Cho Hung Bank, Trapped in Liquidity Crisis Due to Strike

Cho Hung Bank has fallen into a liquidity crisis as customers have run out of money due to the ongoing strike.

In order to prevent the bank from defaulting during the withdrawal frenzy, the government decided to provide Cho Hung Bank with aid. If the strike is protracted however, the government will designate Cho Hung Bank as a non-viable financial institution and demand a fundamental improvement in the bank`s management, such as sacking managers and other staff workers.

According to the Financial Supervisory Service (FSS) and Cho Hung Bank, a total of 1,597.8 billion won, based on savings deposits, was withdrawn on June 18 alone.

Merchant banks, in particular, withdrew 2 trillion won on that day, thereby posting Cho Hung`s total withdrawal amount at 3,597.8 billion won.

For the past three days, as much as 4,989.6 billion won in the bank`s depository has been claimed, and adding up the money taken out on June 19, the number is expected to exceed 10% of the total deposits in won, or 50.5 trillion won.

The accumulated amount of capital deficiency at the bank reached 1.8 trillion won on June 18, and is expected to grow further to 2.5 trillion won on June 19. It will most likely reach 4 trillion won the following day. Cho Hung Bank forecasts that it would be harder to raise capital in markets after June 20.

Upon the lender`s request, the government pledged to chip in 2 trillion won in the form of RP purchases and promised further aid if the bank`s liquidity shortage worsened.

The government convened a vice-ministerial meeting at the Korea Federation of Banks in Myeong-dong, Seoul, yesterday, in which government officials from relevant agencies agreed to allow customers to withdraw their money from banks other than Cho Hung ahead of schedule.

At the same time, the government called on the strikers to immediately return to work while giving a stern warning that civil as well as criminal penalties will be doled out against those who led the illegal activities.

The FSS decided to designate the bank as a non-viable lender under law on financial industry restructuring if Cho Hung fails to afford customer claims for their own money.

Once the management improvement is in order, Cho Hung will have to suffer tough regulations including discipline or dismissal of workers at every level at the bank.

Cho Hung Bank announced yesterday afternoon that 179 branches closed out of 476 across the nation, whereas unionists argued that only 70 branches had normal operations.

Defaults on withdrawal refer to a customer service disruption by a financially-strapped bank, which therefore cannot give money to its customers.

Kwu-Jin Lim Dong-Won Kim mhjh22@donga.com daviskim@donga.com