[Editorial] Overdue restructuring

The Financial Supervisory Commission has finally decided to take a scalpel to the ailing savings bank industry. The regulator disclosed Monday a scheme to distinguish between viable and nonviable banks. For viable players, it plans to provide public funds if they want to shore up their capital base. Nonviable banks will be forced to make self-rescue efforts or face acquisitions by other financial companies.

The commission’s move to restructure the troubled sector is long overdue. It should have begun such efforts two to three years earlier. Its failure to do so has allowed the problem to fester, increasing the cost of cleaning up the mess. Now that it has started the restructuring process, the commission should get its act together and complete the mission without fail.

In February, the FSC made an unsuccessful attempt to tackle the problem. In a surprise move, it suspended the operations of seven insolvent savings banks, suggesting that the remaining banks would have no problem as long as their depositors stayed calm and refrained from making a run on them. But this move failed to reassure depositors.

To put depositors’ worries to rest, the commission will this time examine the financial conditions of all 85 savings banks in operation, excluding the 13 that it already inspected in the first half of the year. Under the FSC’s plan, these banks will be classified into four groups based on their capital adequacy ratios.

Banks whose ratios top 5 percent will be considered normal and are eligible to receive public funds if they intend to bolster their capital structure.

In contrast, those with a ratio of below 1 percent will be required to submit self-rescue plans. If the plans are deemed unrealistic, they will be ordered to shut down for eventual sales to other financial companies. But if their plans are approved, they will be given three months to normalize their operations. A failure to implement the survival plans will make them subject to business suspension.

For banks whose ratios come between 1 and 5 percent, the regulator will give them time to beef-up their capital bases on their own. Specifically, those in the 3-5 percent category will be given six months, while those in the 1-3 percent range will get one year.

It remains to be seen how many banks will be ordered to shut down. According to the FSC, only one savings bank had a capital ratio of below 1 percent at the end of March. But many savings banks saw their conditions deteriorate since then. Between April and June, deposit withdrawals from savings banks amounted to 1.9 trillion won. As the assessment criterion is end-June capital ratios, the number of banks judged as nonviable will certainly be more than one.

It is also highly likely that a considerable number of the banks with capital ratios running between 1 and 5 percent fail to boost their ratios above 5 percent. Some might even see their financial conditions worsen during the period given for normalization efforts. For these firms, judging their viability now could be better.

Another factor that would increase the number of closed banks is the likelihood of the sweeping inspection exposing the banks that have fabricated their financial statements to conceal nonperforming loans and hide losses. The FSC said it would not tolerate such banks.

All this makes it difficult to calculate the restructuring costs. The larger the number of banks suspended, the higher the costs. Since the global financial meltdown in 2008, the government has spent 4.2 trillion won to help troubled savings banks stay afloat. Given the huge costs of restructuring, the FSC should ensure that the savings bank sector does not suffer another meltdown.

One precondition for a successful implementation of the restructuring scheme is that no bank runs occur during the assessment period. To prevent depositors from rushing to their banks to withdraw their money, FSC Chairman Kim Seok-dong said there would be no bank closures until September.

Despite the assurance, worried customers may choose to err on the safe side and withdraw their deposits. FSC officials will have to keep an eye on depositors’ move to prevent bank runs.