“State funds will be injected to MG Community Credit Cooperatives if necessary” Government tries to ease public anxiety

Vice Minister of the Interior and Safety Han Chang-seob speaks at a joint press briefing of related ministries and agencies on the soundness of MG Community Credit Cooperatives at the government office in Seoul on the morning of July 6. Courtesy of the Ministry of the Interior and Safety

The government will make a government-wide response to the “crisis” at MG Community Credit Cooperatives (MG). It announced that it would establish a government-wide response team and “inject state funds if necessary.” The government made the announcement to assure depositors, after signs of a bank run--a large number of the bank’s customers withdrawing their deposits--was detected in some branches after the mention of a “crisis.”

On July 6, the Ministry of the Interior and Safety, the Ministry of Economy and Finance, the Financial Services Commission, the Financial Supervisory Service, and the Bank of Korea held a joint press briefing on the soundness of MG Community Credit Cooperatives at the government office in Seoul and said, “Related ministries and agencies will jointly form a government-wide response team, which will work as a control tower for crisis management, and monitor any changes in the deposits at MG in real time and actively discuss and respond to risk factors.” They then asked citizens including MG customers to “be reassured.”

During the briefing, Vice Minister of the Interior and Safety Han Chang-seob announced that the government would inject state funds if necessary. He explained, “As of the end of May, the MG Community Credit Cooperatives has prepared a total of 77.3 trillion won in reserves against deposits and 2.6 trillion won in reserves for depositor protection,” and said, “It can help secure liquidity with loans from MG and with transactions between branches, and if necessary, it can also pay depositors with loans from the state, public agencies and other financial institutions.”

MG also provides depositor insurance of up to 50 million won per person just like any other bank. But it is subject to the Community Credit Cooperatives Act and not the Depositor Protection Act, so the insurance is not guaranteed by the Korea Deposit Insurance Corporation. Instead, MG protects its depositors with its own resources. The interior vice minister announced that the government would help make payments if MG runs out of funds.

The vice minister also spoke on signs of a bank run detected in some MG branches, which were recently selected for statutory mergers. Han explained, “Even if some branches are merged with nearby branches, all the deposits of the customers will be protected,” and said, “The acquiring branches will still pay the principal and interest for savings and deposits exceeding 50 million won.” He said, “We are reviewing ways to continue existing tax exemptions for customers who terminated their installment savings prematurely, if they redeposit the savings within two weeks,” and mentioned that there was a similar precedent in 2011.

Financial authorities will also help MG sell its bad loans. MG is currently in the process of selling 700 billion won worth of bad loans to its subsidiary, MCI, a lending firm. On Thursday, Kwon Dae-young, a standing commissioner at the Financial Services Commission, announced that the Korea Asset Management Corporation would also purchase 500 billion won worth of bad loans from MG.

He repeatedly stressed that the situation at MG was “manageable.” He said, “It is true that the scale of project financing has increased at MG as at any other bank,” but added, “MG has a very high portion of senior loans, and it has a good loan-to-value (LTV) ratio, so they are well managed.”

According to the information presented by the interior ministry and MG on July 4, as of the end of June, MG had 16.4 trillion won of “management-type land trust loans,” a project financing loan--a type of unsecured loan--which was about a quarter of its real estate-related secured business loans (56 trillion won). In other words, a considerable portion of MG loans were protected with collateral.

The interior ministry had announced that in the case of secured loans, they were senior debt with highest priority in collateral for repayment, and the LTV was under 60%, meaning MG provided loans for only up to 60% of the value of the collateral. In other words, if problems occur, MG can recover a considerable portion of its loans when the collateral is put up for auction. Even if the delinquency rate increases, the government believes it is unlikely for MG to go bankrupt from default loans.

In fact, financial authorities were extremely concerned about a bank run spreading to other MG branches. The total deposits at MG recorded 259 trillion won as of the end of last month. If the money begins to spill out like an ebb tide, MG could soon run out of the 77 trillion won in reserves. This is why the government is trying hard to make a government-wide effort, going beyond MG and the interior ministry, to reassure depositors.