[Why&Next] Bank Run Recreated After 12 Years... Why Saemaeul Geumgo?

On the 6th, officials are posting notices related to the protection of savings and deposits at the MG Saemaeul Geumgo Gyeonghuigung Branch in Jongno-gu, Seoul. Photo by Dongju Yoon doso7@

The bank run (massive withdrawal of deposits) crisis that occurred mainly at some Saemaeul Geumgo institutions is stabilizing. Inside and outside the financial sector, the causes of this crisis, which reoccurred for the first time in 12 years since the 2011 savings bank crisis, are attributed to Saemaeul Geumgo's indiscriminate expansion of real estate project financing (PF) loans, the rapid increase in benchmark interest rates and the resulting real estate market downturn, and the spread of anxiety following the bankruptcy of the U.S. Silicon Valley Bank (SVB).

Increased Anxiety Due to Interest Rate Hikes and SVB Crisis... Bank Run Triggered by Soaring Delinquency Rates

In the financial sector, the origin of the Saemaeul Geumgo bank run crisis is found in the liquidity tightening by the U.S. Federal Reserve (Fed). During the process of withdrawing the excessively loosened liquidity during the COVID-19 pandemic, financial institutions' insolvencies were exposed, and the SVB and Credit Suisse (CS) crises spread the perception that "banks can also collapse."

In the case of Saemaeul Geumgo, news emerged in March that delinquency rates related to the real estate market downturn were surging, igniting anxiety among financial consumers. At that time, the Saemaeul Geumgo Central Association issued several explanatory statements, but suspicion did not easily subside. Amid reports of soaring delinquency rates in the secondary financial sector, only Saemaeul Geumgo's figures remained opaque, which amplified the anxiety.

Subsequently, news broke that Namyangju Dongbu Saemaeul Geumgo would be absorbed and merged due to 60 billion KRW worth of non-performing loan assets. Also, the overall delinquency rate of Saemaeul Geumgo, which was 3.59% at the end of last year, surged to 6.18% (as of June 29), and the corporate delinquency rate, which was in the 2-3% range, approached 10%, turning the Saemaeul Geumgo crisis rumors into near certainty. Ultimately, financial consumers began withdrawing their money from Saemaeul Geumgo, leading to a bank run within days.

An official from the supervisory authority said, "Amid growing perceptions from the SVB and CS crises that 'banks can fail,' concerns about Saemaeul Geumgo's soundness, such as delinquency rates, triggered depositors' anxiety. Especially, unlike institutions such as agricultural and fisheries cooperatives and credit unions that regularly disclose soundness-related figures and issue messages at the government level, Saemaeul Geumgo's information was at an opaque level, which greatly amplified the anxiety."

Saemaeul Geumgo's Entry into 'High-Risk High-Return' PF... Regulatory Blind Spot

The sharp rise in Saemaeul Geumgo's delinquency rate, which led to a bank run, was largely due to non-performing loans arising from construction and real estate-related loans. As asset markets such as real estate rapidly expanded due to liquidity supply by governments worldwide in response to the COVID-19 pandemic, Saemaeul Geumgo was also actively involved in 'high-risk high-return' real estate PF loans.

According to data submitted by the Ministry of the Interior and Safety to the office of Assemblyman Oh Young-hwan of the Democratic Party, the outstanding loan balance Saemaeul Geumgo executed in construction and real estate industries was about 56.4 trillion KRW as of the end of January (including about 20 trillion KRW in joint loans), accounting for half of the total corporate loans (about 111 trillion KRW). This is more than double compared to the end of 2019, just before COVID-19 (about 27.2 trillion KRW). The delinquency rate soared to 9.23%.

Additionally, the outstanding loan balance for managed land trust business loans, which are similar in nature to real estate PF, also surged to about 15.5 trillion KRW, more than 90 times the amount at the end of 2019 (about 1.7 trillion KRW). The delinquent amount also expanded more than tenfold from 6 billion KRW at the end of 2021 to 60.2 billion KRW at the end of last year.

The mutual finance sector's unique 'joint loan' system also increased the burden. Joint loans refer to a method where two or more Geumgo institutions provide loans for one project. For example, the Onsu Station rugby stadium redevelopment project, known as the largest real estate loan nationwide by Saemaeul Geumgo, reportedly involved 176 Geumgo institutions participating and providing about 330 billion KRW in bridge loans.

The total amount of joint loans provided by Saemaeul Geumgo reached 20 trillion KRW. Particularly, many of Saemaeul Geumgo's joint loans were for commercial real estate properties with relatively high risks, such as officetels, knowledge industry centers, and residential lodging facilities. A financial sector official said, "During the 2-3 years after COVID-19, the real estate market rapidly expanded, and it is true that not only Saemaeul Geumgo but the entire financial sector jumped into PF loans. For Saemaeul Geumgo, whose main customers were local community members with medium to low credit, such high-risk high-return businesses were inevitably attractive."

