Financial groups offer to take over troubled secondary institutions

The government and large banking groups are coming to the rescue of the savings banks industry to prevent their debt crisis from harming the financial system.

The extent of urgency in the secondary banking industry could be seen from the remarks of Financial Services Commission Chairman Kim Seok-dong and chiefs of major financial groups.

It has been speculated that FSC Chairman Kim called for major financial groups to acquire ailing savings banks.

“Takeover of savings banks could benefit stock prices (of financial groups),” he told reporters Thursday. “With their acquisition of savings banks, systems of the financial market will also be stabilized.”

In addition, through mergers between the first and secondary banking industry, financial groups could enjoy diversification of business sectors and savings banks will see their profit-taking structure improve, he said.

Kim began to demonstrate his own policy style ― active market intervention ― less than a week after taking office on Jan. 3 as the chief regulator.

Kim said a day earlier that the FSC and leaders in the financial industry have reached a consensus that it is necessary for financial groups to take over several troubled savings banks.

Woori Financial Group and Hana Financial Group have expressed their consent to the regulatory policy, he added.

The Financial Supervisory Service, an executive arm of the FSC, has found dozens of local savings banks vulnerable to a potential rise in loan defaults.

Since the third quarter of last year, the FSS signed memorandum of understandings with distressed savings banks to beef up their financial soundness.

They were required in the MOU to write off soured construction project-related loans ― also known as project financing ― and raise more capital to buffer against possible loan losses.

But most of them failed to see their bad PF loans reduce, which have been blamed as the primary risk factor.

The average default rate on savings banks’ PF loans soared to over 10 percent during the fourth quarter of 2010 as a rising number of unsold homes and falling housing prices have dried up builders’ cash flows, derailing construction firms’ repayment of loans.

It has been estimated that the financial authority spent some trillion won in taxpayer’s money to buy soured loans from more than 50 savings banks in an attempt to protect them from escalating loan defaults triggered by a slumping housing market.

Woori Financial Group chairman Lee Pal-seung said Wednesday that the group will seek to buy one or more savings banks.

“Should problems of savings banks not be resolved, they could deal a blow to the banking sector as a whole,” he said. “A potential purchase of them is expected to create business opportunities for the group.”

Hana Financial Group chairman Kim Seung-yu also hinted at the possibility of acquiring a savings bank. He stressed that it is not only an issue only for the (savings banking) industry but an issue for the market.

Asked about the possibility of Hana’s participation, he said the group will closely monitor the situation for the time being.

By Kim Yon-se (kys@heraldcorp.com)