When one thinks of South Korea one tends to think of stable government and an even more stable financial system. That may change very soon. According to JoongAng Daily, "more than a thousand customers lined up in front of the Busan II Savings Bank located in Busan yesterday as soon as the nation’s financial regulator announced a six-month business suspension of Busan Savings Bank and its affiliate Daejeon Mutual Savings Bank." And not helping the mood was a bank employee who told the crowd that "You won’t be allowed to withdraw your money if you are just standing there without a queue ticket number." Needless to say, most promptly got a number. Those that didn't tried to get their cash at an ATM. Unsuccessfully: "Those without a ticket then headed to the automated teller machines to withdraw their money, but the machines quickly ran out of cash." And while the bank run at Busan was driven by capital inadequacy (shockingly Korea still hasn't figure out that the best way to mask liabilities surpassing assets is through pervasive fraud and suspension of all common sense accounting rules: they should promptly consult with Tim Geithner and Sheila Bair on the issue), it may promptly spread to the entire banking system. "Analysts expressed concerns that public panic about savings banks could spread. “The fears of depositors are mounting, which could lead to bank runs at a number of savings banks, and it could eventually spread to the entire savings bank industry,” said Jung Sung-tae, a researcher at LG Economic Institute." But fear not, for the Korean government is one step ahead: "A way to secure capital [for savings banks] is to establish a joint account holding fund amounting to 10 trillion won,” explained Kim Seok-dong, FSC chairman. “This problem will be closely discussed with the National Assembly.” Any day now Korea will end up with its own version of a taxpayer funded capital block hole, a/k/a in the US as the FDIC, and all problems will be promptly brushed under the rug. We can't wait until this brilliant idea comes to China (advised by Goldman Sachs no doubt). We just wonder if it will be before or after the Chinese bank run hits...
“I’ve saved 40 million won ($35,810) over my whole life. That money was going to be used for my grandson’s marriage but I cannot trust these people [bank employees] saying that I am guaranteed to get my money back,” said Cho So-young, 79.
Although operations of three of Busan Savings Bank’s four affiliates were not suspended, there are fears that they could be hit by a bank run on their deposits.
In the case of Busan II Savings Bank, its capital adequacy ratio stood at 6.0 percent as of the end of 2010, but its liabilities exceeded assets by 12.5 billion won.
Two other affiliates, Jungang Busan Savings Bank and Jeonju Savings Bank, have capital adequacy ratios of 3.6 percent and 5.6 percent, respectively. But they are unlikely to avoid a suspension of business if a bank run occurs.
The state-run Korea Finance Corporation and four commercial banks - Woori, Kookmin, Shinhan and Hana - have decided to inject 2 trillion won of emergency liquidity into the savings bank sector.
In addition, the government has decided to extend the amount of loans that can be borrowed by the Korea Federation of Savings Banks to support savings banks from the current 600 billion won to 3 trillion won.
Financial authorities are currently working to establish a joint deposit insurance account as a safety net for other financial sectors to curb the spread of possible financial risks from the savings banks. Funds for a joint deposit insurance account would be collected by financial institutions.
It is refreshing to see that both US banking insolvency, and its means of dealing with problems (insert head firmly and deeply in sand) are spreading across the world. And with that in mind, and a drink in hand, we now await for the daily trickle of press releases from the FDIC describing today's roster of Failure Friday banks, which have really failed in not realizing that the only way to avoid bankruptcy is to merge with everyone else who is just as insolvent and become a systemic risk.