Crisis at S Korean savings banks

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3 October 2011 Last updated at 16:02 GMT By Lucy Williamson BBC News, Seoul Who's to blame for bad financial shape of South Korea's savings banks? About lunchtime during the last bright days of the Korean summer, Jeong Gu-haeng, the president of one of South Korea's biggest savings banks, jumped from his sixth floor office window, killing himself.

As he jumped, prosecutors were inside the building, seizing documents from the bank's headquarters.

They were investigating whether his Jeil 2 Savings Bank had mishandled loans given out to creditors.

The death of the bank's president - splashed over the front pages of newspapers here - refocused attention on a widening crisis among the country's savings banks.

Jeil 2 was one of seven banks to be suspended last month after financial regulators found that they all had too little capital stored against risky loans.

They have been given 45 days to correct the situation or face being sold.

It was the second round of suspensions to hit Korea's savings banks.

Nine others were suspended earlier this year, and several others have narrowly avoided it.

The current investigation - into seven of the suspended banks - is looking at whether major stakeholders and chief executives misused the company's capital to finance personal projects or those of their close contacts.

But the question of why so many of Korea's savings banks were in such bad financial shape to begin with, goes much deeper.

Risky loans

A large part of the answer lies in the forest of concrete on the outskirts of Seoul's city centre.

Kilometre after kilometre of grey-beige tower blocks, rising high into the sky, have been built to house the capital's burgeoning workforce.

Continue reading the main story Jeil Savings BankJeil 2 Savings BankTomato Savings BankPrime Mutual Savings BankAce Mutual Savings BankDae Yeong Mutual Savings Bank Parangsae Mutual Savings Bank Until recently, real estate was a good investment here.

Prices were rising, people kept buying, and construction firms were keen to keep building.

But after the global financial crisis three years ago, demand began to fall - and with it, prices. And that left builders, and their backers, exposed.

Dr Jeong Dae hee, an associate fellow at the Korean Development Institute, says that savings banks were on the front line of the downturn in the construction industry, because they provide many of the bridging loans which get projects started, often before there are any real assets.

When builders start a construction project, he says: "They often don't have the money to do it, so they go to savings banks and ask for loans.

"But they actually don't have the land or even permission to build the apartments..

"So they make some plans, and the savings banks look at the plans, and if the plans aren't too weird, they give them the money."

As the loans became riskier, he says, the banks' interest rates got higher - meaning that when demand began to fall it was harder than ever for builders to honour their debts.

Blame game

Financial officials agree that the banks' credit practices have been too loose. And that discovery has led the finger of blame to swing in the direction of the country's financial regulators.

Dr Jeong believes that Korea's main financial enforcement agency, the Financial Supervisory Service, or FSS (which takes its cue from the Financial Services Commission, or FSC), was unable to act strictly enough in its regular audits because it was under political pressure not to scare the market.

Savings banks were on the front line of the downturn in the construction industry

And also, he says, because many of the banks' senior employees were former FSS officials.

Allegations that the relationship between financial regulators and the savings banks was too cosy are widely accepted - even by regulators themselves.

One financial official, speaking on condition of anonymity, says: "The FSS has been parachuting in their retirees as auditors of the savings banks, so their juniors [who were still working in the FSS] couldn't go through a very rigorous audit."

In Korea, the sense of professional hierarchy and respect for those in senior positions is acute.

Confronting your boss is almost unheard of.

To inspect a bank which now employs a former senior colleague as auditor would put many Koreans in a difficult position.

"To some extent, we accept it," the official says.

But he also believes that the banks' "lack of risk management skills and business scope" was more to blame.

Wider impact?

But if the proper regulation and good business practices were lacking in Korea's savings banks, what about the rest of its financial industry? And what about the impact of the suspensions on the wider economy?

Dr Jeong says commercial banks are unlikely to face the same problems, because they have different financing to savings banks, and have many more assets.

Savings banks act as a kind of safety net for commercial banks, he says.

They are the first stage in the financing process, and so weed out the worst performers.

Continue reading the main story

If the problem of the savings banks is just non-performing loans, then it's going to be much easier to fix this.”

End Quote Dr Jeong Dae hee Korean Development Institute And Choo Kyungho, the vice-chairman of Korea's policy regulator, the Financial Services Commission, says there's little to worry about financially.

"There are two sides to this," he says.

"From the political-social standpoint, it's a big issue with many concerns. From a purely financial point of view, this issue is very small.

"The total assets of savings banks are less than 3% of the total financial market, so there's no chance this can escalate."

