State-run banks in South Korea are stepping up to provide a whopping $1.5 billion in support to a credit union. This move is aimed at alleviating the strain caused by customer withdrawals through repurchase agreements, which has prompted commercial banks to also offer financial assistance.
The Industrial Bank of Korea and the Korea Development Bank have recently inked deals with MG Community Credit Cooperatives (MGCCC). The former has committed to providing 1.5 trillion won, while the latter plans to extend an amount ranging from 0.5 to 2.0 trillion won.
The motivation behind this action is the growing concern that the troubles faced by MGCCC could potentially trigger a credit crunch within local money markets. Media reports exposing the credit union’s high debt delinquency rates have led to an increase in customer withdrawals, intensifying the urgency for assistance.
Although MGCCC might not yet require the entirety of the funds, the government is proactively preparing a backup plan. It simply cannot stand by and allow the credit union to rely solely on selling bonds. Kim Sang-man, a credit analyst at Hana Securities, aptly notes, “MGCCC is not yet in need of all the funds, it seems, but the government is preparing a back-up tool in advance as it cannot leave the credit union continuing to sell bonds.”
To compound matters, South Korea’s financial services regulator has called on major commercial banks to be ready with approximately 5 trillion won in financing to support the credit union. This development was reported by Reuters on Monday.
In response, MGCCC released a statement last week reassuring that its debt delinquency rate remains manageable, and it will collaborate with the Interior Ministry to enhance its financial stability.
Fortunately, there have been no indications thus far that the situation at MGCCC is adversely affecting South Korea’s major commercial banks. The credit default swap (CDS) premiums for these lenders have experienced minimal fluctuations this month, following a significant spike late last year.
CDS function as derivatives that offer insurance against the risk of a bond issuer defaulting on payments to creditors. According to Refinitiv data, the five-year Woori Bank CDS was quoted at 45.33 on Tuesday, compared to 45.29 at the end of June. It reached a five-year high of 75.17 in early November. Similarly, Kookmin Bank’s CDS stood at 51.59, as opposed to 75.18 last November.
Back in November, concerns arose when a state-backed theme park missed a bond payment, subsequently triggering worries about real estate projects and leading to a credit crunch in domestic money markets. However, authorities managed to stabilize the situation by implementing various liquidity support programs.
Please note that the conversion rate is $1 equals 1,297.7400 won.
