Behind savings bank fiasco
Over the past month, domestic savings banks have made the headlines of local dailies almost every day after the Financial Services Commission (FSC) has suspended eight such institutions due to poor liquidity and snowballing losses.
The trouble was seemingly the result of unmanaged asset/liability gaps that led to massive losses from investing in so-called project financing (PF), a new lending scheme designed to support the construction business.
With the financial regulator failing to fix the mess properly, the story of how the debacle happened continues to haunt the local financial industry and is now turning into a blame game.
On the surface, the fiasco was the outcome of the deadly cocktail of savings banks’ reckless lending to builders mixed with an unfavorable real estate market. The property market has stayed in the doldrums since the latter half of 2008.
However, the government should take some responsibility for its inappropriate regulation. Top regulators just sat back and waited for the property market to rebound. Even when there were clear signs of PF lending turning sour in 2008, FSC Chairmen Jun Kwang-woo and Chin Dong-soo, and Financial Supervisory Service Governor Kim Jong-chang introduced only stop-gap measures and delayed fixing the root cause of the problem.
The root cause, however, was more fundamental and goes back to 2000 when a credit union was renamed as a savings bank. The name change gave the wrong impression to the public, making them believe that secondary lenders were as safe as commercial lenders, although they were more loosely regulated.
Policymakers and regulators underestimated the significance of the word “bank.” The change encouraged many working class people to rush to savings banks for higher interest rates. With soaring deposits, the smaller lenders were looking for higher yields and invested a large portion in PF lending, the key culprit behind the ongoing trouble.
Now the question is how to fix this mess and avoid repeating the same mistake. The best solution might be to take the “bank” out from the “savings bank.” If this is impossible, the regulator should tighten its regulatory grip and monitor with more prudence. More importantly, all policymakers and regulators involved should be held accountable for this trouble that could have been avoided if they had done their jobs properly.