Dr Jeong agrees there's little chance of the savings banks affecting the wider economy. And the risk is made even smaller by an insurance fund that he believes will more than cover any losses.

But politically it has been tricky, even so.

The public have been shocked to learn of the 16 suspensions.

And with national elections due here next year, politicians have been queuing up to demand reform.

Mr Choo says it's not expecting any more suspensions this year, and the FSC has already put forward its proposals to improve the system - though some accuse it, and its enforcer the FSS, of refusing reform themselves.

As Dr Jeong points out, the real problems in this case aren't bad loans at all - but the trickier issues of possible illegality and lack of regulation.

"If the problem of the savings banks is just non-performing loans," he says, "then it's going to be much easier to fix this."

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VIDEO: Eurozone crisis sparks fears for Dexia

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4 October 2011 Last updated at 22:15 GMT Help

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VIDEO: Human cost of Greek crisis

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The people of Greece are now having to pay the price of past official financial mismanagement, as the government takes drastic steps to try to avert a euro debt default. Paul Mason went to Athens to report on the human cost of political hubris.

Broadcast on Wednesday 28 September 2011.

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Ask the experts: Eurozone crisis

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27 September 2011 Last updated at 22:54 GMT By Laurence Knight & Ian Pollock Business reporters, BBC News Our experts answer your eurozone crisis questions Last month, the BBC asked viewers what questions they had about their finances, particularly given fears about a renewed financial crisis and recession.

Here, BBC journalists Laurence Knight and Ian Pollock answer your questions about how the eurozone debt crisis might affect you.

Why, with the eurozone in crisis, is the pound still so weak against the euro? - Roy Waite, Carentoir, France

Put simply, the UK is in no better shape than the eurozone.

Both currency blocs (and the US for that matter) face the same economic malaise. Debts are too high, particularly household debts, so nobody wants to spend - not consumers, not businesses, not even governments.

That means interest rates in the UK and the eurozone are likely to remain very low for many years, making both currencies an unattractive place for investors to park their cash.

But thanks to the hawkish European Central Bank, eurozone interest rates have actually been somewhat higher than in the UK - and were even rising until recently - helping to push the euro's value up.

High interest rates and a strong euro have of course made things even harder for Greece and other heavily-indebted governments, and markets view their debts as very risky.

But the euro is also home to German government debt - considered an ultra-safe investment by markets.

Even if the more distressed eurozone governments defaulted on their debts, the consequences would be felt well beyond the eurozone's borders, much as the collapse of Lehman Brothers in 2008 was felt outside the US.

And if these countries left the euro, the value of the remaining, more German-dominated euro might actually go up.

How prepared are we, the Bank of England, etc, for a Greek default? - Robert W Warne, Cardiff

Use the dropdown for easy-to-understand explanations of key financial terms:AAA-rating GO The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is miniscule.

Bank of England governor Mervyn King revealed in response to MPs' questions in June that the Bank was working with the Treasury to draw up contingency plans for a Greek default.

He did not give any details of what those plans are, nor have any emerged since.

The direct exposure of UK banks to Greece is fairly limited, but - as with the bankruptcy of Lehman Brothers - a Greek default could have a number of knock-on effects that affect the UK far more severely.

For example, it could lead to the failure of one or more European banks because of their exposure to Greece, or to a general loss of confidence in global banks, in the euro or in the debts of other over-stretched eurozone governments.

The plan may consider actions such as:

emergency cash loans from the Bank of England to the UK banks, if there is a collapse of market confidence in theminterventions to support other short-term cash markets, such as commercial paper markets, which are used by companies to fund themselvesthe government injecting new loss-absorbing capital into the banks, if they suffer heavy losses because of the failure of a European bank or losses on other eurozone government debtsthe Bank publishing details of an audit currently under way of the UK banks' exposures to the eurozone, in order to reduce uncertainty and restore confidencemonetary stimulus - such as cutting rates to zero and buying up more UK government debt - in order to head off a broader economic downturnemergency tax cuts and/or spending increases by the government for the same purpose, with some of the resulting borrowing to be funded by the Bank of England's debt purchasescurrency interventions if the euro were to drop significantly against the pound.What would happen to euros in bank accounts in non-eurozone countries when/if the eurozone breaks up and turns into two or more different currencies? - Robert, Bath

You should check the terms of your bank account.

So long as the euro continues to exist - minus some members - your account should be unaffected.

If, for example, Greece left the euro, its government would probably pass a law overriding its existing euro contracts, as well as those of Greek banks, companies and individuals, redenominating them all into new drachmas.

