S Korea struggles to prevent spreading concerns over savings banks

22:37, February 18, 2011      

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South Korea's financial regulator is struggling to prevent concerns over local savings banks from developing into overall financial systemic risks.

The Financial Services Commission (FSC) said on Thursday that it imposed a six-month suspension of operations on two local savings banks due to their liquidity shortages.

Busan Savings Bank, the country's biggest savings bank by assets located in the port city of Busan, was ordered to suspend its business from Feb. 17 to Aug. 16, while its affiliate Daejeon Savings Bank was also ordered to shut down over the same period.

The decision came a month after the FSC suspended operations of a mid-sized Samhwa Mutual Savings Bank, which is now up for sale.

PREEMPTIVE ACTIONS

The nation's financial watchdog suspended the three local banks ' business in a bid to preemptively stave off excessive anxieties about the savings bank industry.

"The FSC aims to prevent concerns over some troubled savings banks from spilling over to other normal ones by distinguishing bad banks from good banks," Ernst Lee, a spokesman at the FSC, said by phone on Friday.

"The regulator does not expect financial systemic risks as the total amount of savings banks' assets is quite small," he added.

As of September 2010, the total assets held by local savings banks amounted to 87 trillion won (78 billion U.S. dollars), equaling to only 5 percent of those held by commercial and specialized banks, according to Nomura Holdings.

Nomura does not expect some banks' suspension to trigger major risks in the whole financial system due to the small scale of savings banks' assets as well as the South Korean government's plan to offer funds, Kwon Young-sun, an economist at Nomura, said in a report.

"We do not believe that the failure of any of the savings banks will cause major financial market instability, given their small size and the country's deposit insurance scheme," Choi Young-il, a senior analyst at Moody's, said in a weekly credit outlook dated in Jan. 10.


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