A bad bailout

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A bad bailout

The National Assembly’s Policy Committee is mulling special legislation to pump fresh funds into 19 mutual savings banks suspended since September 2008. The plan will help clean up their subordinated bonds and bolster deposit reserves.

The rescue package aims to raise the ceiling for public insurance for customers’ deposits to 60 million won ($54,300) and offer tax exemption benefits to new depositors at mutual savings banks of up to 30 million won for three years.

The idea is similar to a bailout package proposed by regional lawmakers after Busan Savings Bank was suspended, which raised some complaints of favoritism. Politicians pulled out the controversial bill as soon as the by-elections ended.

The bailout legislation is problematic in three ways. First, it goes against current financial consumer protection law. It doesn’t make sense to raise the insurance ceiling for customers of mutual savings banks who are chasing substantially higher interest rates than offered by commercial banks. What use is the cap if it is expediently modified to bail out troubled institutions?

Secondly, the provisions aren’t fair to customers who didn’t receive such benefits when a group of savings banks were closed prior to 2008. It is also unclear whether customers of banks that are suspended in the future would receive the same benefits.

Lastly, the tax exemption plan goes against the broader tax policy to gradually reduce tax-incentive deposits in order to increase tax revenue.

The legislation appears to target votes for the parliamentary and presidential elections slated for next year.

The relief program would only increase moral hazard in the financial industry. Instead of punishing troubled savings banks for mismanagement, authorities are rewarding them with tax incentives to lure in customers.

Mutual savings banks have brought about their own demise by recklessly extending loans and paying high interest rates of over 5 percent. The special bill will set a poor precedent. The savings bank crisis should be resolved according to current law that protects customers’ deposits of up to 50 million won.

For further losses, customers should be advised to take legal bankruptcy action. Legislators should come up with laws that can rein in moral hazard not spur it.
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