Watchdog likely to suspend around three more savings banks


Financial regulators plan to launch fresh investigations into 10 more savings banks that survived the probe earlier this year, brewing another round of major upheaval in the country’s scandal-ridden secondary banking sector.

A taskforce of auditors from three state agencies ― Financial Supervisory Service, Financial Services Commission and Korea Deposit Insurance Corp. ― will figure out if the shortlisted firms are healthy enough to function as banks after industry-wide lending to contractors turned sour with the sluggish property market.
Operation suspension is a likely ruling for two to three savings banks scheduled to undergo the probe in the third quarter, an official from the taskforce said.

“We’re trying to come up with a measure that only wipes out the troubled ones and minimizes anxiety among depositors,” the official said.

The move follows the biggest ever raid on the industry in February that halted operations of eight debt-saddled savings banks, uncovered bribery scandals at the top state auditor and started a bureaucratic fight between the financial regulator and the central bank.

The administration has begun reform of the financial watchdog for its failure to prevent improprieties at savings banks. The case revealed a series of graft scandals on the watchdog and shareholders of savings banks where long-held collusive ties have existed.

The suspended lenders from this year are Samhwa, Busan, Busan II, Jungang Busan, Daejeon, Jeonju, Bohae and Domin Savings Bank.

The second round of probes into the remaining 98 savings banks will focus on examining the financial soundness of their lending practices especially for those that lent heavily to builders.

“Some savings banks made reckless loans to project finances in the past two to three years and their performances are in doubt,” an official said. The taskforce said more lenders could be included in the shortlist subject to the probe once the earnings come for the past financial year in July.

Project finance loans fund long-term real estate developments for builders such as apartments or shopping malls. The debt on the project is paid back to savings banks only after they generate profit upon completion, making it a risky business for lenders as the chances of loans going sour depend on the housing market sentiment in part.

The industry is wary of the probe intensifying to weed out potentially toxic assets in the industry. The total amount of deposits in the industry plunged by 1.5 trillion won ($1.4 billion) in the past four months as concerned depositors moved their money to commercial banks with better credit ratings.

“The secondary banking sector will suffer from deposit shortage at least until early next year,” an official at the watchdog said.

By Cynthia J. Kim (cynthiak@heraldcorp.com)