savings bank official said.

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