Banking Pyramid Scheme Comes Crashing Down

Korean Banking System

The Financial Services Commission, which suspended the troubled Busan Savings Bank last week and then promised that no further suspensions were necessary, suspended four more savings banks today as Korea's Banking Pyramid Scheme started to come crashing down.

While the global recession has led to record low interest rates rates across the world, Korea's savings banks often maintained unsupportable rates interest rates of 8%, which savers were too greedy to question. The banks claimed the rates were sustainable because depositors' money was being taken and loaned to Korea's booming construction industry, which is committed to building twice the number of apartments needed in this country by 2015.

Before the apartment glut of 2015, construction companies planned to sell their properties to people as investments, but the scheme began to unravel when it was discovered all the potential buyers were instead putting their money in savings banks to obtain interest rates of 8%, leaving no-one to purchase their over-inflated bubble prices. Once the companies were left with no-one to sell to, they defaulted on their loans leaving the savings banks that funded them insolvent.

But the 62 year-old Chairman of the Association of Savings Bankers said that the failures demonstrated the robustness of Korea's financial system. "These people were going to lose their money anyway" he said "so the outcome is the same whether they lost it on a property or lost it in their bank because they didn't buy a property."

Controversially, 55 year-old Professor Kim from the Economics Department at Seoul International University has written that the notion of money being "lost" is in fact a myth, since money doesn't actually disappear unless the government burns it. Instead rather, this so-called "lost" money actually ends up somewhere else, adding to speculation that construction bosses are aware of the unsustainability of their business model, but run their companies as short-term cash machines before they inevitably fail. Professor Kim admits this relies on the stupidity of bank owners, "but the existence of this is not considered to be in the realm of academic research".

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