South Korea's Authorities Notify Banks to Prepare $4 Billion in Financing Support

Two banking sources with knowledge of the situation said on Monday (July 10), "South Korea's financial services regulator has asked major commercial banks to prepare approximately US$4 billion in financing to support a credit cooperative hit by customer withdrawals."

An employee of the Financial Services Commission confirmed that banks had been asked to set up repurchase agreements to provide liquidity for MG Community Credit Cooperatives, but she would not comment on the dollar amount. Due to the sensitivity of the situation, the official declined to be named, and the commission had no further comments.

Depositors were lining up last week to withdraw funds from a branch of MG Community Credit Cooperatives after local media reported a rise in non-performing loans tied to real estate projects. The branch, in the city of Namyangju east of Seoul, is due to be closed soon.

The credit cooperative has nearly 1,300 branches, and the top financial authorities in South Korea promised on Sunday to maintain liquidity there. They said in a statement that MG Community's capital ratio and liquidity far exceeded regulatory ratios and that it had enough cash-equivalent assets.

Concerns about the potential effects on Asia's fourth-largest economy have been raised in response to sharply rising interest rates and a cooling real estate market.

The five biggest commercial banks in South Korea have already signed repurchase agreements with the credit union or are in the process of doing so, according to the sources, who requested anonymity due to the nature of the situation. Repurchase facilities make it possible to raise money in exchange for securities as collateral, like bonds.