Some legal experts have warned of a huge mess in these circumstances, with litigation brought by anyone who lost out on the conversion.

However, most financial contracts specify the law of a particular country as its "governing law". For a bank account in Athens or a Greek government bond, the governing law is Greece. So it would be hard for anyone to argue in court that these contracts should not be redenominated, if the Greek parliament says so.

But an account held in a non-eurozone country is likely to apply the law in that country, or the law of a popular jurisdiction such as England, New York or Germany. So it should be unaffected by a Greek redenomination law, unless your account is with a Greek bank.

If the euro ceased to exist altogether - with even Germany exiting - then what happens depends primarily on your account terms, assuming that they are not governed by the laws of one of the eurozone countries.

Your bank probably would have reserved the right to choose which national currency to use as a successor to the euro. Its choice would then be a commercial decision, based on how much it values its reputation and client relations over its own short-term financial gain.

Where does the European Central Bank get the money from to buy Spanish and Italian bonds? How much do they have available and what will they do if they use it all? - Peter Gray, Hitchin, Herts

Essentially the ECB, together with the "eurosystem" of 17 national central banks, can itself create the money that it uses to buy government debts.

There is therefore no theoretical limit to how much it can buy up.

When the ECB buys an Italian bond, it can pay for it by providing to the bond seller with a newly-created euro deposit at the seller's national central bank.

The seller can then use this deposit as "money" to buy other financial instruments, or it can redeem the deposit for newly-printed euro cash.

Practically, however, there are three limits on how much the ECB can do this.

The central bank's first priority is price stability. Creating new money is typically viewed as inflationary.

The ECB may try to reduce the impact of this money creation by borrowing the newly-created money back from the market, or by selling other assets it owns - German government bonds perhaps.

However, in the current heavily-depressed economy, many economists argue that money creation is not inflationary at all, at least in the medium-term, as banks are simply hoarding the money.

Secondly, the ECB may make losses on the bonds if Italy defaulted on its debts, or if it sold them back to the market at a lower price than it bought them.

The eurosystem has "capital" - money given to it by the eurozone governments when it was set up, plus profits it has made on its operations - of about 80bn euros that can absorb these losses.

But if the losses are too big, the ECB would need to be given new capital by the eurozone governments - something they are not legally obliged to do.

So the ECB may be concerned that any such bail-out could damage its cherished political independence.

Thirdly, the ECB is concerned not to distort markets too much, and in particular, not to discourage fiscal discipline by the Italian or Spanish governments by making it too easy for them to borrow.

I have three Spanish buy-to-let mortgages. I am saving sterling in the hope that the euro will collapse in value, to help pay off one of the mortgages. If a euro member leaves, is this likely to happen? If I default on the other two mortgages, can the bank take the one that I have just paid off? - Michael Sands, Northern Ireland

There are too many missing pieces of information to give you a sensible answer. Are the three properties in Spain or the UK? Is your lender in the UK or Spain? Were the loans in pounds or euros?

Whatever the facts, you appear to be in a hole, and as the former Labour Chancellor Denis Healey once said, in that situation, you should stop digging.

Let's assume the properties are in Spain and you borrowed euros from a UK lender to buy them.

Your suggested strategy is complex and hinges on several different things going your way, which they may not.

Firstly, devaluation of the euro. That might happen if one or more countries left the euro, but equally the euro might in fact strengthen if just the weakest countries such as Greece and the Irish Republic leave.

If Spain left the euro and, presumably, readopted the peseta as the national currency, you might think you would benefit from a probable devaluation of the newly adopted peseta.

But you might still be legally obliged to repay your debts in euros, regardless of the new local currency in Spain. And again, the euro might not devalue but appreciate if Spain left.

So, your guess that economic upheaval will inevitably reduce the value of your euro-denominated debts may not be accurate.

Your ambition to default on two mortgages after paying off just the third is also off beam.

Firstly, it is arguably dishonest.

Secondly, if you borrowed from a UK lender, then unless they were asleep when they lent you the money, they will have a charge over all three properties.

They will be able to chase you for any outstanding debts, once they have seized the two defaulted properties and sold them.

The same applies if you borrowed from a lender in Spain. If you still owe them money after they have seized your two mortgaged homes and sold them, they can still pursue you for the debt, there and here.

If your finances are too distressed, default may be inevitable. But it will not be an easy escape route from the debts you took on.

