[Editorial] Suspension of savings banks

Announcing six-month suspensions of seven more savings banks Sunday, Kim Seok-dong, chairman of the Financial Services Commission, said that the unease over the insolvency of the second-tier lenders would now be put to rest. The tough action followed the suspension and closure earlier this year of nine other savings banks out of the total 105.

Despite the top financial regulator’s assurances, uncertainties still remain in the minor lenders sector. It was learned that six more savings banks are in an unstable situation with their BIS ratios hovering between 1 to 5 percent and debts exceeding assets. The FSC kept them off the suspension list as examiners acknowledged their plans to improve their status and considered the serious impact on the market that suspending them would have.

Problems with the savings banks grew over a decade since small-scale mutual credit funds were licensed as “savings banks” in the name of diversifying the financial sector while the government’s supervisory function remained loose. Depositors came lured by high interest rates but there were not enough borrowers willing to pay such high rates. Large loans were released through high-risk “project financing” in the construction market, some of which were created for the major shareholders of savings banks or their relatives.

Again this time, as in the earlier suspensions, many retirees who deposited their life savings are among the victims. The banks offered up to 6 percent for savings deposits compared to less than 3 percent at ordinary banks. Some 33,000 people are known to have deposits exceeding the government-protected 50 million won or had bought subordinated bonds.

Regulators should now maintain a “constant and close watch” over the savings bank business as the FSC chairman vowed, and they need to ensure that major shareholders make the maximum investment from their private assets when public funds are provided to save companies from insolvency. Investigation of illegal lobbying by the executives of savings banks and stern punishment should accompany financial supervisory activities in order to bring transparency and accountability to the sector, which has much to do with the lives of those in grassroots society.