Holding banks accountable

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Holding banks accountable

The government is poised to pump in massive public funds to salvage savings banks struggling under insolvent loans. It plans to buy back sour loans made to construction companies, which used the funds for project financing before they went bankrupt in the midst of the real estate market slump.

The deposits in savings banks are mostly held by household consumers, and the government plans to relieve the savings banks before they turn weak. But that could deal a catastrophic blow to households and local economies.

The government would also have to fix the various problems with the project financing and savings banks in order to wrap up the restructuring of the construction industry. The government plans to sign a memorandum of understanding with the savings banks receiving public relief funds that includes promises and commitments on stringent restructuring measures.

More importantly, the government should rein in reckless lending practices based on estimated cash flows from construction projects, and make savings banks pay the price for their negligence and excessive competition.

It should no longer tolerate the practice of abuse of retail deposits as personal piggy banks for foolhardy investments in real estate projects.

Kamco, a state corporation that purchases non-performing loans, already bought 1.7 trillion won ($1.45 billion) worth of insolvent project financing debt to bail out savings banks twice in 2008. Yet the balance of project financing loans at savings banks stood at 11.8 trillion won at the end of last December, up 300 billion won from the same period a year earlier.

These banks have increased loans even as the risk of financing for construction projects aggravated the slow economy and poor sales of apartments in provincial regions. Their actions prove that authorities had been lax in supervising savings banks after their earlier relief funds and failed to prevent further insolvencies.

The government must teach lenders that they can no longer expect taxpayers to pick up the tab for their profligacy and recklessness. It must make the savings banks account for their irresponsible and incompetent management. At the same time, the government should strengthen surveillance to prevent further loans from turning bad.
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