Restructuring of the Public Enterprise after the Crisis : The Case of Deposit Insurance Fund

Title
Restructuring of the Public Enterprise after the Crisis : The Case of Deposit Insurance Fund
Authors
Hahm, Sangmoon
Issue Date
2002-02
Series/Report no.
KDI Working Paper Series;02-01
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.
URI
http://archives.kdischool.ac.kr/handle/11125/16904
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