The Financial Services Commission on Thursday suspended operations of two savings banks as part of its ongoing restructuring of the secondary banking sector hit by toxic construction debt.
It also announced plans to provide a nearly 20 trillion won ($18 billion) credit line in support for other viable institutions.
The regulator said it halted businesses of Busan Savings Bank, the No. 1 in the industry in assets, and its subsidiary Daejeon Savings Bank for six months until Aug. 16.
“Both of them have been suffering cash flow problems and it would be difficult for them to respond to withdrawal requests from depositors,” the FSC said in a statement.
The cash flow problem in the secondary banking sector emerged in the wake of the sluggish real estate sector since the 2008 global financial crisis.
Busan Savings Bank has faced capital erosion with its equity capital of minus 21.6 billion won as of the end of 2010, according to the regulator. Daejeon Savings Bank has been in a more critical situation with equity capital of 32.3 billion won.
At a news conference, FSC Chairman Kim Seok-dong hinted that the two distressed banks could put it up for auction to find a preferred bidder if they continue to see its financial soundness stand at a weak level.
“During the process of restructuring (of the secondary banking industry), there could be ones to become the M&A targets,” he told reporters.
In an initiative action after Kim took office in early January, the FSC suspended operations of Samhwa Savings Bank on Jan. 14 for six months. It has already been placed in the auction market.
As additional measures, the Financial Supervisory Service, an executive arm of the FSC, will make inquiry into Busan Savings and Daejeon Savings to determine whether to allow business resumption.
The FSS also plans to look into financial statements of Busan Savings Bank’s three other subsidiaries ― Busan II Savings Bank, Jungang Busan Savings Bank and Jeonju Savings Bank ― to gauge how the latest suspension affects their financial health.
In addition to the five affiliates including parent Busan Savings, five others in the industry have been put on a regulatory watch list after being found to have capital adequacy ratios below 5 percent.
The FSC is considering pooling nearly 20 trillion won in aid funds from the broader financial sector and taxpayers’ money in order to inject emergency funds into the liquidity-squeezed savings banks and induce M&As.
Out of the total 105 savings banks nationwide, 94 banks have met the minimum guidelines set by the regulators despite their overall difficulties.
The FSC chief said that no savings bank of the 94 players will face business suspension at least during the first half of the year.
The savings banking industry saw their troubled construction project-related financing loans came to a head as a property market slump that started in the 2008 global financial crisis sharply drove up defaults on such loans backed by the projects in the real estate sector.
Meanwhile, some observers in the market who criticized the regulators, the FSC and FSS, are busy trying to shift their responsibility to others after failing to effectively monitor their financial soundness.
By Kim Yon-se (firstname.lastname@example.org)