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The crisis in the Horn of Africa is a warning to the world | Jeffrey Sachs

Newcomers tail of Somali refugees in tents by the charity of the Lutheran World Federation on the side of the Dagahaley in Dadaab, in Kenya refugee camp. Photography: Oli Scarff/Getty Images

The crisis in the Horn of Africa is a profound human disaster in the making and a warning to the world. More than 11 million Africans, primarily pastoralists in dry land of Somalia, Ethiopia, Kenya, Uganda and neighbouring countries, are at risk of dying of starvation after two seasons of rain has failed. They need urgent help to survive, and the Governments and non-governmental organizations are in place to deliver that aid if the necessary funding is confirmed immediately. An estimated $mil is urgently necessary, equal to $1 for each person in the world of high income.

The warning is clear. The Horn of Africa is the region's most vulnerable worldwide, beset by poverty, hunger and global climate change, in particular a drying and warming of the climate during the last quarter of a century. These scourges are leading to the spread of violence and war, and war is contributing to global instability. If fail to meet the challenges of the Horn of Africa in its causes: poverty and the vulnerability of pastoralists and nomadic populations of the agro - we will face increasing violence in the Horn of Africa, Yemen and beyond. The world could be severely endangered and trillions of dollars that would eventually be spent on military responses would be useless to prevent unrest. Hunger cannot be overcome by violence.

West has contributed to the crisis in the region through global climate change to sexual life and livelihood of the population of the region. It is high time that we act to help strengthen the economies of the pastors of these environmental threats to the region. We must not only provide emergency relief but go beyond, to help these poor regions out of extreme poverty and to be more resilient to climate change. Support the sustainable development of pasture in the Horn of Africa is not only save lives but help to put an end to the war and the spread of global instability.

"Traditional donors", including the United States and the European Union, have fallen much promises made at the Summit of the G8 in L'Aquila, Italy, in 2009 to help small farmers, including pastoralists. United States and the EU are in a deep political and financial crisis, meaning or is likely to step forward with the scale of emergency and long-term aid to the Horn of Africa that normally expected to comply with.

In this situation, it is encouraging that the Gulf countries, including members of the GCC, have demonstrated willingness to intensify its assistance to the Horn of Africa, across the Red Sea. These countries are experiencing an impressive increase in income from exports this year, giving them the opportunity to expand its regional and global leadership as well. The Islamic Bank of development, the leaders of the 57 countries of the Organization for cooperation on Islamic (OIC), the financial institution has also shown impressive and inspiring dynamism, as well as a commitment of countries in crisis in the Horn of Africa.

New donors, in the end, step forward to help meet the urgent needs of the Horn of Africa. The time is very short and the needs are great. Generosity and speed are of the essence.

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Eurozone debt crisis is far from the past

Inverted Wenzhou's "harmony" move that if declared bankruptcy comes to power.

The disaster is killed or injured more than 200 people, pressed to gradually reveal the terrible truth: man-made disasters. We know that it is so it can only do this. But obscured in smash the Ministry of railways, finally a little truth, we will still have the joy of a trace of the winner.

Microblogging forced media, media create public opinion, violates the prohibition of control brains, the truth to emerge. A people who are tired of the process, because the results from the very beginning, also will get a grip on power. In such a country, most controls the mouth, eyes and ears, except decisions with powerful information leaves, to one of your own effects already entrusted to the truth of the great depression was in the media and the media. But this summer, conscience no longer afraid of melting pulp, mantle mean enough to empty out detention, to the raging flames, seemed to burn throughout the old world.

The Ministry of railways, the symbol of autocracy and corruption, CAME tumbling Collapse in the examination of the population, less than a week, infestations of iron and steel giant eye stones, because he will be tried in people.

A few days ago, he was a monster with arrogant and persecuted, I turn a posture of the railways I call the shots. People in the compartment seems to be his hostage and slaves, their use and revile dignities. This militarization and planned economic system breeds of freaks, that State within a State: he has his own system of courts, there is a hegemonic subject to the public, independent and high above, no one can shake their domination of the Kingdom. Justice and citizens ' rights is not in the scrutiny of the column, he was drag racing pleasure. With former Director Liu zhijun rail Kingdom controlled, clean, exclusive works even the direction is the direction of the railway.

LiU zhijun drag China corruption Group at high speed as bait and tie up the Government in this crazy high speed travel to wagon-this is not a destination. High speed, fast, self-service sth different types of high-sounding reasons, appears to be the only railroad into a road of independent innovation, no arrivals after an unprecedented rapid development path, looking for landing point of China's economy opens up a new road, that officials agree without prior consultations to seek employment and economic growth and political demands. The agent shot in required of officials, Liu zhijun easily get unfettered power.

