Causes of Savings Bank Insolvency: A Korean Puzzle

The recent savings bank crisis was caused by increased exposure to real estate financing loans and a bad governance system that connived the controlling shareholder’s illegal loans. However, the question of why top savings banks became bankrupt remains an unsolved puzzle. Because most of the top savings banks were grouped as conglomerates, this paper examines whether there was a financial synchronization phenomenon within the savings bank group. The paper analyzes data sets from eight savings bank groups from 2000 to 2012 in Korea and investigates the relationship between synchronization and insolvency risk within financial institutions. The results of a Granger causality test and the vector autoregression (VAR) model show that savings bank groups exhibit Granger causality with their financial indicators. For most groups, financial indicators of parent firms affect those of subsidiaries, thereby increasing the insolvency risk of those groups. Savings bank groups showing synchronization in two or more indices based on the VAR test became insolvent as a result of a deterioration in their financial soundness after 2011 and were eventually dissolved. These results suggest that the level of synchronization for indices can indicate the potential business risk of savings banks to some extent.