Mongolia shaken by banking collapse

"Mongolia, once the darling of foreign investors and mining corporations, has had a large question mark looming over it over the past few years," says Thomas Hugger of fund management firm Asia Frontier Capital. Government back-tracking on profit-sharing agreements for mining projects has rattled investors and sent stocks tumbling 30% in the past year.

Still, following a business-friendly election result and new laws promising more investor protection, the outlook had been getting brighter.

So the surprise collapse last week of the country's fifth-largest bank was an unpleasant shock, says Peter Thal Larsen on Breakingviews. Savings Bank turned out to be sitting on bad loans amounting to twice its capital, some apparently made to its controlling shareholder despite regulations intended to limit this kind of exposure.

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While policymakers minimised the immediate fallout by having a state-owned lender quickly take over its deposits, "the failure has raised doubts about the central bank's grip on Mongolia's financial system" at a time when credit has been growing rapidly (up 40% in the past year). The country's "undoubted commodity wealth" means vast growth potential, but the foundations of the present boom are looking shaky.