[Initial Insight] Real Estate PF and Savings Banks 'Soft Landing', No Time to Hesitate

On the chilly morning of February 17, 2011, when winter rain was falling, Busan 2 Savings Bank in Busan was crowded with depositors rushing to withdraw their money after hearing the news that another savings bank in the same group had been suspended from operations. This bank run, which began in this way, led to the suspension of operations of 16 savings banks in 2011 alone, resulting in an unprecedented "Savings Bank Crisis."

The core cause was real estate project financing (PF) that had accumulated bad debts since the 2008 global financial crisis. On the surface, nearly half of the total 7 trillion won in loans handled by all savings banks?about 3.3 trillion won?was tied up in troubled projects, which triggered the crisis. Subsequent investigations by financial authorities and even the prosecution revealed numerous illegal activities, including prohibited direct real estate investments and slush fund creation by management, too many to list individually.

Entering its fourth year, the Lee Myung-bak administration immediately supplied emergency liquidity worth 2 trillion won after the crisis and established a special mutual savings bank restructuring account in April to inject public funds, but failed to contain the spread. The amendment to the Mutual Savings Bank Act, which strengthened soundness regulations, was only enacted in July 2013 under the Park Geun-hye administration, two and a half years later.

In 2024, savings banks are once again facing a crisis. Coincidentally, the root cause of this crisis is also real estate PF. Although the laws and systems changed after the savings bank crisis 13 years ago are in operation, related indicators continue to deteriorate. Moreover, the government, which had shown strong confidence for a while claiming the situation was manageable, and the savings banks, which are expressing dissatisfaction with government measures and acting out of sync, create an atmosphere similar to that before the "Savings Bank Crisis."

The authorities, who had been reluctant to disclose information, have recently revealed statistics on bridge loans and main PF loan balances, delinquency rates, and land-secured loan balances and delinquency rates that make up real estate PF loans. As of the end of March, the PF delinquency rate of savings banks recorded 11.26%, up 4.30 percentage points from the end of last year. Both the bridge loan delinquency rate (14.00%) and the main PF delinquency rate (10.89%) were in double digits. In particular, the delinquency rate of land-secured loans by savings banks surged by more than 10 percentage points from the end of last year to reach 20.18%.

Meanwhile, policies introduced by the authorities have led to poor results. Plans to induce rapid restructuring and auctions of troubled projects failed to produce results as the initial bid prices were mostly set at principal levels, leading to repeated failures to sell. Especially, the "Real Estate PF Normalization Fund," formed mainly by savings banks under pressure from the authorities, revealed loopholes. Examining the composition of the normalization fund raised in two rounds showed that over 80% of the contributing savings banks and those selling non-performing loans were the same. This created a circular transaction structure where troubled PF loan claims were temporarily transferred to the fund and later repurchased at a low price.

The full-scale restructuring linking real estate PF and savings banks will begin in September. The authorities have set a goal to review restructuring and liquidation plans for projects classified as cautionary (C) or at risk of insolvency (D) from all financial companies, including savings banks, and finalize them by the end of August. Considering that real estate PF insolvency re-emerged as a key issue shortly after the Tae Young Construction workout (corporate financial restructuring) at the end of last year, this comes after nine months.

The 2011 savings bank crisis escalated uncontrollably within just one month amid domestic and international uncertainties. This time, the external environment is also challenging, with instability in the Middle East, concerns about a U.S. economic recession, and the unwinding of the yen carry trade. There is no time to hesitate.