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The financial crisis escalates! South Korea credit unions are being run!
Jul 24,2023
Recently, according to foreign media reports, the South Korea financial services regulator has asked major commercial banks to prepare about $4 billion in financing to support MGCCC, which has been hit by customer withdrawals.
An official from the South Korea Financial Services Commission said,It was not possible to confirm the amount or other details, but banks have been asked to cooperate through a repurchase agreement facility to provide liquidity support to MGCCC.
"The mobility of the MGCCC is being closely monitored," said the official, who declined to be named due to the sensitivity of the matter, and the committee had no further comment.
South Korea Credit Union, called MG Community Credit Cooperatives, or MGCCC, is a special non-bank financial intermediary, a special shadow bank, not a bank, but a bank.
The institution began as a mutual credit group of the South Korea Newtown Movement in 1963 and has been closely integrated with South Korea's grassroots community ever since.
Its total assets (284 trillion won, about US $220 billion) are about twice that of South Korea savings banks, and it has more than 1300 branches, with more than 1/3 of its South Korea nationals being its users.
MGCCC is special in both South Korea and global finance.
MGCCC is not subject to the supervision of the South Korea financial regulator FSS, as a bank financial intermediary, doing the work of the bank, the bank's illegal or non-mortgaged loans, here can be issued quickly, is the South Korea full rental loans.
Even in 2020-2022, when mortgage policies across South Korea banks are required to tighten, users to MGCCC can still apply for mortgages very easily.
This also makes MGCCC the last choice for many small and medium-sized enterprises and personal loans.
In early July, some South Korea media reported that the default rate of some MGCCC branches exceeded 20%, triggering a run.
South Korea's top financial institution pledged on the 9th to ensure the liquidity of the credit union, which has nearly 1300 branches, and said in a statement that MGCCC's capital ratio and liquidity far exceed regulatory ratios, and it has sufficient cash equivalent assets.
The five largest South Korea commercial banks have signed or are in the process of signing repurchase agreements with credit unions, which allow collateral such as bonds to be exchanged for cash, the sources said.
Each bank was asked to prepare 1 trillion won of financing, or a total of 5 trillion won ($3.84 billion), as potential support.
The state-owned South Korea Development Bank and Industrial Bank are also establishing repurchase agreements with credit cooperatives, Yonhap reported on the 11th, citing unnamed financial industry sources.
Supplementary statements issued by officials from the Bank of South Korea, the South Korea Ministry of Finance and the South Korea Financial Services Commission show that since the 6th, MGCCC's withdrawals have slowed down and new deposits are also increasing.
Citibank's investor report also downplayed the risk of the incident, but warned that the South Korea real estate sector's liabilities could have a negative impact on economic growth.
In particular, the report mentions that the run on MGCCC shows no sign of affecting South Korea's major commercial banks. Because the price of the underlying CDS has not changed much this month since it soared to a high at the end of last year.
The report specifically explains the meaning of CDS. CDS, credit default swaps, also known as loan default insurance, is the price of insurance for credit default, and its price is positively related to the risk of credit default.
On July 12, according to Bloomberg News, South Korea banks will hold an interest rate meeting in the context of risks. The majority of respondents believe that the Bank of South Korea will not raise interest rates, which specifically mentioned the MGCCC.
Fears of a potential credit crunch are growing as MGCCC defaults rise.
Huh of Daol Investment believes that, as the South Korea government has said, market jitters related to MGCCC are likely to be managable. "But still people can't help but feel uneasy."
The run on the shadow bank, which seems to detonate the risk outside the bank, actually hurts the general public.
On the front page of MGCCC, the chairman of the board of directors wrote in his letter to customers as follows:
"After five decades of ups and downs, community credit unions are busy preparing for the next hundred years. We have not stopped responding to crises and challenges, and have become a strong pillar supporting economically vulnerable low-income groups and the bottom of society."
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