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South Korean Regulator Requests $4 Billion Financing from Major Banks to Support Troubled Credit Cooperative

In a bid to support MG Community Credit Cooperatives (MGCCC), South Korea’s financial services regulator has approached major commercial banks in the country, directing them to prepare approximately $4 billion in financing. MGCCC has reportedly been hit by customer withdrawals. While the exact details and amount could not be confirmed, the Financial Services Commission has requested the banks’ cooperation in providing liquidity through repurchase-agreement facilities to assist MGCCC. The regulator is closely monitoring the cooperative’s liquidity. Last week, depositors were seen lining up to withdraw funds from one of MGCCC’s branches following reports of a rise in non-performing loans related to real estate projects. The branch is scheduled for closure soon.

South Korea’s top financial authorities have assured the public that they will ensure sufficient liquidity at MGCCC, stating that the cooperative’s capital ratio and liquidity exceed regulatory requirements and it possesses ample cash-equivalent assets. The rising interest rates and fallling property market in South Korea have raised concerns about its potential impact on the country’s economy.

Sources familiar with the matter have revealed that the five major commercial banks in South Korea, including Woori Bank, Hana Bank, Shinhan Bank, KB Kookmin Bank, and NongHyup Bank, have either signed or are in the process of signing repurchase agreements with MGCCC. The banks have been requested to make financing available to the credit union, with each bank preparing 1 trillion won of financing, totaling 5 trillion won (approximately $3.84 billion), as potential support.

Both MGCCC and the banks involved have not provided immediate comments on the matter. The financial authorities’ joint statement, which included officials from the Bank of Korea, the Ministry of Finance, and the Financial Services Commission, revealed that withdrawals from MGCCC had slowed down, and new deposits had been coming in since last Thursday.

Citi, in an investor note last week, cautioned about the negative impacts of the incident on economic growth resulting from the indebted real estate sector. The economist for Citi in Seoul, Kim Jin-wook, stated that the event does not pose systematic risks and any negative effects would likely be less significant than those caused by the missed bond payment by a theme park developer in late 2022. It is worth noting that South Korean financial authorities took coordinated measures with financial groups in November 2022 to establish a liquidity program when concerns about a credit crunch arose following a missed bond payment by Gangwon-Jungdo Development, a theme park developer.

The request from South Korea’s financial services regulator to major commercial banks to prepare $4 billion in financing highlights the gravity of the situation surrounding MG Community Credit Cooperatives (MGCCC). The cooperative has faced significant customer withdrawals, prompting concerns about its liquidity and financial stability. While the exact amount and details of the financing remain unconfirmed, the regulator’s involvement signals a coordinated effort to mitigate potential risks and ensure the cooperative’s operational continuity.

While the impact of the MGCCC incident is being closely monitored, analysts, including those from Citi, have downplayed the risks of systemic implications. They highlight that the incident is distinct from previous events, such as a missed bond payment by a theme park developer, which had more substantial economic repercussions. However, the attention remains focused on the real estate sector, where concerns over mounting debts and non-performing loans persist, potentially affecting economic growth in South Korea.

The collaboration between regulators, financial institutions, and MGCCC aims to strike a balance between ensuring financial stability and preventing disruptions to the broader economy. By addressing the liquidity challenges faced by MGCCC and implementing measures to strengthen oversight and risk management, the authorities aim to restore confidence in the financial system and maintain steady economic growth in South Korea.

Please note that the currency conversion rate mentioned in the article is $1 = 1,302.7800 won.

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