South Korea’s primary regulatory authority for financial services has solicited assistance from major commercial banks to create a nearly $4 billion emergency fund. This move, according to banking insiders, is aimed at bolstering a credit cooperative dealing with an increase in customer withdrawals.
An anonymous representative from the Financial Services Commission disclosed that although specific details are confidential, the agency is calling for cooperation from banks in raising funds through repurchase-agreement facilities. This assistance is specifically targeted at MG Community Credit Cooperatives (MGCCC), whose liquidity the authorities are closely scrutinizing.
Depositors have reportedly been withdrawing funds from a MGCCC branch in the city of Namyangju, east of Seoul, following local media coverage about a rise in non-performing loans connected to real estate projects. As a result, the said branch is slated for imminent closure.
On Sunday, top financial authorities in South Korea pledged to maintain liquidity at the credit cooperative, which boasts nearly 1,300 branches. They emphasized that MGCCC’s capital and liquidity ratios are well above regulatory standards and it possesses ample cash-equivalent assets.
This intervention comes at a time when escalating interest rates and a tempering property market are fuelling anxieties about the potential repercussions on Asia’s fourth-largest economy.
According to insiders, five major South Korean banks – Woori Bank, Hana Bank, Shinhan Bank, KB Kookmin Bank and NongHyup Bank – have committed or are in the process of committing to repurchase agreements with MGCCC. These facilities allow the raising of cash by offering collateral, such as bonds.
Each bank has been asked to set aside 1 trillion won, amounting to a total of 5 trillion won ($3.84 billion). This is envisioned as a potential lifeline, although the exact amount directed to the credit union will be contingent on deposit withdrawals.
MG Community and the five banks have yet to provide comments.
Last week, MG Community released a statement declaring its debt delinquency rate manageable, and expressed a commitment to working with the Interior Ministry to fortify its financial stability.
In a joint statement on Sunday, the Bank of Korea, the Ministry of Finance, and the Financial Services Commission reported that MG Community has seen a deceleration in withdrawals and an influx of new deposits since last Thursday.
In an investor note, Citi downplayed the risks associated with the incident but cautioned about the potential negative impact on economic growth from the indebted real estate sector.
Economist Kim Jin-wook from Citi in Seoul shared, “We don’t see systematic risks from the event,” while warning that the negative repercussions could be far less severe than the fallout from a defaulted bond payment by a theme park developer in the previous year.
Last November, South Korean financial authorities coordinated with financial institutions to set up a liquidity program following a default on a bond payment by theme park developer Gangwon-Jungdo Development. This sparked fears of a potential credit crisis.
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