A Crisis Cripples South Korea's Savings Banks
On the day in May she was supposed to have appeared before prosecutors for questioning, an executive of a shuttered South Korean savings bank hanged herself with her scarf in a Seoul motel. The woman, identified by the police only as “Kim,” was a credit officer at Mirae Mutual Savings Bank, whose chairman was caught fleeing to China in a fishing boat three weeks earlier. She’s the latest casualty in a scandal hitting the periphery of Korea’s banking industry for more than a year.
Since early 2011, regulators have closed 20 Korean savings banks, where risky real estate bets gone bad have wiped out the savings of many ordinary Koreans. Even the prime minister saw money disappear. Prosecutors’ probes have uncovered cases of illicit lending and lax oversight, leading to the indictments of nearly 200 people and at least two jail sentences. Four bank executives have committed suicide, according to police, while more than 88,000 depositors and bondholders, many of them retirees, saw 1 trillion won ($857 million) vanish. “Everyone’s become a victim,” says Nam Joo Ha, an economics professor at Sogang University in Seoul. “Regulators lost the people’s confidence. The savings bank industry lost trust, a financial company’s most important virtue, and the people lost their money.”
South Korea’s savings bank industry was born in the aftermath of Asia’s 1997-98 financial crisis. Regulators allowed private lenders and rural cooperatives to call themselves “savings banks” in 2001 to boost confidence in the usually tiny, regional lenders. The state then granted deposit protection comparable with the insurance at nationwide lenders. This allowed savings banks to grow. In 2006 the government eased lending rules and the banks expanded their scope to include the property market.
Real estate lending became the banks’ downfall when defaults increased following the global financial crisis in 2008. To survive, savings banks started selling customers subordinated bonds that had low priority for repayment in the event of default. Because of high annual yields—as much as 10 percent, almost double the savings account rates at national banks—the securities became popular, particularly among the elderly living on interest payments.
The most recent round of closings came on May 6, when the Financial Services Commission announced the shutdown of four lenders including Korea Savings Bank, whose more than 10,000 depositors included 50-year-old Je Mi Young. The Seoul housewife sat trembling in her pajamas that Sunday morning, as headlines streamed across her television screen delivering the news that the bank was out of business. Her savings would be protected by state-run Korea Deposit Insurance Corp. (KDIC), which guarantees as much as 50 million won. Still, the additional 40 million won bond investment she made on behalf of her mother would be wiped out. “I always wondered what kind of stupid people put precious money into messy banks,” says Je. “Now I am one of them.”
Prime Minister Kim Hwang Sik was also swept up in the bank closures. He lost 40 million won when the FSC shut down Seoul-based Jeil Savings Bank in September. Like other Jeil depositors, he eventually got his money back from the KDIC, says Choi Hyung Du, a spokesman in Kim’s office.
Jeong Gu Haeng, president of Jeil’s affiliated bank, Jeil 2, was the first to commit suicide. On Sept. 23, he jumped six floors from his downtown Seoul office, according to police. A credit officer at Tomato 2 Savings Bank, and the chairman of Ace Mutual Savings Bank also killed themselves, according to police.
The government is discussing how to raise the money needed to repay an estimated 1 million-plus depositors. The 70,650 customers who had amounts exceeding the 50 million won insurance limit, along with 17,445 bondholders, need to stand in line as debtors in bankruptcies and civil suits.
Customers have pulled their money from savings banks, sending deposits down 23 percent since the end of August to a four-year low of 54.8 trillion won at the end of March, according to Bank of Korea data. Kang Sin Ah, a 43-year-old Seoul office worker, in January moved 20 million won to a state-run lender from a savings bank that had been paying as much as 3 percentage points more in interest. “What’s the advantage, if I have a nightmare every day about losing it?” she says.