Forecast: 18 Savings Banks Under Intensive Monitoring... Largest Number in 5 Years

The number of savings banks under focused monitoring by the Korea Deposit Insurance Corporation (KDIC) has reached the highest level in five years. This is attributed to the impact of non-performing real estate project financing (PF).

On the 14th, Kim Hyun-jung, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea, received the 'Status of Monitoring Stage Classification by Financial Sector' submitted by KDIC, which showed that 18 savings banks were under focused monitoring in the first quarter of this year.

KDIC operates monitoring stages by financial sector to manage the risks of financial companies covered by deposit insurance. Stage 1, general monitoring, includes institutions with sound financial conditions and low risk of failure. Stage 2, priority monitoring, covers those with moderate or various vulnerabilities requiring risk management beyond normal levels.

Stage 3, focused monitoring, applies to institutions with weak financial conditions that are continuously deteriorating and have a high likelihood of leading to an insurance event. Accordingly, KDIC implements risk management measures such as quarterly risk checks for Stage 1, enhanced risk management through dedicated desks and management interviews for Stage 2, and for Stage 3, it conducts focused reviews, requires submission of business and asset-related documents if necessary, requests inspections by the Financial Supervisory Service (FSS) and submission of results, and may request joint inspections with the FSS.

According to KDIC, as of the end of the first quarter this year, there were 28 institutions under priority monitoring: 2 banks, 4 life insurance companies, 3 non-life insurance companies, 8 financial investment companies, and 11 savings banks. The number of institutions under focused monitoring totaled 29: 1 bank, 2 life insurers, 2 non-life insurers, 6 financial investment companies, and 18 savings banks. Notably, the 18 savings banks under focused monitoring represent the highest number in five years.

Kim’s office explained, "With red flags raised across the financial sector due to real estate PF risks, concerns about PF defaults in the secondary financial sector, including savings banks, are increasing. In particular, the risk of real estate PF defaults in the savings bank sector is understood to be higher than in other secondary financial sectors."

Meanwhile, KDIC conducts risk analysis based on individual financial companies’ financial information to prevent insurance events, and performs on-site inspections such as joint examinations with the FSS or independent investigations when necessary. Since the 2011 savings bank crisis, amendments to the KDIC Act enforcement decree have relaxed the conditions for independent investigations, allowing KDIC to conduct independent investigations on savings banks with potential insolvency risks.

In the past five years, KDIC conducted one independent investigation in 2022 and two in 2023 on the savings bank sector. According to Kim’s office, based on the savings banks’ first-half financial results, an independent investigation on one savings bank is scheduled to begin this month, with two more planned within the year. Additional independent investigations by KDIC may follow depending on the third and fourth quarter financial results and management conditions of savings banks.

Kim stated, “Savings banks are a financial pillar for ordinary citizens and small businesses. The crisis in savings banks is not merely an issue of individual financial institutions but a serious matter that could undermine the stability of the entire financial system. Urgent risk management measures by KDIC and financial authorities are needed.”