South Korea asks banks to prepare $4 billion to support credit union

South Korea's financial services regulator has asked major commercial banks to prepare around $4 billion in financing to support a credit cooperative hit by customer withdrawals, two banking sources familiar with the matter said on Monday.

An official at the Financial Services Commission confirmed that banks had been asked to prepare liquidity through repurchase-agreement facilities to aid MG Community Credit Cooperatives, but did not comment on the amount. The official declined to be named due to the sensitivity of the matter and the commission had no further comment.

Depositors were lining up last week to withdraw funds from a branch of MG Community Credit Cooperatives after local media reported a rise in non-performing loans tied to real estate projects. The branch, in the city of Namyangju east of Seoul, is due to be closed soon.

South Korea's top financial authorities pledged on Sunday to ensure liquidity at the credit cooperative, which has nearly 1,300 branches, saying in a statement that MG Community's capital ratio and liquidity far exceeded regulatory ratios and it had sufficient cash-equivalent assets.

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Sharply rising interest rates and a cooling property market have raised concerns about the potential impact on Asia's fourth-largest economy.

South Korea's five major commercial banks have signed or are in the process of signing repurchase agreements with the credit union, said the sources, who declined to be identified because of the sensitivity of the issue. Repurchase facilities allow for raising cash in exchange for collateral, such as bonds. Woori Bank, Hana Bank, Shinhan Bank, KB Kookmin Bank and NongHyup Bank had been asked to make financing available to MG Community Credit, although the actual amount extended to the credit union would depend on deposit withdrawals, the sources said.

The sources added that each of the banks was asked to prepare 1 trillion won of financing, or 5 trillion won in total ($3.84 billion), as potential support.

MG Community and the five banks did not immediately respond to requests for comment.

MG Community said in a statement last week that its debt delinquency rate was manageable and it would work with the Interior Ministry to improve its financial soundness.

Sunday's statement, from officials at the Bank of Korea and the Ministry of Finance as well as the Financial Services Commission, added that withdrawals at MG Community had slowed and new deposits had been coming in since last Thursday.

An investor note from Citi last week played down the risks from the incident but warned of negative effects on economic growth from the indebted real estate sector.

"We don't see systematic risks from the event," said Kim Jin-wook, an economist for Citi in Seoul, adding that any negative effects would likely be far less than those of a missed bond payment by a theme park developer late last year.

South Korean financial authorities coordinated with financial groups to set up a liquidity programme last November when a missed bond payment by theme park developer Gangwon-Jungdo Development sparked worries about a credit crunch. ($1 = 1,302.7800 won)