Korean Bank Runs

From The Korean Times:
By Kim Jae-won

The government suspended the operations of Busan Savings Bank, the largest savings bank in Korea by assets, and its affiliate Daejeon Mutual Savings Bank, Thursday, citing capital inadequacy caused by mounting insolvent project financing (PF) loans.

Announcing the move, Financial Services Commission (FSC) Chairman Kim Seok-dong said no more savings banks will face suspension in the first half of the year, unless a run occurs on them. Three other affiliates are facing scrutiny by regulators over their financial status

“A great deal of money is required to restructure the savings banks,” Kim said, adding that the National Assembly should act promptly to enable the creation of 10 trillion won in funding. “It will be pivotal in stabilizing the market.”

Once the announcement was made, branches of three Busan Savings Bank affiliates that were not suspended faced thousands of customers who were trying to withdraw their deposits.

About 1,400 tried to make their way into the Haeundae branch of Busan II Savings Bank, an affiliate of Busan Savings Bank.

The FSC decided to expand its emergency fund by five times to 3 trillion won.

“This expanded provision is aimed at calming customers,” an FSC official said. Four banks — Woori, Kookmin, Shinhan and Hana — also opened a credit line worth 2 trillion won with the state-run Korea Finance Corp.

The two savings banks ceased operations for six months immediately after the announcement was made. Customers are provided with government payment guarantees on their deposits up to 50 million.

Complete withdrawals of deposits will be banned with each customer allowed a uniform 15 million won payment.

The suspension of the two leading savings bank came a month after the FSC suspended the smaller Samhwa Mutual Savings Bank in order to weed out unviable players. Samhwa is set to be taken over by a commercial bank.

The trouble facing savings banks is closely linked to the property market slump that started during the 2008 global financial crisis, sharply driving up defaults on loans backed by construction projects.

Daejeon Mutual’s liabilities exceeded its assets by 32.3 billion won as of the end of 2010, the FSC said in a statement.

Its capital adequacy ratio, the key measure of capital strength, was found to be minus 3.18 percent as of the end of last year, far lower than the minimum regulatory level of 1 percent, the financial regulator added.

Busan Savings’ liabilities exceeded its assets by 21.6 billion won at the end of last year, with its adequacy ratio standing at 5.13 percent.

“Daejeon Mutual is in a situation where it cannot respond to depositors’ withdrawal demands due to a liquidity shortage triggered by a recent run on deposits,” an FSC official said.....read on