Global bank woes spark default jitters at savings banks

People walk past Silicon Valley Bank headquarters in California on March 10. [AP]

Savings banks are facing the risk of loan defaults, as the collapse of global banks could further rattle the property market.

The Financial Supervisory Service convened a meeting with representatives from savings banks and the Korea Federation of Savings Banks (FSB) on March 16 to review real estate project financing (PF) loan defaults. Real estate PF loans of savings banks totaled to 10.7 trillion won ($8.18 billion) in the third quarter last year, up 3.8 trillion won from 6.9 trillion at the end of 2020.

Project financing is the long-term financing of an infrastructure and industrial projects based on the projected cash flow of the project rather than the balance sheet of the borrower.

According to the Bank of Korea, PF loans accounted for 29.4 percent of all loans from savings banks in the third quarter last year. Commercial banks had 7.9 percent of their loans in PF, credit finance companies had 11 percent, insurance companies 17.4 percent and securities 24.2 percent.

The default rate of savings banks’ real estate PF loans was 2.8 percent in the same period, more than double the 1.2 percent in 2021. The rate is the second highest among all sectors — securities ranked the highest at 8.16 percent — but securities tend to have high defaults because their relatively small total loan size makes default rates jump with just one or two weak companies.

“Problems can emerge from savings banks that invested in real estate PFs if financial instability, fund shortage and economic slowdown overlap,” said Seok Byoung-hoon, an economics professor at Ewha Womans University.

Savings banks claim such concerns are unnecessary.

According to FSB, the liquidity ratio of savings banks was 177.1 percent last year, comfortably outnumbering the 100 percent set by supervision regulations. Savings banks can respond to liquidity demands such as deposit withdrawals since liquidity in the savings bank market is being well-managed, the federation said.

Financial Services Commission (FSC) vice chair Kim So-young said domestic banks maintain enough liquidity and basic strength to withstand the exposure from failed U.S. banks.

Despite related authorities' confidence in the system, concern over non-banks, such as savings banks and securities companies, lingers.

Non-banks expanded real estate PF loans to profit from low interest rates and the booming property market during the pandemic, but tides have turned as rates soared and the market withered. A record-high number of unsold houses poses another threat for non-banks. There were 75,359 unsold houses in January — the highest since November 2012.

The financial exposure, or the amount of money an investor stands to lose, of non-bank institutions involved in real estate PFs is also a potential risk. The exposure was 191.7 trillion won last June, double that of 2018, according to the Korea Institute of Finance. The institute expects the exposure to have increased more throughout last year.

Rising default rates in commercial banks are warning signals, too.

The default rate of won loans by domestic commercial banks in January was 0.31 percent, up 0.06 percentage points from the month before and the highest in 20 months.

“Corporate and household loans can weaken under high interest rates and the slump in the economy and property market,” said Kim Jung-sik, a professor of economics at Yonsei University. The risk from rising defaults in the property market needs to be contained so that it doesn’t spread across the sector in general, Kim added.

Experts call on banks to extend ongoing government efforts to stabilize the market. The financial regulators have announced a number of measures in October to fuel liquidity in the system and revitalize the corporate bond and short-term money market.

“Stabilization measures need to be extended in a time of growing market uncertainty,” said Samsung Securities analyst Kim Eun-Ki, noting that the limit on the repurchase agreement of retirement pensions by insurance companies is scheduled to be back in place this month.

“It is necessary to improve the structural quality of the finance sector as concerns on volatility and uncertainty take over the market,” FSC vice chair also said.

Some say the mobile banking service that made banks more accessible can ironically be a detonator for bank runs, as seen in the case of SVB. Mobile banking accounted for 11.7 percent of all bank transactions in 2015 but rose to 39.7 percent last year. The transaction amount jumped from the 6-trillion-won range in 2019 to 14.2 trillion last year.

“We need a system that allows financial regulators to step in in case of a bank run,” Democratic Party lawmaker Kim Byung-wook said.

BY HA NAM-HYUN,LIM SEONG-BIN [sohn.dongjoo@joongang.co.kr]