S. Korea Suspends Four Savings Bank Over Financial Weakness

South Korea’s Financial Services Commission said it ordered four mutual savings banks to halt operations for six months because they failed to meet the regulator’s financial strength criteria.

The regulator told the lenders to improve their finances within next 45 days by boosting capital and may mandate sales of the banks if they fail to do so, the commission said in an e- mailed statement today.

South Korea shuttered 16 savings banks last year after a sluggish real estate market caused developers to default on loans for construction projects. The shutdowns sparked nationwide probes into savings banks, their management, the role of regulators and the part played by lobbyists, leading to the indictment of more than 100 people.

“With this, we’ve completed restructuring on the savings banks industry that started last year,” Kim Joo Hyun, the commission’s secretary general told reporters today. “In the future, such restructuring will be done through the market system.”

Affiliates of the suspended savings banks will operate normally unless there are excessive deposit withdrawals, the regulator said.

Government Aid

South Korea has been tightening supervision of small lenders and reviewed the nation’s 85 savings banks in July to determine if they were sound enough to receive government aid or should be sold.

Last year’s closures prompted stricter lending rules and the regulator urged savings bank to return to providing financial services to low-credit individuals and small business owners rather than extending loans for risky construction projects.

The combined assets at South Korean savings banks totaled 60.2 trillion won ($53 billion) as of December, down 31 percent from the end of 2010, according to Financial Supervisory Service data.

Deposits at the banks dropped 28 percent to 55.7 trillion won as of February, from 76.8 trillion won at the end of 2010, according to Bank of Korea data. That compares with 8.8 percent deposit growth to 950.6 trillion won at national commercial lenders in the same period, the data show.

The South Korean regulator first began suspending savings banks in January last year.

To contact the reporter on this story: Seonjin Cha in Seoul at scha2@bloomberg.net

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net; Paul Tighe at ptighe@bloomberg.net

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