[Inside Chodong] Mutual Finance Institutions Must Strengthen Liquidity Response Capabilities

Saemaeul Geumgo Crisis Settled for Now Amid PF Defaults
Need to Review and Prepare for Contingencies at Fisheries and Livestock Cooperatives
Institutional Improvements Needed, Including Raising the Deposit Insurance Limit

The bankruptcy crisis of Silicon Valley Bank (SVB) in the United States has left us with several lessons. One is that depositors are significantly more sensitive and respond much faster to the possibility of asset deterioration than in the past. Compared to before, information asymmetry has greatly decreased, and with the spread of internet and mobile banking, the speed of deposit and asset movement has accelerated. Another lesson is that even U.S. Treasury bonds, considered the world's safest assets, may not sufficiently serve as a liquidity buffer when interest rates rise rapidly. As long as the U.S. government does not default, the likelihood of losing principal and interest by holding U.S. Treasury bonds to maturity is extremely low. However, the situation changes if one suddenly has to sell them in the market while suffering valuation losses due to rising market interest rates.

The SVB crisis led to a bank run as large-scale venture investments unsettled depositors. The bank responded by selling a significant portion of its U.S. Treasury bonds at prices far below face value, eventually reaching its limit. The liquidity crisis at Credit Suisse (CS), one of Europe's major investment banks (IB), was triggered by the spread of anxious sentiment among depositors and investors over deteriorating investment assets. In particular, CS's status as an investment bank with many investment assets, unlike European commercial banks, maximized the anxiety of depositors and investors.

Domestically, Saemaeul Geumgo nearly faced a liquidity crisis through a similar path as SVB. Twelve regional unions invested in real estate project financing (PF) for a development project by the same developer, and defaults by the developer caused loan deterioration. Depositors, feeling uneasy, partially withdrew funds or made withdrawal inquiries, raising concerns about the spread of a liquidity crisis. Fortunately, the Saemaeul Geumgo Central Association's swift response, including agreements among regional unions to provide emergency liquidity support if necessary, prevented the situation from escalating. Had this been mishandled, it could have led to a frightening liquidity crisis triggered by Saemaeul Geumgo, following last year's Legoland incident.

Risk factors that could still act as triggers for crises remain. Therefore, mutual financial institutions such as Saemaeul Geumgo, credit unions, fisheries cooperatives, and livestock cooperatives need to take this incident as an opportunity to review and enhance their liquidity response capabilities. Mutual finance institutions protect depositors through their respective central associations under individual laws. Compared to banks, where the government agency Deposit Insurance Corporation protects depositors, the deposit stability of mutual finance institutions is somewhat lower. The central associations should serve as a buffer by providing liquidity support to regional unions in emergencies. However, it is questionable whether they have sufficient liquidity response capabilities in the event of a deposit withdrawal crisis. The central associations also manage a considerable amount of assets in short-term financial assets, bonds, and alternative investments. If a bank run occurs, they may face a situation like SVB, where they have to sell assets at low prices to respond to urgent liquidity needs.

At the same time, the pace of raising the deposit insurance limit should be accelerated. The government is currently promoting a plan to raise the deposit insurance limit to 100 million won. With crisis signals from U.S. and European banks being detected one after another, and domestic real estate PF facing uncertainties due to unsold and unstarted projects, it is impossible to foresee when and how these might act as triggers for deterioration. Deposit insurance stabilizes depositors' anxious sentiment at a low cost, maximizing the preventive effect against bank runs. It is the best method to calm the minds of depositors and investors without actually using funds.