S. Korea mulls creating public funds to rescue savings banks

South Korea is mulling injecting public funds to rescue ailing local savings banks in an effort to overhaul the troubled sector in the second half, sources said Sunday. The government is seeking to put seven teetering savings banks up for sale this year, whose operations have been suspended since January due to a pile-up in soured construction loans and weak capital positions. The Financial Services Commission, the country's financial regulator, and the Financial Supervisory Service, its executive body, have started consultation over how to raise funds to overhaul the sector as special aid funds worth about 15 trillion won (US$13.9 billion) may not be sufficient in solving the problem. "As the size of soured debt has increased more than expected, the government expects that 7 to 9 trillion won may be tapped from the funds to sell the seven players. It is a general view that the government cannot brace for the restructuring of the savings banks in the second half with the remainder of the funds," said an official at the financial authorities. The government managed to pool up to 15 trillion won in liquidity from the broad financial sector amid criticism from opposition lawmakers that using the funds is nothing but a stop-gap measure and public money should be injected to restructure the ailing sector. If the retrieval of potential public funds hits a snag, the ruling party could face severe criticism that it wasted taxpayers' money. The potential backlash could harm the party as the general and presidential elections are slated just one year away. But there is also a view that it would be better for financial authorities to cut straight to the point by using public funds to overhaul the ailing sector as a massive corruption scandal involving the savings banks is growing. Some senior officials from the financial regulators were arrested for allegedly taking bribes from one of the troubled savings bank in return for turning a blind eye on illegal lending activities and other irregularities.