하나은행 하나금융경영연구소

The Korea savings banks are similar in their history and operation to savings banks of the US and 2nd-tier regional banks of Japan
● Savings banks of the US used to be prohibited from opening branches other than an approved main office in each state, but now allowed to
● Japanese 2nd-tier regional banks were private financing companies (“mutual loan providers”) for middle and low-income class, but now are turned into financial institutions offering loans and deposits

Causes for the bank failure: Although having attracted a massive amount of deposits, supported by high interest rates and deposit insurance scheme, they came to be debt-ridden due to the investment strategy focusing on high risk high return vehicles as a way to address reverse margin in a short time frame
● Deposits: comparatively high interest rates and deposit insurance scheme led to excessive deposit holdings
- The local savings banks offer higher interest than other local depositary corporations including commercial banks and credit unions
- They hold large deposits for the national GDP and total financial holdings, compared with those of the US and Japan where municipalities are well established
● Loans: concentrated on highly volatile and risky sectors such as property development as a way to buffer against potential reverse margin from high interest for deposits
- Saving banks of the US and Japan have centered on mortgages or relationship banking for local SMEs, while those in Korea mostly focused on transactional banking
* Relationship banking (cf. transactional banking): a banking practice creating profits by acquiring exclusive information under information asymmetry or seeking persistent relationship with loyal customers
- It means the local savings banks pursued a high risk high return strategy almost as aggressive as investment banks, rather than commercial banks, to cover high interest

Recommended Solution (1) P&A for restructuring
● A series of actions are required such as liquidation or M&A to resolve the bank failure, but the restructuring for local savings banks has been worryingly slow since 2000
- Number of savings banks in operation: 211 in 1997, 121 in 2000, 113 in 2003, 110 in 2006, and 105 in 2009
● Therefore, speedy restructuring is necessary based on P&A or any other approaches involving a 3rd party (government)
- The government takes actions to preempt insolvency and suspends operation of debt-ridden savings banks. → the assumer takes up assets/liabilities (with shareholders’ rights extinguished). → the government offers payment guarantee for the share of liabilities that cannot be covered with assets
● However, such restructuring may not go well if not backed up by supportive measures on the government part such as investing public funds to ease burdens of an acquiring financial institution
- Potential risks for an acquiring company: acquired banks may go insolvent after the acquisition, additional capital may be required for the banks subject to financial workout, and other issues may arise including succession of employment contract and disposal of business rights

Recommended Solution (2) Financing the restructuring with industry-wide joint funds
● Public funds are effective for speedy restructuring but their building-up is often impeded by political issues. As such, industry-wide joint funds may serve as a good alternative
- Joint funds for deposit guarantee is an account contributed jointly by financial sectors including banks and insurers for the purpose of bailing out failing institutions that are likely to affect a specific sector on a large scale
- At the moment, an amendment to the Depositor Protection Act has been proposed to the National Assembly to that end (with a precedent of the UK)
● However, not in line with the ‘polluter-pay principle’, the joint funds may hurt equity between sectors in the short term and increase moral hazard in financial institutions in the long term
- The UK still faces controversies surrounding a fair distribution of the funds between sectors
- The scheme is structured to be more advantageous for those seeking high risk high return and guaranteeing high interest (although the cost is born by all sectors)

Recommended Solution (3): De-regulation of retail-oriented lending practices
● Deregulation may contribute to bolstering profit structure, which is expected to encourage other financial institutions to acquire savings banks and reduce the dependence of the banks on the joint funds
- Under the current regulation, the savings banks are prohibited from opening branches other than their headquarters in principle, and required to manage the mandatory ratio of loans offered in designated service areas at 50% or more of their total loans
* They are required to build additional capital of 200% and 100% respectively in case of setting up a branch or sub-branch
- Recent revision, however, enlarged the service areas (11 areas integrated in 6 nationwide), lowered the minimum local loan ratio, and reduced the capital threshold required per service area for opening a sub-branch dedicated loan service (from 25% to 12.5%)
● Considering that little regulation for service areas is required for micro-lending where banks don’t depend on exclusive information and such regulation may not be equitable for lenders, the geographic regulation needs to be eased further
● However, in terms of wholesale banking, deregulation is not necessary, as it may fuel adverse selection with more pricing options available, rather than boosting relationship banking
- Adverse selection refers to a market process where a higher risk of delinquent loan arises because banks offer loans to companies with low credit ratings due to asymmetric information

Conclusion and Implications: Need for a two-track approach to expand customer base of the savings banks
● Wholesale banking: the savings banks need to be engaged in the partial guarantee scheme for SMEs, with the minimum loan ratio per service area unchanged
● Retail banking: phased deregulation in service areas is recommended for financially-sound savings banks (e.g. running a credit rating system for individuals)