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Wed, February 2, 2022 | 19:09
Companies
Excessive sales pressure causes DLS fiasco
Posted : 2019-08-25 16:23
Updated : 2019-08-25 16:23
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gettyimagesbank

Banks urged to strengthen risk management

By Lee Kyung-min

The recent fiasco involving a set of high-risk, high-yield financial products sold by the nation's top commercial banks resulted from a blind push to generate profit, a key directive from the lenders' management to boost non-interest income, industry officials said Friday.

The products are derivative-linked securities (DLS) and derivative-linked funds (DLF), structured to track the performance of underlying assets such as interest rates and government-issued bond yields. Their returns are determined by movements of those underlying assets.

Of the about 822 billion won ($681 million) investment in the DLS and DLF in question, nearly half was sold by Woori Bank and the other half by KEB Hana Bank, with many investors set to incur losses.

Of them, Woori sold DLS worth over 126 billion won linked to the performance of 10-year German treasuries, which are set to incur 95 percent losses.

This means a person who invested 100 million won will lose 95 million won.

Intense criticism of the banks is inevitable as they are unlikely to be held responsible for the investors' losses, all the while charging a handsome service fee of between 1 to 1.5 percent of the total sum invested, according to an industry official who declined to be named.

"For example, a customer who bought a 100 million won of DLS should pay between a 1 million won to 1.5 million won fee up front regardless of the products' performance," the official said.

"If bank officials underperform in sales of such products, they will not be promoted ― not to mention the increased risk of being demoted or moved to a remote branch in a regular reshuffle."

The fear-driven marketing from the banks has been an effective way for their holding companies to boost service fees that account for a large portion of non-interest income.

Woori Financial Group and Hana Financial Group reported 611.7 billion won and 1.1 trillion won in non-interest income, respectively, in the first six months of 2019.

Of Woori group's income, 565.6 billion won, or 92 percent, came from Woori Bank. For Hana group, 39 percent, or 438.8 billion won, came from KEB Hana Bank.

However, the profit-seeking strategy has resulted in what customers consider "irresponsible marketing."

According to complaints filed with the Financial Supervisory Service (FSS), many customers claim they were misled by the banks' private banking officials, who they said convinced them that bonds issued by the government of an economic powerhouse like Germany would not likely incur losses.

Many banks with a wealth management division have sold these products to high-end customers, saying they are available only to a limited number.

The FSS will look into the complaints to see if the banks sold the products to customers without making sure they understood what they were about to buy and the possible risks.

Voices will grow that the financial regulator should urge banks to strengthen risk management, a key component of the healthy management of financial groups.

"Risk management is vital to the successful operation of financial groups, which is true for all other industry players," Kim Sang-kyung, chairwoman of the Korea Network of Women in Finance, said. "Measures need to be taken to keep risk-prone entities in check,"

Emaillkm@koreatimes.co.kr Article ListMore articles by this reporter



 
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