By Kang Seung-woo
The government ordered seven savings banks to suspend operations Sunday amid ongoing fears that a secondary banking sector crisis could pose a serious threat to the country’s financial stability.
After a detailed review of savings banks’ capital adequacy ratios, the Financial Services Commission (FSC) sidelined seven lenders, including major players such as Jeil and Tomato, for six months starting noon.
The government previously imposed a temporary halt on the operations of nine other savings banks from January to August, attempting to stem a rush by customers to withdraw funds. The secondary banks have been reeling due to heavy exposure to the country’s toxic construction and real estate markets.
The other savings banks newly hit with suspensions were Jeil 2, Prime, Daeyeong, ACE and Parangsae.
The move came after financial regulators completed a two-month inspection of 85 local savings banks, focusing principally on their debt conditions and capital adequacy ratios. The FSC said the Bank for International Settlements (BIS) ratios of the seven excluding Jeil 2 came in below 1 percent and each of them had more debts than assets. Jeil 2 was suspended due to fears of a bank run, with its parent company, Jeil suspended.
The banks could be allowed to resume operations if they succeed in “normalizing” their businesses within the next 45 days. If they fail to do so, the state-run Korea Deposit Insurance Corp. (KDIC) is expected to put them up for sale or transfer their business contracts to a KDIC-operated savings bank.
“The measure concludes a phase in our efforts to overhaul the savings banking sector. By reducing risks and uncertainties, we believe that the secondary banking sector is on course for stabilization, and will pose a lesser threat to the wider financial sector,” FSC Chairman Kim Seok-dong said at a news conference.
Under the law, payment of up to 50 million won ($44.950) is guaranteed to each customer of the seven banks. Depositors will be allowed to draw up to 20 million won out of their accounts from Thursday, while those in need of additional funds will be able to borrow up to 25 million won from a commercial lender.
Since Kim started as the top financial regulator in January this year, the FSC has embarked on a battle with the distressed savings bank sector, which is suffering from soured project financing (PF) loans.
Beginning with the suspension of Samwha Savings Bank on Jan. 14, a total of nine lenders, including the sector’s giant Busan Savings Bank, have been ordered to halt operations. As of Sunday, seven of the initially suspended nine banks have restarted business operations after being sold to other financial institutions or run by the KDIC.
Meanwhile, Kim said the FSC will back those that have sound BIS ratios.
“To ensure confidence in the market, we will support savings banks with more than a 5-percent BIS ratio seeking capital expansion,” he said.