'Pincette Evaluation and M&A Activation' Signal for Savings Bank Restructuring

"Soundness Expectations Not Met"... PF Delinquency Rate at 11%
Early Corrective Actions Possible if Rating Downgraded
Industry Restructuring Accelerates with M&A Regulation Easing

As the prolonged high-interest rate environment and the 'sorting out' for the smooth landing of real estate project financing (PF) rapidly deteriorate the soundness of savings banks, financial authorities are accelerating various measures such as management status inspections and reviewing the relaxation of merger and acquisition (M&A) regulations to prevent the spread of the crisis in advance. Industry attention is focused on the movements of major savings banks for the first time in about 13 years since the savings bank crisis began in earnest in 2011.

According to financial authorities on the 20th, the Financial Supervisory Service (FSS) will conduct a management status evaluation for three savings banks at the end of this month based on the results of soundness monitoring of savings banks. The management status evaluation is a measure by financial authorities to assess and grade the management condition of financial companies in terms of capital, assets, profitability, liquidity, management control, and risk management, and to respond to the risk of insolvency. This is the first time the FSS has initiated a management status evaluation against savings banks due to deteriorating soundness.

In the past savings bank crisis, problems arose due to low capital adequacy ratios based on the Bank for International Settlements (BIS) standards, but recently, delinquency rates have surged sharply as non-performing assets have increased. The industry delinquency rate jumped significantly from 2.5% at the end of 2021 to 8.8% at the end of the first quarter of this year. In particular, the real estate PF delinquency rate of the top 20 savings banks soared from 4.4% in the first quarter of last year to 11.1% in the first quarter of this year. On the other hand, the overall BIS ratio of all savings banks in the first quarter was 14.4%, well above the legal standard of 7-8%, and the liquidity ratio was also 192%, exceeding 100%.

In response, Lee Bok-hyun, the head of the FSS, stepped forward to explain the necessity of the management status evaluation for savings banks. After a meeting with bank presidents the previous day, Lee told reporters, “There were criticisms that the management of rising delinquency rates among savings banks did not meet expectations,” and added, “We initiated the management status evaluation to encourage active soundness management efforts such as the disposal of non-performing loans.” He also explained, “We are confident that conducting the management status evaluation on savings banks will not cause market shocks, and the possibility of spreading to other financial companies or sectors is very low.”

Considering the possibility of a bank run (massive deposit withdrawals) caused by amplified psychological anxiety, financial authorities are refraining from specifying the savings banks subject to this management status evaluation. The FSS targets savings banks that have received vulnerable ratings in soundness for two consecutive quarters for the management status evaluation. If delinquency rates or non-performing loan ratios exceed 20%, it is considered a soundness problem. The three savings banks mentioned as candidates for the management status evaluation were notified by the FSS at the end of December last year to improve their soundness by the end of March but failed to meet this requirement.

Within the financial sector, the FSS’s decision is interpreted as a proactive measure in response to the prolonged high-interest rate environment, rising delinquency rates due to economic recession, and real estate PF insolvency risks, which have increased the need for preemptive action on savings banks. A senior financial official explained, “Except for savings banks affiliated with financial holding companies, most are likely struggling with funding and delinquency management,” adding, “The longer the market conditions negatively affecting soundness persist, the more difficult it will be for non-financial holding company affiliated savings banks.”

Meanwhile, as financial authorities proceed with the management status evaluation, there are expectations that some savings banks whose soundness significantly deteriorates, such as those falling to a comprehensive grade 4 or below, may face prompt corrective actions. Prompt corrective actions involve imposing management improvement recommendations, demands, or orders through the resolution of the Financial Services Commission. Through management improvement orders, financial companies can be forced out of the market via business transfers or mergers.

Financial Supervisory Service building in Yeouido, Seoul. Photo by Younghan Heo younghan@

The financial authorities’ policy to clean up insolvent savings banks, combined with plans to activate savings bank M&A, is expected to accelerate industry restructuring. The authorities are considering allowing M&A for metropolitan area savings banks even if their BIS ratios are higher than the FSS’s internal management standards (10-11%). This means M&A could be possible before metropolitan savings banks become insolvent.

Previously, in July last year, the Financial Services Commission relaxed M&A regulations once through the amendment of the ‘Approval Criteria for Major Shareholder Changes and Mergers of Savings Banks,’ but M&A has remained sluggish so far. This is because the M&A benefits were seen as tailored to non-metropolitan savings banks. According to the amendment, metropolitan savings banks can only benefit from regulatory relaxation if their BIS ratio falls below 7% and they are subject to prompt corrective actions.

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