Savings Bank Crisis and Depositors Protection Act Amendments


Since the FSC suspended the business operation of Samwha Savings Bank on January 14, seven more savings banks facing severe liquidity shortage have been suspended in February. After the announcement of the suspension of Samhwa Savings Bank, massive withdrawal of deposits by savings banks customers were followed, which led the FSC to suspend seven additional savings banks which could not repay depositors’ savings.


1. Background or Causes of the Savings Banks Problem

Savings banks, highly exposed to real estate project financing (PF) market, experienced rapid deterioration of their financial health during the global financial crisis in 2008 as real estate market went through subsequent recession.

During the property market boom, many savings banks significantly increased their PF loans; however, as the property market went down after the financial crisis of 2008, those PF loans turned bad, hurting savings banks’ financial health. The amount of loans classified as substandard or below (SBL) in Savings bank increased from KRW 6.1 trillion in September 2009 to KRW 6.9 trillion in September 2010 and loan delinquency averaged 17.9% in September 2010, compared with 13.0% 2 years earlier.

But the Savings banks crisis caused by liquidity shortage and bank run crisis has limited possibilities for any detrimental effects on the entire financial market, as Standard & Poor’s report said on March 3. The FSC has developed and implemented a comprehensive plan to prevent Savings Banks from becoming insolvent again. The value of troubled savings banks amounted to KRW12.6 trillion, which accounted 15% of the entire Savings banking system, but now it is only 0.45% of the entire banking system, the amount of which is KRW 2,803 trillion.

The whole system from most commercial banker’s point of view, they are more stable than Savings banks. The amount of PF loans only made up 3.2% of all bank loans outstanding and SBL ratio decreased from 18.11% in September 2010 to 16.44% in December, 2011. Financial authorities have also been continuously working on this problem with resolution guidelines of the troubled real estate PF loans over December 2011.


(Source: Financial Supervisory Service)


2. Government Measures for Savings Banks Problems

FSC held a meeting on February 21 and announced plans to minimize the impact of savings banks suspensions on depositors and Small and medium enterprises (SMEs) in the region, and to provide sufficient liquidity for other savings banks.


1)     For Savings Banks and Depositors

At first, the government relieved depositors’ anxiety about their deposit in suspended Savings Banks. The government helped them get a deposit-backed loan from commercial banks to meet depositors’ urgent need for cash and receive provisional payment from Korea Deposit Insurance Corp (KDIC).

And to help stabilize savings banks’ operation, the government will help the Korea Federation of Savings Banks expand its liquidity support and purchase bad PF debts from savings banks through Korea Asset Management Corporation (KAMCO) to improve the soundness of savings banks’ assets.


2)     For Low-income Households in the region

The government strengthened support for microcredit services, by doubling its annual support for Miso Microcredit branches and encouraging local branches in the region to more engage in the microcredit service.


3)     For local SMEs and small business owners

Korea Credit Guarantee Fund (KODIT) and Korea Technology Finance Corporation extent the maturity of outstanding guarantees and IBK offered SMEs a loan to help them stabilize their business operation.


3. A Special-purpose fund for the restructuring of savings banks.

In order to calm down the Savings Banks inconveniences Korean government and FSC have launched an amendment to the Depositor Protection Act, which passed the National Assembly on 11th March. A new special-purpose account in the Deposit Insurance Fund has been formed for the reconstruction of the savings banks.



Korea finance sectors already deposit certain amount of insurance fees for Deposit Protection. With this new amendment though,, 45% of their insurance fees are will join the special account for savings banks. For Savings Banks, 100% of their insurance fees join the special account.

Government contributions also form a pivotal part in the special account as well. The amendment prepared a legal ground for it to inject public fund to the special account.


(photo: voice of people news)

The Standing Committee of the National Assembly would supervise the following management of the special fund. Korea Deposit Insurance Corporation (KDIC)  would submit reports on fund management and white paper on the operation of the special fund.

The revised Depositor Protection Act would enter force on April 1st, 2011, until the day today’s Savings bank troubles smoothe down. Legally, it would remain valid until Dec. 31st, 2026. When it liquidates, the left over funds from government contribution would belong to the national treasury, and the remainder would go to each sector’s insurance deposit accounts (excluding savings banks’) by the proportion of contributions they have made.

Excessive Project Finance loans of Savings Banks were the key attributor of recent Savings Bank runs. Nevertheless, we ought to find it fortunate that it had little impact on Korea’s 1-tier economy and finance. The Depositor Protection Act, that would surely relieve the cautions of Savings Banks to seize further inconvenience for Savings Bank depositors.


Kyoung-eun Lee (

Kyoung-tae Oh (


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s