(EDITORIAL from the Korea Times on Dec. 5)

Bailout Package: Savings Banks Should Implement Drastic Restructuring

The state-run Korea Asset Management Corp. (KAMCO) has decided to take over bad
loans from struggling savings banks, signaling the start of public fund
injections into the banking sector. KAMCO said Wednesday that it will acquire 1.3
trillion won ($884 million) of non-performing loans the banks extended to
construction firms in the form of project financing.
No doubt the bailout package is designed to help many ailing savings banks
dispose of their exposure to risky project financing in the aftermath of the
global credit crisis. The banks will be able to sell off their bad debts so that
they can improve their financial health to better tide over the persisting
financial turmoil originating from the U.S. subprime mortgage woes.
Project financing has emerged as a time bomb in the local financial sector since
the construction and property market began to lose steam. Thus, it is urgent to
defuse the bomb to stabilize the banking system. In this regard, the KAMCO-led
rescue package is seen as a preemptive containment step.
According to the Financial Services Commission (FSC), 89 savings banks have
extended a combined total of 12.2 trillion won ($8.3 billion) in loans to 899
building projects. The FSC said 6.7 trillion won, or 55 percent of the loans, has
no problem with debt repayment. However, 1.5 trillion won, or 12 percent of the
loans, is classified as non-performing. Under the bailout program, KAMCO is to
take over 86 percent of the bad debts.
Ostensibly, the rescue plan looks nice to both savings banks and debt-ridden
builders. But critics are against such a stabilization formula because KAMCO's
takeover of the non-performing loans is tantamount to injecting public funds into
private financial companies. The government is under attack for squandering
taxpayers' money to save troubled savings banks and failed construction projects.
It is unreasonable for the government to claim that the bailout money is not
public funds because it will be financed by KAMCO's own capital, not by the state
budget. No one believes such a claim since KAMCO is a state-controlled asset
management agency that played a key role in acquiring bad debts from banks and
other financial firms when the Asian currency crisis hit South Korea in 1997-98.
The rescue package also raises the problem of ``moral hazard'' because KAMCO has
committed to take over savings banks' bad debts without forcing them to take
radical self-rescue measures. Many savings banks have come under criticism for
recklessly increasing their loans to risky building projects without paying heed
to the property bubble. First, executives of the banks should take responsibility
for their mismanagement and failure to control risks related to loan provision.
Besides, KAMCO is blamed for underestimating the potential loss of the
non-performing loans. Thus, it will have to buy the bad debts at too high prices
that will make it difficult for the state-run corporation to fully recoup its
bailout money. The conclusion is that the rescue program is nothing but a stopgap
measure, which is not enough to solve the brewing financial woes. Most of all,
any bailout packages should be linked to drastic restructuring of the
beneficiaries in order to avoid wasting taxpayers' money.
(END)