Party’s over for savings banks

Korea’s financial authorities have announced they will strengthen supervision of large savings banks, examining the qualifications of major shareholders every one or two years and conducting extensive reviews of their operations.

The purpose of the intense scrutiny is to prevent potential chaos in the financial market triggered by savings banks going under.

This is a belated precaution from the Korean government, since this risk has existed for some time. Those in the provinces are already experiencing financial problems because of failed banks. Large savings banks start out as mutual savings banks, and unlike large commercial banks, they have been on a loose leash with regulators for years. Their efforts to expand have failed not because of tough regulation but because they lacked the sales power to compete with commercial banks or other moneylenders.

To compensate, they increased reverse mortgage sales to individuals and project financing for construction firms.

Savings banks lent much more than commercial banks normally would through reverse mortgages. They also provided project financing loans for apartment construction in provincial areas, which commercial banks would have ignored.

Both reverse mortgages and apartment construction in provincial areas are risky because they are very sensitive to the ups and downs of the real estate market. Even before 2008, when the global economic crisis broke out, there were concerns over financial troubles at savings banks.

In the end, these fears have been realized, as the real estate market has plummeted and apartments outside major cities have trouble finding buyers. At the end of last year, Jeonil Bank had its operations suspended. Its real estate loans became insolvent, and illegal loans it made were discovered. To put it simply, Jeonil went too far without managing its risks.

Not all savings banks are involved in illegal activities, but the category as a whole has enjoyed lax supervision.

Starting now, oversight at savings banks needs to be toughened to prevent confusion in the financial market and head off damage to customers.

A first step would be to ensure banks manage risk more thoroughly. There could be another financial crisis if action is taken too late.