Some savings banks can’t be saved

The restructuring of troubled mutual savings banks is finally expected to pick up speed as financial authorities have targeted 12 banks and demanded they submit outlines of how they intend to improve their operations.

Some of the targets had capital-to-asset ratios of less than 1 percent, according to the standard set out by the Bank for International Settlement. Others were picked because their debt exceeds their capital assets.

But the actual number of banks considered to be in financial dire straits is much higher. A total of 35 showed capital-adequacy ratios below the minimum 8 percent threshold that the BIS sees as indicating sound financial health.

After the Busan Savings Bank and six others were shut down, the industry’s troubles became common knowledge. Nonetheless, it is shocking to see that so many banks are in poor health.

The problem is that the industry failed to improve, even with the breaks it received. As a matter of fact, these banks were exempted for five years from the international auditing standards required of all listed companies. And in order to help boost their BIS ratios, the financial authorities also lowered expectations in terms of their loss reserves.

In June, the government also purchased nonperforming loans - which had been financed by real estate projects - worth 1.9 trillion won ($1.77 billion) to clean up banks’ bad debt. The total government bailout for their bad loans now stands at around 7.4 trillion won. Yet, the savings bank industry remains highly indebted.

We do not believe that the financial authorities were ignorant of all these cases of insolvency, which poses the question: What were they doing all this time?

The government provided assurances that the situation would improve once it began purchasing the project-financing loans in 2008, but the situation now seems to have grown almost beyond its control.

Authorities need to be firm as they move to clean up the industry. They should shut down banks that have no realistic chance of recovering.

They should also not be swayed by political pressures. Some members of the ruling Grand National Party suggest that the restructuring of the industry be deferred until the Seoul mayoral by-election in October. But the authorities must keep in mind that financial restructuring should be aimed at serving the people, not political ambition.