The Day the Bubble Burst

Back home it's not so hard to find a bank that pays a good rate of interest on its savings accounts, but it seems that in Korea this is more of a challenge. Kookminbank, which we opened accounts with when we arrived in Korea, would pay us 1.7% in an ordinary savings account, when we'd been getting around 3.7% in the UK. The 2% difference isn't purely explained by different national interest rates - the base rate in the UK is currently 5.25% versus 4.5% in Korea - so our Korean bank clearly isn't very competitive.

But in Korea, there is another option. Customers can choose a Money Market Fund (MMF) account, which is linked to the stock market and pays a better rate of interest - currently 4.12% with Kookminbank. However, somewhere buried in the small print is the revelation that it's not merely the interest rate which may fluctuate based on market performance, but the capital amount as well. In other words, the value of your bank account can go down as well as up. It's not entirely clear to what extent most ordinary customers appreciate the potential risks of these MMF accounts, and the breezy way in which the bank staff admit that your savings could go down while paradoxically promising that it won't happen makes one suspect the worst.

Still, some customers are at least sufficiently aware of the link that when the global markets take a sudden turn for the worst, as has happened a couple of times in the last three weeks, there is a rush to the bank to withdraw money from the MMF accounts and move it somewhere safer. The spectacle of such scenes alone is a good reason why most banks in the UK would be wary about the widespread adoption of these market-linked accounts. But it looks like Kookminbank have tired of it as well; they are now requiring customers to give a day's notice before withdrawing money from their MMF accounts which may - or may not - take some of the heat out of any potential panic.

I haven't really fully thought through the implications that major banks here might be speculating on the international markets with customer money that can - theoretically - be quickly swiped away from under them, but it didn't fill me full of confidence about the Korean banking system.