BOK-FSS inspection targets KEB Hana, IBK

By Kim Yoo-chul

The Bank of Korea (BOK) has teamed up with the Financial Supervisory Service (FSS) to inspect four leading lenders suspected of having “potential financial vulnerabilities” because of high corporate debt.

“As rising interest rates may spur uncertainty among both retail and institutional investors, as well as the private sector, the FSS has asked the BOK to launch a joint inspection of four domestic banks,” an FSS official said Sunday.

An 11-member special inspection team, including four FSS officials, has been looking into total lending by the Industrial Bank of Korea (IBK) since last week, according to the FSS. The inspections of the other banks will begin May 16. All of these audits may be extended, “if necessary.”

“Specifically, the joint team is checking the relevant details of the IBK's corporate risk management division and corporate lending teams,” said the FSS official.

Woori Bank, KEB-Hana and BNK Kyongnam Bank, a leading regional bank, are the “next targets” to be inspected by the special team.

“If the team finds evidence that they have greater exposure in private lending, which the BOK and FSS believe is far beyond internal guidelines, then they may receive a correction order,” said the official.

Last week, a report from the U.N.'s Economic and Social Commission for Asia and the Pacific (UNESCAP) noted that looming threats of rising debt were undermining the region's positive economic growth outlook.

The UNESCAP report said Korea needs to tackle the issue of private and corporate debt. “Based on previous experience, any overexposure in terms of whether the debt is private, corporate or household can induce a huge amount of domestic financial vulnerability,” it said.

BOK Governor Lee Ju-yeol confirmed that the central bank “would raise” its benchmark lending rate when it becomes possible to do so. The governor said financial imbalances could grow if the BOK maintains its current interest rate, even as the local economy continues 3 percent growth and inflation consolidates at 2 percent.

“Under an era of low interest rates, companies were given easier accessibility to borrow money for operating costs; however, this is not good for them at a time of high interest rates,” said a BOK official.

Local financial markets expect the BOK to increase its benchmark rate by 25 basis points to 1.75 percent in July from the current 1.5 percent.

As of the first quarter of this year, corporate lending by the IBK amounted to 152.44 trillion won, accounting for 82.3 percent out of its total liabilities. The percentage at BNK was 63.4 percent, followed by Woori Bank and KEB-Hana with 50.6 percent and 46.7 percent, respectively, according to data provided by the FSS.

“BNK Kyongnam was the sole regional bank that was included in the inspection list as most of its lending went to key subcontractors of debt-ridden shipbuilders such as Sung Dong and STX. Those shipbuilders are nearing bankruptcy affecting the financial soundness of their key contractors. We have to keep an eye on them,” said another FSS official.