The industry also believes that the expansion of non-performing loans was partly due to the sector's characteristics of being closely connected to local communities at the unit level. Unit Geumgo institutions lack sufficient capacity to evaluate the feasibility of real estate PF projects, and it is relatively easy for collusive relationships to form. Recently, former and current employees of Geumgo have been prosecuted and are on trial for illegal payment of PF loan commissions, and Namyangju Dongbu Saemaeul Geumgo, which triggered the bank run, violated regulations by not even conducting due diligence during the loan process related to hundreds of billions of KRW in problematic loan assets.

On the other hand, regulatory levels were lax. For example, agricultural and fisheries cooperatives and credit unions stopped joint and collective loans early last year when the risk of real estate PF insolvency increased, but Saemaeul Geumgo only imposed restrictions on joint and collective loans and managed land trust loans in April. A financial authority official said, "Agricultural and fisheries cooperatives and credit unions are under the Financial Services Commission, so continuous soundness management was possible even after imposing soundness regulations, whereas Saemaeul Geumgo was relatively slower in management and supervision."

While concerns about insolvency in PF loans, which were aggressively pursued amid the real estate market downturn, are growing across the entire financial sector, the reason the crisis surfaced first in Saemaeul Geumgo compared to securities, capital, and savings banks is similar. Another financial authority official said, "Around last year, when savings banks, securities firms, and capital companies were withdrawing, Saemaeul Geumgo actually increased corporate loans significantly and had relatively many high-risk loan assets. The market's recognition of this also had a big impact."

Why are other secondary financial sectors such as securities, capital, and savings banks not facing problems? As of the end of March this year, the delinquency rate on real estate PF loans by securities firms was 15.88%, higher than Saemaeul Geumgo, but the loan balance was relatively small at 5.3 trillion KRW. Loan balances of credit specialized financial companies such as card companies and capital companies were large at 26.1 trillion KRW, but the delinquency rate was still low at 4.20%. Especially, securities firms, card companies, and capital companies do not have deposit-taking functions, so there is no reason for a bank run like Saemaeul Geumgo. Savings banks did not significantly increase real estate PF loans because they suffered greatly from a large-scale real estate PF insolvency crisis in the early 2010s. Their loan balance was 10.1 trillion KRW, with a delinquency rate of 4.07%.

Government's Swift Response to the 'Nightmare' 12 Years Ago... Bank Run Nearing Resolution

The government's response, having experienced the savings bank crisis 12 years ago, was also swift. As signs of large-scale deposit outflows appeared at Saemaeul Geumgo, the government formed an 'inter-agency response team' and sought to minimize deposit outflows by restoring agreed interest and tax-exempt benefits if withdrawn deposits were redeposited.

Subsequently, the authorities arranged for repurchase agreement (RP) purchase contracts worth 6.2 trillion KRW between the five major commercial banks (KB, Shinhan, Hana, Woori, NH Nonghyup), Industrial Bank of Korea, Korea Development Bank, and Saemaeul Geumgo to supply additional liquidity. As a result, early last week, deposit outflows from Saemaeul Geumgo decreased to about 600-700 billion KRW, and later in the week, deposit amounts increased, entering a stabilization phase.

Professor Han Jae-jun of Inha University's Department of Global Finance said, "A bank run is psychological," and added, "Although the government's response might be somewhat excessive by trying to cover everything, without such measures, the bank run at Saemaeul Geumgo could have worsened."

With a sigh of relief, the authorities plan to focus on managing Saemaeul Geumgo's soundness. They will sell a total of 1.2 trillion KRW in non-performing loans through Korea Asset Management Corporation (KAMCO) and MCI Loans within the year, and also raise soundness regulations to the level of other mutual finance institutions. They will maintain liquidity ratios above 80% and adjust credit limits for construction and real estate industries to 30% each, with a combined limit of 50%.

Regarding the PF loans of Saemaeul Geumgo, which are a major concern, the stance is that there should be no significant problems since many are senior loans and the loan-to-value ratio (LTV) is about 60%. For projects with feasibility, they will be re-pursued through PF lender agreements, and for those without feasibility, loan recovery can be made by selling collateral.

The industry advises that this crisis should serve as an opportunity to upgrade the soundness supervision level of Saemaeul Geumgo. A financial sector official said, "In the U.S., during the SVB crisis, the process of rescuing depositors with responses that did not follow principles led to a kind of 'too big to fail' for financial institutions. To prevent this from becoming a bad precedent for other institutions, it is necessary to renew Saemaeul Geumgo's soundness management and supervision system."