Faster, better, stronger, over mainland China suddenly of Olympic Games a strong self-confidence, they want to hasten to catch up with world powers. Speed near perverted obsession, led to a great leap forward movement of the railway. Speed speed increased again, by car, followed by the rail system. Land of moaning, behind the driving rail wheel all the way, was tears of relocation of people. Road movement sweeping the continent, home to many Chinese. On the front of the dazzling speed, people's knees.

No output, Monster Shuttle, road vehicle exchanges, people can't see the distant, more do not know what is at the end.

Last year a home visit, see set up a root in the Guanzhong plain thick concrete severed post, Qinling mountain of sight inquire., I have been cutting pain, I know that the development of the beast has been claimed to be able to slam the oil lands. Acquaintances said high-speed train project oversight, everything on the site is a boss in charge, he is afraid of technical problems with print quality and was forced to resign. I understand the great leap forward will leave infinity affected rail system.

Fixed is for what? Why are we so fast?

Allows for high-speed civil aviation does not guarantee the construction of the airport after the destruction of so much land, several high-speed destroying more land, and the only to pull the same group of people. More people flow, means more land barren, inflation is not going to stop. Wheat, maize, sorghum, soya beans are produced on the road from you?

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To avoid repetition of the financial crisis

Inverted Wenzhou's "harmony" move that if declared bankruptcy comes to power.

The disaster is killed or injured more than 200 people, pressed to gradually reveal the terrible truth: man-made disasters. We know that it is so it can only do this. But obscured in smash the Ministry of railways, finally a little truth, we will still have the joy of a trace of the winner.

Microblogging forced media, media create public opinion, violates the prohibition of control brains, the truth to emerge. A people who are tired of the process, because the results from the very beginning, also will get a grip on power. In such a country, most controls the mouth, eyes and ears, except decisions with powerful information leaves, to one of your own effects already entrusted to the truth of the great depression was in the media and the media. But this summer, conscience no longer afraid of melting pulp, mantle mean enough to empty out detention, to the raging flames, seemed to burn throughout the old world.

The Ministry of railways, the symbol of autocracy and corruption, CAME tumbling Collapse in the examination of the population, less than a week, infestations of iron and steel giant eye stones, because he will be tried in people.

A few days ago, he was a monster with arrogant and persecuted, I turn a posture of the railways I call the shots. People in the compartment seems to be his hostage and slaves, their use and revile dignities. This militarization and planned economic system breeds of freaks, that State within a State: he has his own system of courts, there is a hegemonic subject to the public, independent and high above, no one can shake their domination of the Kingdom. Justice and citizens ' rights is not in the scrutiny of the column, he was drag racing pleasure. With former Director Liu zhijun rail Kingdom controlled, clean, exclusive works even the direction is the direction of the railway.

LiU zhijun drag China corruption Group at high speed as bait and tie up the Government in this crazy high speed travel to wagon-this is not a destination. High speed, fast, self-service sth different types of high-sounding reasons, appears to be the only railroad into a road of independent innovation, no arrivals after an unprecedented rapid development path, looking for landing point of China's economy opens up a new road, that officials agree without prior consultations to seek employment and economic growth and political demands. The agent shot in required of officials, Liu zhijun easily get unfettered power.

Faster, better, stronger, over mainland China suddenly of Olympic Games a strong self-confidence, they want to hasten to catch up with world powers. Speed near perverted obsession, led to a great leap forward movement of the railway. Speed speed increased again, by car, followed by the rail system. Land of moaning, behind the driving rail wheel all the way, was tears of relocation of people. Road movement sweeping the continent, home to many Chinese. On the front of the dazzling speed, people's knees.

No output, Monster Shuttle, road vehicle exchanges, people can't see the distant, more do not know what is at the end.

Last year a home visit, see set up a root in the Guanzhong plain thick concrete severed post, Qinling mountain of sight inquire., I have been cutting pain, I know that the development of the beast has been claimed to be able to slam the oil lands. Acquaintances said high-speed train project oversight, everything on the site is a boss in charge, he is afraid of technical problems with print quality and was forced to resign. I understand the great leap forward will leave infinity affected rail system.

Fixed is for what? Why are we so fast?

Allows for high-speed civil aviation does not guarantee the construction of the airport after the destruction of so much land, several high-speed destroying more land, and the only to pull the same group of people. More people flow, means more land barren, inflation is not going to stop. Wheat, maize, sorghum, soya beans are produced on the road from you?

View the original article here