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[Editorial] MSFC crisis is not a simple matter

Posted December. 11, 2000 23:42,   


The government's intention to suspend operations at Dong-A Mutual Savings and Finance Co., the industry¡¯s largest firm, has heightened the specter of a crisis in the financing trade. Customers' fears led to a massive run on deposits at other mutual savings and finance companies (MSFCs), which had negative repercussions on sound firms.

The place MSFCs occupy in our financial market is not big in relative terms, but the effects of a chain of bankruptcies would by no means be insignificant as the scale of their trade is substantial. The amount that they discount promissory notes and bills issued by small and medium-sized firms is estimated to approach some 5 trillion won.

MSFCs provide financing for small-scale independent business owners and, according to relevant statistics, some 70 percent of MSFC customers live on the interest provided by their deposits. This suggests what a traumatic impact any crisis among MSFCs would have on the livelihood of ordinary Koreans.

The government must assume the leading role in formulating proactive measures to resolve any MSFC insolvency. We can expect some positive effects if the government promptly implements its decision to inject 1 trillion won in public funds in the troubled MSFCs. It should also go ahead with interim measures allowing customers to withdraw some of their deposits, even during the business suspension, by securing collateral from the MSFCs.

The Financial Supervisory Service¡¯s investigations and auditing of the MSFCs must be completed as soon as possible. This would enable the differentiation of sound firms from ailing ones, which would help ensure the normalization of sound companies. Timing is the key here. For this reason, we urge the government to simultaneously push ahead with both short-term and long-term measures to resolve the MSFC crisis.

A close examination of what caused the MSFC crisis clearly shows the tasks that the MSFCs must undertake ahead of the implementation of the government's measures. The Association of Mutual Savings and Finance Companies pointed out in a press release last week that the major cause of the crisis was government statements warning of possible insolvencies at one or two more mutual savings firms.

Granted, the officials' statements had the effect of adding fuel to the fire, but there is no denying that the industry should take some of the responsibility for the crisis. This can easily be shown by the fact that the unlawful loans by MIC Korea and the Dong-A Mutual Savings and Finance Co. first gave rise to the loss of confidence in the entire industry and led to the large-scale withdrawal of funds.

Aggravating the situation was the fact that some customers withdrew their money ahead of a new financial policy that comes into effect next year, when only a limited amount of customer deposits will be guaranteed by banks and financial institutions. Other factors directly responsible for the MSFC crisis are their inordinately aggressive business expansion plans and bad investments in the stock market. This being the case, the MSFCs must conduct an examination of the business wrongdoing, which amounted to a betrayal of their customers, and come out with viable self-rescue plans.

Other financial institutions should offer support for the government's rescue plans for the MSFCs. Banks may think that they now face an enormous burden in dealing with their own problems, much less helping others, but they must not overlook the fact that they may not be safe from the fallout from the possible failure of domestic MSFCs. The crisis should provide our mutual savings and finance firms with the opportunity to be reborn as sound financial institutions. Otherwise, our attempts to stabilize the financial markets will turn out to be an exercise in futility.