By Lee Chang-sup Chief Editorial Writer
If history is any guide, Korea needs to study the U.S. financial crisis in the late 1980s and early 1990s.
The potential trigger is the so-called Korean small-sized 105 savings banks, formerly community-based mutual savings and finance companies. Many of them are in trouble for their relentless lending to builders, project financiers and home buyers in a highrisk and high-return manner.
The latest collapse of the Jeonjubased Jeonil Savings Bank is a harbinger for trouble ahead. Until its losses became known as serious, regulators were in the dark. The problem is more “Jeonils” are lurking.
These savings banks are roughly equal to 25 percent of Kookmin Bank in assets. About 15 percent went sour but some estimate their troubled loans reach 30 percent.
Why are they struggling? The depressed property market is the main culprit as more than half of their loans are tied to that sector.
Once they are in serious trouble, the risk will spread to big commercial banks.
US S&L Crisis
U.S. policymakers have painful memories of the trouble the savings and loan companies faced, often called the S&L crisis, in the late 1980s and early 1990s. American taxpayers used $124 billion in clearing 747 bankrupt S&Ls.
Their fiasco contributed to the U.S. recession and the widening of its budget deficits in the early 1990s. Responsible for their failure are moral hazards, imprudent real estate lending and misguided tax reform.
In scale, the S&L crisis was about 50 percent of the Wall Street meltdown in 2008. But in the late 1980s when the Internet was not widely used, the S&L crisis was little known to Korea.
The same U.S. S&L crisis could be repeated in Korea more than two decades later. Korean household debts, much of which are tied to mortgages, are at a record level.
During the Roh Moo-hyun administration, home and property prices rose at a rapid pace. Breadwinners borrowed heavily to buy homes out of their herd-mentality belief that property is the most attractive investment tool. Builders and project financiers also borrowed heavily for real estate investment.
New mortgage lending rules at banks were belatedly tightened, including the debt-to-income ceiling and loan-to-value ratios. Unable to raise bank loans, potential home buyers and constructors rushed to savings banks for loans at double the rate available at banks.
Later, the government also extended the rules to them.
The Financial Supervisory Services eventually toughened the lending rules for savings banks this year.
They could not extend more than 25 percent of their credit to a specific industry, down 5 percentage points. By 2013, the ratio will be downed to 20 percent.
Savings banks are barred from extending more than half of their credit to properties. Guidelines for their financial soundness will be strengthened and eligibility of major shareholders will be screened yearly.
But the belated tightening is not a fundamental solution. It may worsen their current plight.
The rescue fund available is $2 billion but the Korea Deposit Insurance Corp. needed more to help them bail out. A significant raise in deposit insurance premiums is not enough to fill the gap. Ultimately, taxpayer money may be necessary.
Preemptive Steps
The worst scenario is the continuing slide of home prices by 20 to 30 percent in some cases, and the rise of the interest rate at a rapid pace, which would mean the bubble bursting and a mini-financial crisis.
Optimists are skeptical over the possibility of revisiting the financial crisis.
They say defining their trouble as a crisis is too radical but they agree that at least a downturn of consumption, the bailout of a few savings banks and the ensuing nosedive of the property market will depress the economy.
The Lee Myung-bak administration has been commended for curbing property prices, one of the serious social ills. But solving one problem creates another. The depressed property market will push home buyers and builders to the edge of bankruptcy.
As Korea painfully experienced in the 1997 financial crisis, misfortunes come en masse. Collapse of savings banks will jolt the financial market, pushing market rates higher, scaring away foreign portfolio investors and lowering the won’s value.
It is deadly to allow property prices to rise rapidly but the government must at least take steps to keep the property market from falling by a double- digit rate, so that borrowers pay back debts and interest on time.
It is better to preclude another minicrisis rather than to stifle the property market. Until the credit card crisis erupted in 2002, few had known of the trouble in advance. Policymakers should be wise enough not to repeat past mistakes. A time bomb is again ticking in the property market. A few savings banks may soon need intensive care.
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