Avoid repeat of policy failure

Angry customers flocked Friday to withdraw their money from Busan Savings Bank, whose operations were suspended. Thousands of depositors also thronged to the bank’s subsidiary Busan II Savings Bank Thursday. The Financial Supervisory Service must share the responsibility for the situation since its role is to supervise savings banks.

After taking similar action against Samhwa Mutual Savings Bank last month, the financial regulator suspended operations at Busan Savings Bank and Daejeon Savings Bank, both of which are subsidiaries of Busan Savings Bank Group, the country’s biggest mutual savings bank in assets. Busan Savings Bank was once a healthy financial institution for the working class in Busan, but asked for trouble by scaling up its size through acquisitions of poorly performing savings banks in 2008. At the time, financial authorities reluctant to inject public funds had allowed savings banks to expand branch offices if they invested 12 billion won (10.8 million U.S. dollars) to buy non-performing savings banks. Busan Savings Bank took over two insolvent savings banks and increased the number of branches to expand savings. With the expanded deposits, the bank increased project financing loans but its financial health weakened due to the sluggish real estate market. The direct cause of the weakened financial soundness was bad loans but the fundamental reason was policy failure of financial authorities that prompted acquisitions of non-performing savings banks through special favors.

Since 2008, financial authorities have helped savings banks reduce losses by allowing them to sell bad loans to Korea Asset Management Corp. under repurchase agreements. In this sense, the Financial Services Commission and the Financial Supervisory Service effectively encouraged accounting fraud. Instead of tackling insolvency of savings banks at the proper time, the government aggravated the situation by covering up bad loans.

The government bought bad loans worth 1.7 trillion won (1.5 billion dollars) from savings banks in late 2008, when the global financial crisis erupted, and in early 2009. It also injected 2.8 trillion won (2.5 billion dollars) into non-performing savings bank last year. The government’s policy failure is to blame for the vicious circle of the injection of public money and insolvency of savings banks.

The government is pursuing a measure to allow commercial banks such as Woori and Kookmin to take over the three suspended savings banks. This is also an attempt to cover up the insolvency of the savings banks by selling them to commercial banks rich in assets. This stop-gap measure seeks to avert public criticism for wasting tax money. To force commercial banks to acquire insolvent savings banks, the government should give special favors to acquirers. The policy failure of the past should not be repeated.