By Kim Jae-won
The International Monetary Fund (IMF) said Monday that Korea needs to improve its financial safety net by providing emergency liquidity assistance (ELA) to troubled companies on time and injecting fresh money into the state-run deposit insurance company to protect depositors in crisis.
The Washington D.C.-based agency said that the country’s financial safety net can work in a more responsive way by disbursing funds to liquidity crunched firms quickly and bringing the Korea Deposit Insurance Corp. (KDIC) out of deficit.
“For ELA, this can be achieved by reviewing and revising the legal and procedural aspects to remove any scope for delays in actual disbursement of funds. For deposit insurance system, improvements can be made by bringing the deposit insurance fund out of deficit, and assuring a back-up funding,” said the IMF in its report with a title of “Crisis preparedness and crisis management framework.”
The report was released when the country’s mid-sized builder, Dongbu Corp., filed a court receivership late in December, failing to repay hundreds of billions of won. The company had suffered from a credit crunch crisis for the last few years as its apartment development projects in metro Seoul area went sour.
Dongbu had been in discussion with its main creditor Korea Development Bank for extending loans, but the state lender refused to do so, asking the company’s Chairman Kim Jun-ki to resign. Market watchers said that policymakers should be more prepared for a possible crisis, not to weigh down on the market.
The IMF emphasized the roles of the KDIC, and said two improvements are required to make it intervene effectively during or leading up to a crisis. One is not allowing insolvent banks to continue to accept fresh deposits and repay existing deposits, and the other is establishing a back-up funding arrangement to improve its ability to make prompt depositor payouts and meet liquidity needs in times of crisis.
The agency also said that such arrangements may include a funding arrangement with the Bank of Korea or a line of credit from the government. The IMF also recommended the government review the processes involved to reduce the allowed timelines for making decisions on depositor payouts, for providing financial assistance to troubled banks and their resolution.
The KDIC paid trillions of won in insurance payments to depositors in early 2010 when the country faced the fallout of dozens of secondary banks named “savings banks.” At the time, thousands of depositors claimed full payments of their money in the defaulted banks as the KDIC was required by law to pay up to 50 million won of deposits per bank.