[Why&Next] Breaking the Vicious Cycle of PF Insolvency... What Is the Government's Plan?

2011 Savings Bank Crisis Also Triggered by Real Estate PF
Repeated PF Failures... High-Risk 'Bridge Loan-Main PF' Dual Structure
Government to Fundamentally Reform Real Estate PF... Considering Significant Increase in Developer PF Equity Ratio
Additional Provisions Pressure on Financial Sector... Prompt PF Project Restructuring Encouraged

Taeyoung Construction, which is experiencing a liquidity crisis due to real estate project financing (PF), has applied for a workout. On the 5th, the construction site of Taeyoung Construction's Seongsu-dong development project located in Seongdong-gu, Seoul, has come to a halt. Photo by Jinhyung Kang aymsdream@

At the center of the 2011 savings bank crisis was real estate project financing (PF). Solomon Savings Bank, Busan Savings Bank, Tomato Savings Bank, Prime Savings Bank, and others indiscriminately lent money to construction companies and developers without proper verification, aiming for high returns. When the real estate market contracted, they failed to recover the loans properly and had to close down. As a result of the ripple effects that continued until 2015, a total of 31 savings banks shut their doors.

The government injected fiscal funds to purchase non-performing loans from savings banks and accelerated bankruptcy procedures by appointing the Korea Deposit Insurance Corporation (KDIC) as the bankruptcy trustee. At that time, the funds supported through KDIC amounted to 27.1717 trillion won. Meanwhile, the Financial Services Commission (FSC) introduced the 'Standard Loan Regulations for Savings Banks,' allowing loans only to PF projects with at least 20% equity capital, implementing significantly strengthened measures.

The workout (corporate financial restructuring) application by Taeyoung Construction on December 26, 2023, also started with real estate PF. Taeyoung Construction, which aggressively expanded PF projects through direct and indirect loan guarantees during the real estate boom, found itself unable to even pay interest at loan maturity due to high interest rates and a declining real estate market, leading it to request restructuring from creditors. This means that the strengthened loan regulation measures, which had been reinforced over about 12 years since the savings bank crisis, proved ineffective.

The government plans to fundamentally reform the practices and structure of the real estate PF market, using the Taeyoung Construction workout as an opportunity. While the past government focused on the bank run crisis caused by indiscriminate PF loans by savings banks and concentrated on protecting financial consumers, the current intention is to break the vicious cycle emerging from changes in the financial environment.

Fundamental Reform of High-Risk 'Bridge Loan-Main PF' Dual Structure... Minimum 20% Equity Capital

View of Yeouido apartments from the 63 Building observatory. Photo by Hyunmin Kim kimhyun81@

Korea's real estate PF market is characterized by a dual structure called 'Bridge Loan-Main PF.' Bridge loans occur during the process when developers purchase land and pay the balance, while main PF is structured during the repayment of bridge loans and the procurement of construction costs. Since bridge loans are based on initial project feasibility assessments, they carry much higher risks and are often treated as high-interest short-term loans by secondary financial institutions such as securities firms, capital companies, and mutual finance companies rather than commercial banks.

The government views the excessively low self-responsibility of developers who initiate real estate development projects as a structural problem. Typically, developers finance only 5-10% of the total project funds with their own capital and leverage the rest. They initiate multiple large-scale real estate development projects with small amounts of capital, repaying PF loans with money paid by residents who bought houses at high prices, thereby earning high returns. This structure excessively pursues risk and inevitably leads to moral hazard in some cases. This is the background behind Deputy Prime Minister and Minister of Economy and Finance Choi Sang-mok's remark on the current real estate PF market: "If sale prices fall, there is a domino effect of failures. Under the current structure, crisis situations are bound to repeat."

Accordingly, led by the Ministry of Economy and Finance, related ministries are expected to prepare a 'Real Estate PF Normalization Plan' focusing on structural reform to raise developers' equity capital contribution ratio to 20%. Even in nearby Japan, it is customary for real estate developers to invest a significant portion of their own capital and complete project permits before initiating the main PF. The United States also requires real estate developers to cover early-stage development costs such as land acquisition.

Financial Supervisory Service (FSS) Governor Lee Bok-hyun raised the tone further. At a securities industry meeting held by the Korea Financial Investment Association on the 24th, he stated, "I believe it is undesirable going forward for real estate development to proceed without developers being in a state of self-responsibility close to 100%, not just 20% equity capital."

Additional Provisioning Pressure on Financial Sector... Inducing Orderly Restructuring of PF Projects

Newly appointed Deputy Prime Minister and Minister of Economy and Finance Choi Sang-mok is attending the Macroeconomic and Financial Meeting held at the Bankers' Hall in Jung-gu, Seoul on the 29th. The meeting was attended by Lee Chang-yong, Governor of the Bank of Korea; Kim Ju-hyun, Chairman of the Financial Services Commission; Lee Bok-hyun, Governor of the Financial Supervisory Service; and Park Chun-seop, Senior Secretary for Economic Affairs. Photo by Jo Yong-jun jun21@

The government has also urged the financial sector to build up provisions more actively related to real estate PF. This is a measure to enhance loss absorption capacity in advance as PF project restructuring proceeds following the Taeyoung Construction workout. FSS Governor Lee emphasized the need for financial institutions with capacity to accumulate provisions as much as possible and warned, "We will hold financial companies strictly accountable if they use resources for dividends and bonuses."

Active provisioning is also expected to facilitate vigorous private-sector restructuring of the real estate PF market. Even Taeyoung Construction requires extensive restructuring of 60 PF projects. The government plans to promptly address problematic real estate PF projects, focusing on financial institutions that have accumulated provisions in advance.

A senior official from the Financial Services Commission explained, "It is necessary to create an atmosphere where stakeholders within PF projects can resolve issues on their own in the private sector," adding, "We plan to continuously induce an orderly soft landing."

As restructuring becomes more active, the role of the auction and forced sale market is also expected to become important. The government believes that inducing land price declines through auctions and forced sales is necessary to attract 'new money' investment. The fund established by the Korea Asset Management Corporation (KAMCO) in October to purchase low-feasibility PF assets for restructuring has so far recorded only one purchase.

A senior official from the Financial Services Commission emphasized, "We plan to comprehensively reorganize related regulations and processes through this real estate PF restructuring," adding, "It is necessary to stop the vicious cycle of crisis."