Another savings bank fiasco looming

By Lee Hyo-sik

Another round of secondary banking suspensions is looming large as financial regulators have begun sorting out the bad apples from 94 savings banks which survived the previous three rounds of expulsions.

According to industry sources, Friday, up to eight savings banks saddled with toxic real estate loans have been put on a hit list for their poor financial standings.

The Korea Deposit Insurance Corp. (KDIC) is poised to inspect about five small- and medium-sized savings banks beginning from June 18. The Financial Supervisory Service (FSS) is reportedly looking into three large secondary banks, indicating another round of suspensions may occur late this year.

It was only a month ago when financial authorities stopped four troubled secondary banking institutions doing business.

But, the majority of the survivors continue to grapple with worsening financial soundness due to surging bad loans amid the prolonged property market slump.

According to the FSS, about half of 94 banks posted losses in the first quarter of the year. Bank for International Settlements (BIS) capital ratios, a key indicator of financial soundness, for over 10 banks were below 3 percent.

Banks are normally required to maintain a BIS ratio over 8 percent.

The KDIC said the upcoming inspection will try to ascertain the financial status of several struggling savings banks but denied that more could be suspended in the near future.

``Rather than uncover irregularities, we will try to grasp their situation and help them resolve problems. The planned investigation does not necessarily mean restructuring of the savings banking sector,’’ a KDIC official said.

In the past, the state deposit insurer was authorized to investigate those with BIS ratios lower than 5 percent. But since March, it has been allowed to audit any savings banks showing signs of capital erosion and other financial distress.

On May 6, financial authorities suspended the operations of Solomon Savings Bank, the No. 1 in assets and lending, as well as Mirae, Korea and Hanju savings banks, for six months.

Heads of all four banks have been arrested on charges of embezzlement, breach of trust and other irregularities.

Last year, a total of 16 savings banks, most of which had BIS ratios below 1 percent, were suspended. Some of the lenders had more debts than assets but made false reports to conceal their financial troubles.

Some of these lenders were acquired by Korea’s large commercial banks, including KB Financial, Woori Financial, Shinhan Financial, Hana Financial and BS Financial.

Hana bought Jeil II and Ace Savings Banks, while KB acquired Jeil. Shinhan took over Tomato, and BS picked up Prime and Parangsae.

Savings banks ran into trouble in the wake of the global financial market turmoil in late 2008.

These secondary banks paid for ruthless attempts to exploit the mid-2000s property bubble, which came crashing down with the Lehman Brothers.

Many borrowers were unable to pay back the money they borrowed, pushing savings banks’ bad loans to record-high levels.