By Kang Seung-woo
The nation’s financial watchdog said in its 2011 policy plan Tuesday that it will fortify its monitoring on potential risks and improve financial institutions’ soundness this year.
According to the Financial Supervisory Service (FSS), it sees household lending and project financing (PF) loans as the two biggest sources of uncertainty to the financial industry and will toughen supervision of them to shield the sector.
“Financial institutions need to take preemptive actions against potential risks, such as household and PF loans, while developing internal stability to steady the financial market,” FSS Governor Kim Jong-chang said in its policy briefing for 2011 to finance companies executives and experts. “Based on stability, we need to try our best for the financial industry to evolve into an upper tier.”
Escalating household loans have recently emerged as big threats, as the central bank‘s growing tightening mood and potential rises in the key interest rate are likely to trouble households’ repayment ability.
The Bank of Korea (BOK) has raised its key interest rate three times since July last year amid soaring inflationary pressure and it is also expected to revise up the policy rate a few times this year.
According to the BOK, local lenders’ household loans recorded 590.2 trillion won ($527.63 billion) as of last November, rising by 6.6 trillion won from the previous month. It is the sharpest growth in three years and 11 months since housing prices surged by 7 trillion won in December 2006.
As a result, the FSS intends to patch up the practice, under which banks allow borrowers to continue extending a grace period of mortgage loans and pay back interest while delaying repaying the principal. The practice is criticized for leading people toward exposure to potential loan defaults.
The FSS is considering introducing a broad test system on local commercial lenders’ foreign exchange soundness.
“From this year, the FSS plans to hold biannual or more likely annual tests of banks to grade their foreign currency health and foreign exchange liquidities as well as the profitability of currency operations,” said an official of the head of the FSS’s foreign exchange bureau.
“Local banks will be initially subject to the planned test, and local branches of foreign banks will be put on review for potential regular tests.”
The FSS added that foreign exposure of local banks represents merely 13 percent of their total operations, but currency risks are posing a huge threat to their health and profitability.