World Clock

Thursday, 24 February 2011

South Korea's Little Known Financial Crisis Developing

It would appear that the west has been late to catch on to the fact that South Korea's savings banks are in trouble.  The Wall Street Journal recently reported that there had been a surge in the amount of savings banks that had either temporarily ceased operations or had closed permanently.

Over the past couple of weeks there have been 5 savings banks in the South Korea that have temporarily or permanently closed. The reason for this because more and more people were beginning to withdraw there money from these banks, which resulted in a flood of savers then withdrawing there money. This is what is better know as a 'run on a bank(s)', which looks something like this.


Much like the US and the UK, South Korea also has deposit protection/guarantee scheme that protects savers called the KDIC. The KDIC insures people's deposits in accounts (for normal savings accounts). However that fact that savers were withdrawing their deposits at such a rate not only represents a lack of confidence in those banks but also shows that they have little faith that the Korean government will insure their deposits.

This in itself according to the blog is symptomatic of a more systemic problem, which strikes at that heart of the Korean mindset. That is they are largely distrustful of large, authoritarian entities. Additionally presents the case as to why this is dichotomy in Korean society, saying that democracy is quite young and the legacy of mistrust of authoritarian regimes understandable. On the other hand Korean's wealth is built up mostly from large corporations AKA chaebol.

The WSJ highlights the problem perfectly saying "  

"The suspensions come as the government tries to head off risks of systemic shocks caused by distressed savings banks, which are suffering from their exposure to the weak South Korean real estate market"

The conclusion that the blog mentioned is that the rising cost of living coupled with declining real estate values is a dangerous combination, which understandably has put savers on edge. This then has the potential to effect the overall economy as consumer confidence gets hit.

Also Reuters has commented that the Financial Services Commission (US equivalent of FDIC - UK equivalent of FSCS) has been trying to assure depositors that the financial health of the other 105 savings banks are sound. Whilst at the same time urging savers not to withdraw too much money [sounds ominous].

No comments:

Post a Comment