Savings Banks Should Implement Drastic Restructuring

The state-run Korea Asset Management Corp. (KAMCO) has decided to take over bad loans from struggling savings banks, signaling the start of public fund injections into the banking sector. KAMCO said Wednesday that it will acquire 1.3 trillion won ($884 million) of non-performing loans the banks extended to construction firms in the form of project financing.

No doubt the bailout package is designed to help many ailing savings banks dispose of their exposure to risky project financing in the aftermath of the global credit crisis. The banks will be able to sell off their bad debts so that they can improve their financial health to better tide over the persisting financial turmoil originating from the U.S. subprime mortgage woes.

Project financing has emerged as a time bomb in the local financial sector since the construction and property market began to lose steam. Thus, it is urgent to defuse the bomb to stabilize the banking system. In this regard, the KAMCO-led rescue package is seen as a preemptive containment step.

According to the Financial Services Commission (FSC), 89 savings banks have extended a combined total of 12.2 trillion won ($8.3 billion) in loans to 899 building projects. The FSC said 6.7 trillion won, or 55 percent of the loans, has no problem with debt repayment. However, 1.5 trillion won, or 12 percent of the loans, is classified as non-performing. Under the bailout program, KAMCO is to take over 86 percent of the bad debts.

Ostensibly, the rescue plan looks nice to both savings banks and debt-ridden builders. But critics are against such a stabilization formula because KAMCO's takeover of the non-performing loans is tantamount to injecting public funds into private financial companies. The government is under attack for squandering taxpayers' money to save troubled savings banks and failed construction projects.

It is unreasonable for the government to claim that the bailout money is not public funds because it will be financed by KAMCO's own capital, not by the state budget. No one believes such a claim since KAMCO is a state-controlled asset management agency that played a key role in acquiring bad debts from banks and other financial firms when the Asian currency crisis hit South Korea in 1997-98.

The rescue package also raises the problem of ``moral hazard'' because KAMCO has committed to take over savings banks' bad debts without forcing them to take radical self-rescue measures. Many savings banks have come under criticism for recklessly increasing their loans to risky building projects without paying heed to the property bubble. First, executives of the banks should take responsibility for their mismanagement and failure to control risks related to loan provision.

Besides, KAMCO is blamed for underestimating the potential loss of the non-performing loans. Thus, it will have to buy the bad debts at too high prices that will make it difficult for the state-run corporation to fully recoup its bailout money. The conclusion is that the rescue program is nothing but a stopgap measure, which is not enough to solve the brewing financial woes. Most of all, any bailout packages should be linked to drastic restructuring of the beneficiaries in order to avoid wasting taxpayers' money.