Bank run fears engulf savings bank industry

Kim Seok-dong, Financial Services Commission chairman, right, and Kim Jong-chang, Financial Supervisory Service governor, center, explain the savings bank suspension yesterday at the FSC headquarters. By Oh Jong-taek

More than a thousand customers lined up in front of the Busan II Savings Bank located in Busan yesterday as soon as the nation’s financial regulator announced a six-month business suspension of Busan Savings Bank and its affiliate Daejeon Mutual Savings Bank.

The line formed by depositors extended about 100 meters (328 feet) from the door of Busan II Savings Bank. “You won’t be allowed to withdraw your money if you are just standing there without a queue ticket number,” a bank employee told the crowd using a microphone.

Those without a ticket then headed to the automated teller machines to withdraw their money, but the machines quickly ran out of cash.

“I’ve saved 40 million won ($35,810) over my whole life. That money was going to be used for my grandson’s marriage but I cannot trust these people [bank employees] saying that I am guaranteed to get my money back,” said Cho So-young, 79.

Although the government guarantees deposits of up to 50 million won at savings banks, the number of customers who hold deposits of more than 50 million won stood at around 4,700 in Busan Savings Bank and 675 in Daejeon Mutual Savings Bank, which triggered the current crisis.

Although operations of three of Busan Savings Bank’s four affiliates were not suspended, there are fears that they could be hit by a bank run on their deposits.

In the case of Busan II Savings Bank, its capital adequacy ratio stood at 6.0 percent as of the end of 2010, but its liabilities exceeded assets by 12.5 billion won.

Two other affiliates, Jungang Busan Savings Bank and Jeonju Savings Bank, have capital adequacy ratios of 3.6 percent and 5.6 percent, respectively. But they are unlikely to avoid a suspension of business if a bank run occurs.

The financial regulator recommends that savings banks maintain a capital adequacy ratio above 5 percent.

The FSC yesterday placed on a watch list five savings banks whose capital adequacy ratio fell below 5 percent, including Bohae Bank, Domin Bank, Woolee Savings Bank, Saenuri Savings Bank and Yes Savings Bank. Financial authorities expressed confidence that these five banks would not be suspended since they were undergoing management restructuring.

But analysts expressed concerns that public panic about savings banks could spread.

“The fears of depositors are mounting, which could lead to bank runs at a number of savings banks, and it could eventually spread to the entire savings bank industry,” said Jung Sung-tae, a researcher at LG Economic Institute.

The financial regulator is preparing to take measures to counter this possibility.

The state-run Korea Finance Corporation and four commercial banks - Woori, Kookmin, Shinhan and Hana - have decided to inject 2 trillion won of emergency liquidity into the savings bank sector.

In addition, the government has decided to extend the amount of loans that can be borrowed by the Korea Federation of Savings Banks to support savings banks from the current 600 billion won to 3 trillion won.

Financial authorities are currently working to establish a joint deposit insurance account as a safety net for other financial sectors to curb the spread of possible financial risks from the savings banks. Funds for a joint deposit insurance account would be collected by financial institutions.

“A way to secure capital [for savings banks] is to establish a joint account holding fund amounting to 10 trillion won,” explained Kim Seok-dong, FSC chairman. “This problem will be closely discussed with the National Assembly.”

By Jung Jae-yoon, Lee Jung-yoon [jyj222@joongang.co.kr]