November 27, 2024

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A Korean Federation of Community Credit Cooperatives branch in Seoul on Sunday (Yonhap)

Seven Korean lenders have decided to provide over 6 trillion won ($4.64 billion) in financial assistance to the country's primary mutual financial institution that has been hit by liquidity shortage concerns, according to industry sources on Tuesday.

Five major Korean commercial banks -- KB Kookmin, Shinhan, Hana, Woori and NongHyup -- as well as the Industrial Bank of Korea and the Korea Development Bank, have signed repurchase agreement contracts with the Korean Federation of Community Credit Cooperatives after customers started pulling deposits from the credit union last week.

A repurchase agreement, also known as a repo, is a financial arrangement in which the borrower provides a security to the lender temporarily in exchange for cash, with a mutual agreement to repurchase it at a predetermined price in the future.

With each contract ranging from 500 billion to 2 trillion won, approximately 6.2 trillion won will be provided to KFCC, according to industry sources.

Also, as part of these repurchase agreements, the banks have agreed to accept the government bonds and monetary stabilization bonds issued by the KFCC as collateral.

The deal comes after financial authorities on Friday gathered officials from local banks to discuss the public’s rising concerns over the primary mutual financial institution and asked for short-term liquidity support for KFCC.

Since the beginning of this month, public concerns over KFCC’s rising delinquency rate started to spread. As of June 29, the delinquency rate on KFCC-issued loans stood at 6.1 percent, a significant increase from 3.59 percent at the end of last year.

To stem fears of a bank run, the Korean government last week sought to reassure depositors in KFCC that the government would ensure the safety of their assets.

The KFCC also has been encouraging depositors who withdrew their funds between July 1 and 6 to reconsider and redeposit their funds. It is offering the same interest rates and maturity benefits to those depositors if they choose to come back with their funds by July 14.

According to the government, these efforts have been effective so far.

The upward trend in withdrawals started to weaken on Thursday, and the withdrawal amount on Friday also showed a decrease of around 1 trillion won compared to the previous day.

On Monday, the government launched a dedicated team to address the ongoing issues and monitor the situation.

The team comprises officials from the FSC, the Ministry of Public Administration and Security, the Ministry of Finance, the Financial Supervisory Service and the Bank of Korea.

By Song Seung-hyun (ssh@heraldcorp.com)