Daily Management Review

South Korea Orders Banks To Set Aside $4 Billion For Supporting Credit Unions


South Korea Orders Banks To Set Aside $4 Billion For Supporting Credit Unions
According to two banking sources familiar with the situation on Monday, South Korea's financial services regulator has requested major commercial banks to set aside $4 billion in financing to help a credit cooperative that has been affected by customer withdrawals.
The Financial Services Commission, according to a representative, could not confirm the sum or any other specifics, but it had requested the banks' assistance in MG Community Credit Cooperatives' (MGCCC) preparation of liquidity through repurchase-agreement facilities.
"(Authorities) are closely monitoring the liquidity of MGCCC," the official said, declining to be named due to the sensitivity of the matter. The commission had no further comment.
Last week, after local media reported an increase in non-performing loans related to real estate projects, depositors were waiting in queue to withdraw money from a cooperative branch. The business will shortly close in Namyangju, a city east of Seoul.
The credit cooperative, which has over 1,300 branches, committed on Sunday to maintain liquidity, stating in a statement that MGCCC's capital ratio and liquidity greatly above statutory ratios and it had enough cash-equivalent assets.
Concerns about the potential effects on Asia's fourth-largest economy have been raised in response to sharply rising interest rates and a slowing real estate market.
The five biggest commercial banks in South Korea have already signed buyback agreements with the credit union or are in the process of doing so, according to the sources, who requested anonymity due to the nature of the situation. Repurchase facilities make it possible to raise money in exchange for securities as collateral, like bonds.
The sources claimed that Woori Bank, Hana Bank, Shinhan Bank, KB Kookmin Bank, and NongHyup Bank had been asked to provide finance to MGCCC; however, the precise amount made available to the credit union would depend on deposit withdrawals.
According to the sources, each bank was instructed to arrange 1 trillion won in financing, for a total of 5 trillion won ($3.84 billion) in potential support.
Requests for comment from MGCCC and the five banks were not immediately fulfilled.
In a statement released last week, MGCCC claimed that its debt default rate was controllable and that it would cooperate with the Interior Ministry to strengthen its financial stability.
In a statement released on Sunday, representatives of the Financial Services Commission, the Ministry of Finance, and the Bank of Korea also noted that MGCCC withdrawals had decreased and that fresh deposits had started to flow since last Thursday.
In a letter to investors last week, Citi downplayed the incident's hazards but raised concerns about the sector's debt-ridden real estate market's potential impact on economic development.
"We don't see systematic risks from the event," said Kim Jin-wook, an economist for Citi in Seoul, adding that any negative effects would likely be far less than those of a missed bond payment by a theme park developer late last year.
When concerns about a credit crisis were raised by the theme park developer Gangwon-Jungdo Development's missing bond payment in November, South Korean financial authorities worked with banking organisations to set up a liquidity scheme.