Korea's Banking Problems Have Not Gone Away

| About: iShares MSCI (EWY)

Until now, Seoul was the last of the core Asian markets to correct. It may be doing so now, and problems in some of the biggest savings banks may be the catalyst.

Korea has been a crowded market lately with trades focusing on the role it is playing in the global industrial recovery, but also a place where guys have been betting on the short side.

Now that the regulators have frozen the activities of Busan Savings Bank and Daejeon Mutual Savings Bank due to their failure to keep enough capital to meet requirements, the cracks are showing.

A few sessions back, the Kospi fell 0.60% — not a huge gap in itself, but this time, it was the locals who were selling.

This may be the correction for Korea. Ultimately, that should be a good thing as part of the cleansing process that has been going on in emerging markets over the last six to eight weeks. In the short term, the EWY could be volatile:

It turns out that the banks were suffering as their construction loan portfolios rotted. Shutting them down for the next six months may not help with that situation, but the regulators’ plans to start an $18 billion rescue fund should help Korea’s other banks avoid similar problems down the road.