[Initial Insight] P2P Failures Resemble Savings Bank Crisis... Did Authorities Not Know?

[Asia Economy Reporter Kangwook Cho] Nine years ago, in 2011, the 'Savings Bank Insolvency Crisis' began when the real estate project financing (PF) loans of Busan Savings Bank Group, then the largest in South Korea, became insolvent due to the aftermath of the financial crisis. This crisis spread throughout the industry and led to a massive shock known as a 'bank run' (large-scale withdrawal of deposits). Savings banks were highly regarded as a smart asset management option with high-interest savings and deposits during the financial boom around 2008. However, due to bad loans and major shareholder corruption at the time, many companies were suspended from operations, 31 savings banks were expelled, and approximately 100,000 victims emerged.

Recently, a full-scale investigation by financial authorities revealed that two out of three online peer-to-peer (P2P) lending companies are at risk of closure. Among 237 P2P companies, 113 did not respond to the financial authorities' request for audit reports from accounting firms on loan receivables, and among these, eight companies filed for closure between July and August. Notably, Popfunding, an online investment-linked finance company (P2P) praised by Financial Services Commission Chairman Eun Sung-soo as a 'financial innovation case,' was under prosecution investigation for fraud, embezzlement, and misappropriation of funds, and it was revealed that the company filed for closure in June. Some private equity funds that invested in Popfunding also suffered losses during operations, delaying repayment of principal and interest. The total amount of suspended redemptions is estimated at 35.5 billion KRW. This incident occurred just six months after Chairman Eun visited the company.

P2P companies began to emerge in South Korea around 2015 and were spotlighted as a new investment avenue capable of high returns. In the era of ultra-low interest rates, where else could investors expect an annual return of 10% as promised by P2P firms? At that time, the industry was still in its infancy, with no major incidents and low default rates. The overall loan volume was small, and loan repayments were rarely overdue. P2P financial companies advertised themselves as heralding a new era of finance by emphasizing their low default rates. However, five years later, the reality turned out differently.

Looking at overseas cases, the leading countries in P2P finance, the United States and China, also suffered from P2P financial insolvencies. In the U.S., LendingClub, a P2P finance company that went public at $8.6 billion in 2014, faced a fraudulent loan scandal in 2016. In China, Lufax, with a corporate value of about $39.5 billion and fundraising capacity of about $1.7 billion, withdrew from business due to large-scale loan fraud incidents causing significant investor losses, effectively leading to the near collapse of P2P finance.

Despite these precedents, financial authorities chose to create non-binding 'guidelines' and allowed companies to voluntarily implement them while monitoring the market. The rationale was to grow the market by imposing direct or indirect sanctions only if guidelines were not followed. Expectations were that P2P finance would provide funding opportunities to financially marginalized groups, improve the efficiency of the loan market, and enhance protection for financial consumers. With this tacit support, P2P finance continued to grow, surpassing 7.4 trillion KRW in loan handling volume by the end of July 2020.

However, beneath optimistic expectations, the wounds of insolvency festered, and a domino effect of closures became an inevitable scenario. The real issue is the damage to investors if a 'mass closure' occurs. It is realistically unlikely that investors will recover their invested funds if P2P companies shut down.

When new technologies or systems emerge, trial and error inevitably follow. Therefore, a transitional period involving side effects and self-correction is necessary. But during that period, who will take responsibility for those who suffer losses? Did the financial authorities, who experienced the savings bank crisis, really fail to foresee the possibility of insolvency crises in P2P finance as well?

This content was produced with the assistance of AI translation services.