Korea’s Troubled Savings Banks

SEOUL, South Korea -- The problems with Korea’s savings banks have made international news as the government seeks to reign in these troubled institutions. The dilemma is confusing at best and a cause for concern at worst as the issues become politicized with upcoming elections and fresh embezzlement and corruption allegations at Busan Savings Bank. Lets see if we can sort some of this out for you.

Key Players

There are three key institutions in Korea’s financial industry that are directly involved in this savings bank situation: the Financial Supervisory Commission (FSC), the Financial Supervisory Service (FSS), and the Korea Deposit Insurance Corporation (KDIC).

The FSC is an administrative arm of the federal government operating under the supervision of the Prime Minister. It makes and executes the rules and regulations that control financial institutions. It also supervises the FSS.

The FSS is a supervisory institution that inspects and supervises financial companies. It is not actually a part of the Korean government; it is a public institution like the Central Bank – the Bank of Korea (BOK).

The KDIC is a deposit insurance corporation sanctioned with protecting investors. The KDIC derives its obligations and powers from the Deposit Protection Act.

What is a savings bank?

Korea’s financial industry has several different types of financial institutions.

The “savings banks” fall into the category of second-tier financial institutions. They traditionally offer loans (with higher interest rates) to companies and individuals with lower credit ratings or no collateral that would give them the ability to obtain loans elsewhere. There are 98 savings banks in Korea.

Korea’s first-tier financial institutions are the commercial banks like KB, Woori, Shinhan, Hana, and KEB. These financial institutions are more selective when deciding who is eligible to receive loans, making them more stable and trusted than the second-tier financial institutions. Many of these banks are looking into acquiring some of the struggling savings banks.

The 'run' on Busan Savings Bank as depositors rush to get their money out

What happened?

Real estate prices in Korea have taken a big hit since the 2008 global financial crisis. This has caused Korea’s savings bank industry to struggle with bad loans from construction-related loans that they made during the housing boom in 2005 and 2006.

Because of this the FSC suspended the operations of Samhwa Mutual Savings Bank back in January. Hearing this news, depositors at other savings banks became concerned about the financial stability of their own savings banks and started to panic and withdraw their money. The FSC quickly stepped in and suspended the operations of seven more savings banks (for six months each) to preemptively prevent a could-be bank run situation.

The FSC suspended savings banks that did not meet the minimum Capital Adequacy Ratio (CAR) requirements. The CAR requirement is in place to protect the depositors. CAR measures solvency - the percentage of a bank’s capital to its risk. The FSS currently mandates that savings banks in Korea maintain a minimum CAR above 5 percent. Banks with ratios of 8 percent or more are usually deemed financially sound so most banks maintain an even higher ratio. With a low CAR, a bank has no “cushion” to weather large or sudden withdrawals by depositors.

A bank with “suspended service” is not bankrupt, but it is only allowed to perform very limited tasks during the suspension period. The important thing to note is that when a bank’s operations are suspended, customers (depositors) cannot deposit or withdraw any money.

For your reference, the eight suspended banks are listed below:

What is happening now?

The FSC has already supplied 7 trillion KRW to the savings banks industry to quell the urgent liquidity problems. They have another 8 trillion KRW on hand to supply liquidity to the savings bank sector if needed.

The eight suspended banks have been directed by the FSC to raise more capital from major shareholders, merge with other savings banks, or find a buyer.

Meanwhile, the FSC has launched a 2-month inspection into the financial health of 85 of the 98 savings banks and will restructure the industry based on the results of this inspection. The inspections will be done by a Task Force Team that consists of individuals from the FSS, the KDIC, and private accounting firms.

What does this mean for you?

No matter what happens, your account is almost certainly insured by the KDIC. If you’re not sure, ask your teller right now! The KDIC insures a bank’s savings accounts, time deposits, and installment accounts for up to and including 50 million KRW, including principal and interest, per person, per bank (this goes for all banks – first and second tier). Please note that investment products like mutual funds, bonds, RPs, and a few others are not KDIC insured.

If you are unlucky enough to have deposits in one of the suspended banks, there are four possible options/outcomes for you:

• If your savings bank meets the CAR requirements when the suspensions expire in 6 months, the bank will be un-suspended and you will be able to resume regular banking activities or you could choose to withdraw your entire deposit (including principal and interest).

• If during the 6-month suspension period, your bank is sold to another institution you will be able to make additional deposits to your account or withdraw your entire deposit (including principal and interest) from the new bank as soon as the M&A process is complete.

• If your bank files for bankruptcy during that 6-month suspension period, you will have to wait until the bankruptcy process is complete before the KDIC will issue you your money. Although you may have to wait a while, you will eventually recoup your entire deposit (including principal and interest).

• If you urgently need to withdraw your money during the 6-month suspension period, it is possible, but you will lose all or some of the interest that you were expecting to earn.

The Korean government has an effective system of checks and balances in place to protect the country’s financial industry. In the short-run many customers may be inconvenienced and annoyed, but in the long-run, the system will protect the depositors. Stay vigilant and be sure your deposits are KDIC insured, but don’t lose confidence just yet.

Michelle Farnsworth is an 8-year resident of Korea who is currently the Foreign Client Relationship Manager at the Shinhan Bank Seoul Global Center – the first and only bank branch in  Korea that is exclusively dedicated to serving foreigners and foreign companies. Please visit the “Shinhan Bank Seoul Global Center” on Facebook for more information or contact Michelle directly at farnsworth@shinhan.com. You can also check out her “Ask Michelle” column in Seoul’s Groove Magazine.

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