Reforms to prevent another savings bank crisis

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Hi, readers! Recently, the Financial Service Commission reform the supervise regulations on mutual savings and finance. I am pretty sure you are wondering why the FSC made this decision. Okay I will tell you about the background of this decision and how the regulations change. I hope it could be good answers to your curiosity.

So, what is mutual savings and finance? It refers to receiving deposit from cooperative members and lending these deposits to other members with cheaper interest rate to help finance accommodation between members. For this reason, these cooperatives are classed as “Small loan finance” with getting tax benefits. Furthermore, the cooperative adopted direct election system and the self-supporting system, so that it has been criticized for poor management.

Driven by saving bank crisis in 2011, the importance of regulations on mutual savings and finance firms is emphasized. Mutual saving and finance firms have seen their financial assets drastic increase for recent 3 or 4 years.   The problem is that over 90 % of these assets are from households’ real estate project financing and most of clients have relatively low income and credits. Therefore, recent housing market’s slump drove concerns over insolvency. FSC made some reform on the regulations of supervise service of these financial firms in an effort to prevent possible damage.

MBS

  1. To restrain excessive increase of loans, deposit-investment ratio should be below 80percent. Small cooperative whose loan is not over 20 billion won would not be subject to this regulation. The rule does not apply to “sunshine loan” and loan for governmental funds.
  2. Loan with grace period over 300 billion won and loan of multiple debtor having transactions with more than 5 financial firms are designated “high risk loan”. Additionally some of them are imposed additional loan loss reserves. As of March 2012, high risk loan reached at 49 trillion won, amounting for 30% of private loan of mutual savings and finance firms.
  3. In an effort to prevent the possibility of abusing credit union’s subordinated loan as a mean to raise capital, loan and guarantee for suppliers are prohibited.
  4. When creating and making alteration credit unions mutual benefit product, rules of examination of basic document will be relaxed in consideration of fairness with general insurance plans. The basic documents will be required preliminary notification or voluntary examination, compared to current requirements-preliminary permission or preliminary notification.

With these efforts, there will be less chance to suffer from financial crisis as we did from “saving bank crisis”.

By Park Soojeong (adorablesj@hanmail.net)

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