South Korean Regulator Requests $4 Billion Financing to Support Troubled Credit Cooperative

South Korea’s financial services regulator has reportedly asked major commercial banks to prepare approximately $4 billion in financing to provide support to MG Community Credit Cooperatives (MGCCC), which has been hit by customer withdrawals. Concerns over rising non-performing loans related to real estate projects have prompted depositors to line up for fund withdrawals, raising worries about the impact on the country’s economy.

South Korea’s top financial authorities have pledged to ensure liquidity at MGCCC, stating that its capital ratio and liquidity are well above regulatory requirements. To address the situation, the regulator has requested five major commercial banks to provide repurchase-agreement facilities, potentially amounting to 1 trillion won ($3.84 billion) each.

Background:

MGCCC, a credit cooperative with nearly 1,300 branches, faced increased customer withdrawals following reports of rising non-performing loans tied to real estate projects. A branch in Namyangju, east of Seoul, is expected to be closed soon. In response, South Korea’s financial authorities have committed to maintaining liquidity at MGCCC, emphasizing its strong capital ratio and sufficient cash-equivalent assets. However, concerns persist due to rising interest rates and a cooling property market, raising potential repercussions for Asia’s fourth-largest economy.

Financial Support Requested:

To assist MGCCC, South Korea’s financial services regulator has sought the cooperation of major commercial banks, including Woori Bank, Hana Bank, Shinhan Bank, KB Kookmin Bank, and NongHyup Bank. The regulator has requested these banks to prepare approximately 1 trillion won ($3.84 billion) each in financing to provide liquidity support. However, the actual amount extended to MGCCC will depend on the level of deposit withdrawals. The banks are expected to utilize repurchase-agreement facilities, allowing them to raise cash by providing collateral in the form of bonds.

Efforts to Stabilize MGCCC:

MGCCC and the five banks involved have not yet responded to requests for comment. However, MGCCC stated last week that its debt delinquency rate remains manageable and that it plans to collaborate with the Interior Ministry to improve its financial soundness. In addition, South Korea’s financial authorities have released a joint statement assuring that withdrawals at MGCCC have slowed and new deposits have been received since Thursday, indicating a positive development.

Market Outlook and Risk Assessment:

While some concerns exist about the potential impact on economic growth from the indebted real estate sector, a recent investor note from Citi downplayed the risks associated with the MGCCC situation. Citi’s economist in Seoul, Kim Jin-wook, stated that the event is unlikely to pose systematic risks and that any negative effects would likely be less significant than those resulting from a missed bond payment by a theme park developer in late 2022.

Coordination with Financial Groups:

It is worth noting that South Korean financial authorities previously collaborated with financial groups in November 2022 to establish a liquidity program in response to concerns over a credit crunch triggered by a missed bond payment by Gangwon-Jungdo Development, a theme park developer. This coordinated effort aimed to mitigate potential systemic risks and stabilize the financial sector.

Conclusion:

South Korea’s financial services regulator has requested major commercial banks to prepare around $4 billion in financing to support MG Community Credit Cooperatives, which has experienced significant customer withdrawals due to concerns over rising non-performing loans in the real estate sector. South Korea’s top financial authorities have reassured the public that MGCCC’s capital ratio and liquidity exceed regulatory requirements. Efforts are underway to stabilize the situation, with the banks being asked to provide repurchase-agreement facilities. While concerns persist regarding the impact on the economy, recent developments indicate a slowdown in withdrawals and new deposits coming in.