Suicides hint at magnitude of South Korean banking crisis

On the day she was supposed to have appeared before prosecutors for questioning last month, an executive of a shuttered South Korean savings bank hanged herself with her scarf in a Seoul motel. The woman, identified by the police only as “Kim,” was a credit officer at Mirae Mutual Savings Bank whose chairman was caught fleeing to China in a fishing boat three weeks before. She's the latest casualty of a scandal that has been eating at the periphery of Korea's banking industry for more than a year. So far, regulators have closed Korea's 20 weakest banks. Prosecutors have uncovered illicit lending and lax oversight, leading to indictments of nearly 200 people and at least two jail sentences. Four bank executives have committed suicide, according to police. More than 88,000 depositors and bondholders, many of them retirees, saw 1 trillion won ($857 million) of their savings in excess of insured levels vanish. “Everyone's become a victim,” said Nam Joo Ha, an economics professor at Sogang University in Seoul. “Regulators lost the people's confidence. The savings bank industry lost trust, a financial company's most important virtue, and the people lost their money.” Before the closures, South Korea used to have more than 100 so-called savings banks, which are small, separately licensed provincial lenders. They have narrower business models than the country's 18 nationwide institutions, such as Kookmin Bank and Woori Bank, which collectively are 30 times larger by assets. Mounting loan defaults related to property in South Korea's sluggish real-estate market following the global financial crisis in 2008 led to capital and liquidity shortages. Inadequate Capital To survive, savings banks started selling customers subordinated bonds that had low priority for repayment in the event of default. The bonds became popular, particularly among the elderly living on interest payments. The yields, as much as 10 percent annually, were almost double the savings account rates at national banks. The Financial Services Commission began suspending operations of savings banks that had inadequate capital in January last year. The first closures led to bank runs at other lenders, leading to more shutdowns. At 6 a.m. on Sunday, May 6, Korea's regulator announced the closing of four lenders including Korea Savings Bank, whose more than 10,000 depositors included 50-year-old Je Mi Young. Je had been excited two days earlier when she received a text message from the bank saying her 10 million won deposit would mature in three days. Before the day could come, the Seoul housewife sat trembling in her pajamas that Sunday morning, as headlines streamed across her television screen delivering the news that the bank was out of business. 'Bad Dream' Her savings would be protected by state-run Korea Deposit Insurance Corp., which guarantees as much as 50 million won at both savings banks and larger lenders. Still, the additional 40 million won bond investment she made on behalf of her mother would be wiped out. “I wish it were a bad dream,” said Je, pulling her trimmed black hair behind her ear while attending a KDIC meeting on claiming restitution for the savings later that week. “I always wondered what kind of stupid people put precious money into messy banks. Now, I am one of them.” Je recalls getting a text message in September 2010 from Korea Savings pitching five-year notes yielding 8 percent annually. It was easy, the bank promised. She invested her mother's savings, four times as much as her own, in bonds that aren't protected by deposit insurance. “How can I tell my 80-year-old mother I've lost the funds she lives on?” she said. “I was deluded by a couple of percentage points of interest rate. Now I can see it was only a trap.” Shares Plunge Shares of Korea Savings Bank tumbled 49 percent this year until trading of the stock was halted on May 7 following the closure. Its Jinheung Savings Bank Co. (007200) unit, which is still operational, was unchanged at 1,210 won in Seoul trading today. The stock has dropped 63 percent this year. Solomon Savings Bank (007800), the largest such lender, had plunged 47 percent this year by the time it was shut last month. Prime Minister Kim Hwang Sik was also swept up in the bank closures. He lost 40 million won when Seoul-based Jeil Savings Bank was shut down in a second round of closures by the FSC in September, and was reimbursed through the KDIC along with other depositors, according to Choi Hyung Du, a spokesman in Kim's office. First Suicide Jeong Gu Haeng, president of Jeil's affiliated bank, was the first to commit suicide. On Sept. 23, he jumped six floors from his downtown Seoul office, according to an officer at Seoul Metropolitan Police Agency who asked not to be identified, citing agency policy. Jeil's chairman Yoo Dong Cheon was arrested in October for alleged embezzlement and breach of fiduciary duty, according to the prosecutors' office. Because court proceedings aren't public and the bank was sold, Yoo's contact information isn't available. Customers pulled their money from savings banks for the next seven straight months, with deposits dropping 23 percent to a four-year low of 54.8 trillion won, according to Bank of Korea data. By contrast, deposits at nationwide lenders grew 4.4 percent to a record 963 trillion won in the same period. “The savings bank industry is returning to what it was supposed to be: a regional-based, small-loan provider to lower- credit customers,” said Jeong Young Sik, a research fellow at the Seoul-based Samsung Economic Research Institute. The government is currently discussing restitution measures to pay back what are estimated to be more than 1 million depositors the insured amount of their savings. The 70,650 account holders who had amounts exceeding the 50-million-won limit, along with 17,445 bondholders, need to stand in line as debtors through bankruptcies and civil suits. Minimizing Disruption To minimize disruption to lending for small businesses, which relied on the savings banks, the government is offering state-backed microloans. Small lenders now account for 1.2 percent