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S. Korea: Seoul Tightens Rules on Savings Banks
Source: koreaherald.co.kr
Source Date: Monday, April 12, 2010
Focus: Institution and HR Management
Country: Korea (Republic of)
Created: Apr 12, 2010

Korea’s financial regulator said yesterday it will tighten capital rules on savings banks and limit their lending to real estate development projects, in a bid to improve savings banks’ financial soundness.

“Risk has grown as savings banks grew larger. They will be facing stricter rules in line with their increased size,” Kwon Hyouk-se, an official at the Financial Services Commission said at a press conference.

Currently, savings banks are required to keep their BIS capital adequacy ratio at 5 percent or above, but this will be raised to 7 percent in the future, the FSC said. BIS stands for the Bank for International Settlements.

Normal credits, currently classified as loans less than 90 days overdue, only include loans less than 60 days overdue, it added.

The FSC plan also requires savings banks to keep their lending to construction projects below 25 percent of their total lending, starting from next year. The maximum lending guideline will be further lowered to 20 percent in 2013, the FSC said.

Overall, real estate market-related loans should not exceed 50 percent of its total lending, the regulator said.

The changes will apply to savings banks with assets exceeding 2 trillion won ($1.78 billion) initially and will then expand to include smaller banks in the future.

“Some savings banks are now bigger than provincial banks, but they are still subject to looser rules in terms of capital soundness and corporate governance,” Kwon said.

The industry’s largest Solomon Mutual Savings Bank has 5.4 trillion won in assets, far bigger than Jeju Bank’s 2.9 trillion won, the smallest of provincial banks, FSC officials said.

Concerns have been growing over the deteriorating financial soundness of savings banks, as they raced for external growth at the expense of asset soundness.

Under a record-low interest environment, the savings banks have been luring savers’ money with higher interest rates while extending loans to real estate development projects, considered risky by commercial banks.

According to the Financial Supervisory Service, the FSC’s executive arm, total assets of the nation’s 104 savings banks grew nearly 20 percent year-on-year to a combined 84.4 trillion won at the end of February.

The delinquency rate for their loans, meanwhile, spiked to 15.7 percent in February, from 13.2 percent two months earlier.

Moreover, a prolonged slump in the construction sector is spilling over into savings banks, as more than half of their loans are linked to the construction and property market.
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