South Korea’s financial services regulator has requested major commercial banks to arrange approximately $4 billion in financing to assist a credit cooperative facing customer withdrawals, according to banking sources familiar with the matter. The Financial Services Commission (FSC) has asked banks to provide repurchase-agreement facilities to MG Community Credit Cooperatives to address liquidity concerns. While the FSC official confirmed the request, they refrained from disclosing the exact amount. The official preferred anonymity due to the sensitivity of the situation.
The urgency for financial support arose after reports of a rise in non-performing loans linked to real estate projects triggered a rush of depositors seeking to withdraw funds from an MG Community Credit Cooperative branch in Namyangju, located east of Seoul. The branch is expected to close shortly.
In response, South Korea’s top financial officials issued a statement on Sunday assuring the public of their commitment to ensuring liquidity at the credit cooperative. They emphasised that MG Community had a capital ratio and liquidity that exceeded regulatory requirements and possessed sufficient cash assets, including property equivalents.
To provide support, South Korea’s five major commercial banks, namely Woori Bank, Hana Bank, Shinhan Bank, KB Kookmin Bank, and Nonghyup Bank, have either signed or are in the process of signing repurchase agreements with the credit union. These agreements would allow the credit union to raise cash against collateral such as bonds. The sources revealed that each bank was asked to prepare 1 trillion won of financing, totalling 5 trillion won ($3.84 billion), but the actual amount provided would depend on the extent of deposit withdrawals.
MG Community stated in a previous announcement that its loan default rate was manageable and that it would collaborate with the interior ministry to strengthen its financial stability.
South Korean financial authorities have taken measures to address liquidity concerns in the past. In November of the previous year, they worked with financial groups to establish a liquidity program following concerns about a credit crunch triggered by the default on bond payments by the theme park developer, Gangwon-Jungdo Development.
While an investor note from Citi downplayed the risks associated with this event, it did caution about potential negative effects on economic growth stemming from the highly indebted real estate sector. Citi economist Kim Jin-wook stated that the impact would be much less significant than the bond payment defaults witnessed by the theme park developer last year, and he does not perceive it as a systematic risk.
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