of the country's financial assets, down from almost 2 percent before the closures, according to the Financial Supervisory Service. “The mutual savings bank industry will shrink considerably after last year's closures and restructuring,” said Michael Na, a Seoul-based banking analyst at Nomura Holdings Inc. “While the clean-up removed contagion risks to the overall financial system, the industry will need to accept downsizing.” FSC Chairman Kim Seok Dong said May 9, just after closing four more banks and bringing the total to 20, that the restructuring of the industry is over, and the market will judge whether individual savings banks survive. Daily Nightmare “Without the income from high-risk borrowers such as developers, savings banks can't compete with bigger commercial banks on deposit rates,” Na said. “There's no merit for depositors to go to the smaller, less-secure banks at this point.” While previously the savings banks paid one or two percentage points more than their bigger rivals on deposits, that margin has since shrunk, with the average rate at 4.47 percent in April compared with 3.7 percent at nationwide lenders, according to the Bank of Korea. Kang Sin Ah, a 43-year-old Seoul office worker, in January moved 20 million won to a state-run lender from a savings bank that had been paying as much as 3 percentage points more. “What's the advantage if I have a nightmare everyday about losing it?” she said. “I feel much safer after moving my money into a bigger bank.” South Korea's savings bank industry was born in the aftermath of Asia's 1997-98 financial crisis. Regulators allowed private lenders and rural cooperatives to call themselves “savings banks” in 2001 to boost confidence in the usually tiny, regional lenders. Expanded Scope The state then granted deposit protection equal to insurance at nationwide lenders, which allowed savings banks to grow. Deposits ballooned and in 2006 grew further as the government eased lending rules for the industry. With assets approaching their peak, savings banks expanded their scope to include lending to the property market, which became the source of their downfall. “Korean savings banks collapsed after expanding into real- estate businesses, just like Spanish ones,” said Samsung's Jeong. “We've learned that banking businesses, regardless of their size, require an extremely high level of transparency, stringent regulations and qualified managers and owners.” Greed, Immorality The Seoul Central District Court in February handed down a seven-year and a 14-year prison sentence, respectively, to Park Yeon Ho, chairman of the defunct Busan Savings Bank, and his deputy Kim Yang. The two, based in Korea's largest port city on the southeastern-most tip of the peninsula, were charged with embezzlement, accounting fraud and causing 1.22 trillion won of losses by owning and operating construction businesses with depositors' money, according to court documents. Their “greed” damaged the society, the court stated in its sentencing, calling the executives “immoral” for pursuing high-risk returns instead of stability. The bank was closed in February 2011. In addition to investigating bankers, prosecutors have widened their probes to include government tax and regulatory officials, accounting firms, politicians and lobbyists. About 200 people have been indicted through February, according to the latest tally announced by the special investigations team at the prosecutors' office. Fishing Boat The four bank executives that have committed suicide all did so in the midst of being summoned by prosecutors. In November, a 50-year-old credit officer at Tomato 2 Savings Bank, an affiliate of a lender suspended in September, hanged himself a day after he was summoned by prosecutors, according to an officer at Gyeonggi Provincial Police Agency who asked not to be identified citing policy. The executive, identified only as “Cha,” was found after his wife received a text message from him saying, “I'm sorry, I love you,” and asked police to find him, according to the officer. Then in January, the body of Kim Hak Heon, chairman of Ace Mutual Savings Bank, which is based in Incheon, west of the capital, was discovered in a Seoul hotel room on the day he was to be questioned regarding allegations of illicit lending and accounting fraud, police said. In early May, Mirae Mutual Chairman Kim Chan Kyung was found stowed away on a fishing boat heading to China and was captured three days before his bank was closed, the coast guard confirmed. According to the Financial Supervisory Service, which implements regulatory policy, he allegedly withdrew 13 billion won of client money from the bank, which is based in the southern island of Jeju, known as Korea's Hawaii. Chairman's Aide Kim was charged with embezzlement, according to court documents, and hasn't entered a plea. A hearing scheduled for yesterday was indefinitely postponed because of document problems, according to the court's website. He couldn't be reached for comment as he's being detained by prosecutors, and contact information for his lawyers isn't available. The Mirae Mutual woman identified as “Kim” who hanged herself in May had been an aide to the chairman in her role as credit officer, Yonhap News Agency reported. Lee Dong Ok, a 65-year-old retired junior-high school teacher, used to bank at Mirae Mutual's branch in Seoul. Four days after the closing, she was in the bank lobby waiting to collect as much as 20 million won of her savings under a government rule that allowed provisional withdrawals in order to prevent a bank run. Heart-Stopping “When I first heard of the closures, I thought my heart was going to stop,” she said. “I dashed over here and pounded on the closed doors with several other customers.” In the same lobby, a manager from a nearby branch of Hana Bank, the country's fourth-biggest lender by assets, was waiting to pitch his products and offer Mirae customers the paperwork to claim deposit-insurance refunds. “To an old lady like me, 1 to 2 percentage points of extra interest was big,” Lee said. “Now I realize safety is the most important. I'll never deal with savings banks again.” --Bloomberg News--