Depositor Discipline of Mutual Savings Banks in Korea

Abstract

This paper verified whether coverage limit-exceeding depositors withdraw or decrease their deposits based on the risk-seeking behavior of mutual savings banks even if the number of depositors are small and whether mutual savings banks in management crises present a relatively high-risk premium to attract deposits in order to verify the existence of depositor discipline for mutual savings banks. This is contrary to the perception that depositor discipline will not function as most of the deposits in mutual savings banks are included as targets for protection by the deposit insurance system. Next, the results of a verification of regional characteristics showed that there were no regional differences in depositor discipline. This seems to be because the information and communication technology in Korea is so developed that there is no information gap between urban and rural areas. Lastly, we divided the analysis period for mutual savings banks into the periods 2007 to 2010 before insolvencies were visible, 2011 to 2014 when restructuring was taking place, and 2015 to 2016 after the completion of the restructuring. The results were that asset soundness had a tendency to be given more importance when restructuring was ongoing, and after restructuring was complete. Despite these analysis results, this paper still has some issues to face, which we would like to identify in the following. First, to allow depositor discipline to function, information about mutual savings banks must be disclosed more transparently to ordinary depositors. Next if the monitoring by the supervisory organizations is lacking and if not even the depositor discipline is functioning properly, it is necessary to reevaluate the current deposit insurance system as a whole, to lower coverage limits to make depositor discipline function properly.

Keywords: Deposit Insurance, Moral hazard, Market Discipline, Depositor Discipline, Mutual Savings Banks