Four savings banks that have recently been declared insolvent are found to have sustained huge losses from high-risk investments. Worse still, astronomical amounts of money have allegedly been embezzled by the managers of two of them. If they are not recouped, taxpayers will have to hold the bag.

Prosecutors are widening their investigation into an allegation that Lim Suk, chairman of Solomon Savings Bank, embezzled 500 billion won from customer deposits and put the money into a maritime service company he is suspected of owning. Also under investigation is Kim Chan-kyong, chairman of Mirae Savings Bank, who is suspected of embezzling nearly 500 billion won.

According to one estimate, the government will have to pour 6 trillion won into the restructuring of Solomon, Mirae and two other insolvent savings banks. Add this to the 15.7 trillion won it spent on the two rounds of restructuring it conducted on more than a dozen insolvent savings banks last year, and it reveals a grim picture of what has become of this non-banking industry. Moreover, there is no guarantee that this is the last bout of costly industry-wide restructuring.

As past and current cases show, there is no quick fix for the ailing industry. Instead, it needs drastic surgery urgently, but the government is dragging its feet.

Reform of the industry will have to begin with a ban on these institutions using the word “bank”in their names. Savings banks are not commercial banks. As such they are classified as non-banking financial institutions.

At the same time, the maximum deposit amount whose payment is guaranteed by the state-run Korea Deposit Insurance Corp. should be drastically reduced if deposit guarantees cannot be withheld from these non-banking financial institutions.

The industry’s downfall, as witnessed in the past and current restructurings, is a case that graphically illustrates what kind of havoc a financial policy, misguided though well intentioned, may wreak when it is implemented.

The origin of savings banks dates back to 1972 when the financial authorities froze private loans and allowed mutual savings and finance companies to be created. As one after another went bankrupt in the wake of the 1997-98 Asian financial meltdown, the Kim Dae-jung administration helped them lure depositors by raising the minimum insurance-guaranteed portion of a deposit from 20 million won to 50 million won in 2001 -- the same amount guaranteed for a deposit with a commercial bank.

The next year, mutual savings and finance companies were allowed to change their names to mutual savings banks despite their status as non-banking financial institutions. This permission gave the false impression to depositors that they were as dependable as commercial banks, when in fact their regulatory supervision was not as strict.

Moreover, they were not required to show same level of prudence as commercial banks. As such, they could make higher-risk investments and pay higher rates of interest to depositors than commercial banks.

The government gave all these favors to the non-banking financial institutions, aiming at giving low-income households and small businesses greater access to loans at a time when liquidity was in short supply. Of course, they had to pay higher rates of interest than those charged by commercial banks.

The two successors to the Kim administration had their share of accountability. The Roh Moo-hyun administration took measures to encourage mergers and acquisitions among them. It also eased regulations to allow them to make new high-risk investments, such as project-financing investments.

The Lee Myung-bak administration permitted them to drop “mutual” from “mutual savings banks” and, by doing so, made them look more like commercial banks. A more serious mistake was made when it put pressure on healthy savings banks to take over those whose performances were much to be desired. This also planted the seeds of insolvency among them.

Against this backdrop, the Financial Services Commission is under public pressure to change their names back to mutual savings and finance companies, cut the maximum insurance-guaranteed deposit amount and take other reform measures. Their immediateimplementation, however, would risk destabilizing the entire financial industry. If so, the commission will be able to commit itself to a phased reform and start work on the first phase soon.