By Kang Seung-woo
The nation’s top financial regulator Thursday unveiled tighter measures governing the management of savings banks to boost their financial health.
Financial Services Commission (FSC) Chairman Kim Seok-dong said Thursday that it will toughen controls over major shareholders of the secondary banks and their involvement in high-risk business.
The move came after the FSC suspended the operations of eight savings banks due to capital shortages triggered by mounting insolvent construction project financing (PF) loans and tapped reserve funds created from the financial sector and taxpayers to salvage the troubled banks.
“The FSC will strengthen the surveillance role of outside directors and auditors at savings banks and immediately weed out unsuitable players in order to restrain savings banks' excessive competition for growth,” Kim said.
“Savings banks’ excessive investment in risky assets and severe competition to see loan assets grow, combined with the worsening management environment following the 2008 global financial crisis, sparked the crisis in the sector, forcing the FSC to restructure the industry.”
The FSC said that it will slap harsher penalties on wrongdoings by the lenders’ major shareholders, who are blamed for savings banks’ imprudent lending practices that have led to the recent problem in the sector. The current rules only subject bank management to fines worth 10 to 20 percent of inappropriate loans made, but according to the revision, the penalty will increase to 40 percent.
“By introducing stricter rules against major shareholders, we expect to prevent abuse of funds,” the FSS noted.
The FSS also said that it will put limits on savings banks’ investment in risky assets like high-yield corporate bonds and excessive lending activities as well as issuances of subordinated bonds.
In addition, it will abolish favorable lending system, so called the “8.8 club,” for savings banks whose capital adequacy ratio is more than 8 percent and non-performing ratio is below 8 percent in its efforts to prevent another capital shortage. If savings banks meet the standard, they are allowed to extend loans of more than 8 billion won to a single client.
In terms of consumer protection, the financial regulator said that it will improve disclosure rules.
Local savings banks have excessively extended PF loans on the back of the housing market boom in 2005 and 2006. But the global financial crisis hit the property market hard and it has yet to see a recovery, causing lenders and constructors to suffer from a mountain of debt.
The FSC ordered Samhwa Mutual Savings Bank to halt operations in January due to its liquidity crisis and since then seven more savings banks have been suspended including Busan Savings Bank, the nation’s largest lender.
The default rate of PF loans by local financial firms came in at 12.84 percent as of the end of the third quarter last year, nearly doubling from 6.37 percent a year ago, according to the FSS.