Thursday, February 24, 2011

Korean Government Tries to Prevent Further Savings Bank Panic

Another Article About Savings Banks Problems in Korea
The Wall Street Journal's Live Korea Blog pointed out that Korean government officials were trying to 
prevent a bank run, i.e. large withdrawls from savings banks.  As explained here at the Seoul Gyopo Guide, in this earlier article, panic would lead to more panic among investors, thereby creating a self-fulfilling prophecy.

The Savings Banks Problems Is Just a Symptom of a Potentially Larger Problem
The point made in the previous post here at the Seoul Gyopo Guide is still true, and it is more important that the actual facts that are being reported bby the Wall Street Journal.  The underlying causes for this situation are the real issue at hand.  The issue is that the underlying assets own by banks, i.e. mortgages or loans made to small-mid sized companies, are struggling, and at the same time, consumers have to use more of their savings due to increased inflation caused by a variety of reasons.  When there is an imbalance between the amount of deposits in the bank, and the fair value of the assets of a bank, like loans, then banking regulators seize or close banks. 
This is not the first time that these issues have affected Korea.  The consumer borrows heavily when credit is available for multiple reasons, one of which is the consumer income tax deduction which is allowed when credit cards are used.  In each of the instances that consumers became over-stretched, financial institutions struggled and had to divert their attention to repairing themselves, and away from other activities. 

The List of Challenges is Getting Longer, and the KOSPI is Taking Notice
Over the past month, the KOSPI is down by over 5% from its highest level last month.  From a longer-term perspective, this is no big deal.  However, should the selling continue, as it has in India which is down 11% for the year, and Asian growth is perceived to be slower, then more shocks to consumer confidence are sure to follow.  While Korean brands have retained their high posts amongst the global elite, some cracks tot he economy are beginning to appear.


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