By JASON BOOTH

Staff Reporter

The economic crisis in South Korea is spilling over into the Koreatown district of Los Angeles.

The deposits of locally based retail banks that serve the Korean American community have plummeted, as customers have withdrawn hundreds of millions of dollars to send back to cash-strapped friends and relatives in South Korea. That drop in deposits means the banks have less money to lend, raising concerns that the access to capital among Koreatown businesses could be reduced.

In addition, local agencies of South Korea-based banks, which deal in trade finance and make loans to Korean companies operating here, have effectively halted operations due to an inability to raise capital.

Korea First Bank said it will close its L.A. agency by June, and Seoul Bank said it has ceased accepting new business at its L.A. agency and will close it by the end of the year.

“It is a very difficult situation for Korean banks,” said Cho Hyo-il, manager of the Commercial Bank of Korea agency in Los Angeles and president of the Korean Bank Association of California.

Bankers and other members of the business community estimate that around $350 million has been sent to South Korea from Southern California since early December. That compares with a normal level of less than $50 million.

The money has been sent both to help friends and family get through tough economic times, and increasingly for investment in South Korean financial and property markets.

With so much money being sent overseas, deposit levels at local Korean-owned banks have dropped by 5 percent to 10 percent since the start of December, bankers said.

Fewer deposits will probably impact business conditions within the Korean-American community in several ways, said Oh Yi-Yong, head of the international department at Hanmi Bank, which is L.A.’s second-largest Korean bank.

“Due to increased competition to attract more deposits, we will probably see deposit interest rates go up,” he said.

Hanmi helped accelerate the surge in withdrawals by offering commission-free cash transfers to South Korea, a move that was copied by a number of other local institutions. In response to the fund outflow, Hanmi has initiated a campaign to lure more deposits, Oh said, though it has not yet resorted to raising interest rates.

For December and January, the peak of the frenzy, Hanmi Bank saw more than $60 million in withdrawals, compared with $19 million in the like two-month period a year earlier. The outflow has resulted in a drop in deposits of more than 5 percent, Oh said.

The greatest volume of withdrawals was at California Korea Bank, the largest Korean bank in Los Angeles, which saw around $80 million remitted to South Korea in December and January, according to Vice President and Cashier Conrad Ritvelt.

That compares with a small net inflow of deposits during the like period a year earlier.

Nara Bank, which also offered commission-free transfers in the wake of the crisis, saw $1 million to $2 million withdrawn and sent to Korea each day in December and January, according to President Ben Hong. That is 10 times the normal level for that time of year, he said.

Due to their strong ties to the Korean American community in Los Angeles, the Korean retail banks based here are expected to weather the current upheaval with limited damage.

However, the South Korean credit crunch is having far harsher impact on the agencies of Korea-based banks operating in Los Angeles.

For years they had benefited from their close relationships with South Korean companies that were expanding their operations in the United States. Now, however, those relationships are proving to be a liability, bankers say.

Since last summer, American banks that had loaned money to Korean agencies began cutting off their credit lines due to worries that their heavy exposure to Korean companies posed an excessive credit risk, said Cho at the Commercial Bank of Korea.

That increased credit risk has been reflected in the tumbling credit ratings for the parent banks of these agencies. The debt of Korea Exchange Bank, which has the largest Korean agency in Los Angeles, has a Moody’s credit rating of B1, which is four notches under investment grade.

The bank’s “financial strength” rating, which strips out external factors such as government support, is E, which indicates insolvency.

“The Korean banks are having a very hard time securing funds from U.S. banks. Right now everybody is winding down exposure to Korea,” said Josh Wang, a banking analyst at Moody’s in New York.

With local credit lines drying up, the agencies have been forced to borrow money in Korea just to maintain their cash requirements, at interest rates as high as 20 percent, said Cho.

Unable to pass on such high costs to customers, the agencies have effectively given up making loans.

In the last six months, Korea Exchange Bank’s L.A. agency has seen its outstanding loans fall to about $400 million, down from more than $500 million, according to General Manager Kim Hyun-dong.

“Because of business problems we have reduced our loan balance drastically,” Kim said. “We have called in loans and are not giving extensions.”