Bad bank to launch in May: FSS chief

By Kim Bo-eun

Yoon Suk-heun

The chief of the Financial Supervisory Service (FSS) said Tuesday a "bad bank" will be established next month to take over the troubled funds of Lime Asset Management.

A bad bank is a corporate structure set up to buy poorly performing assets from another financial institution. The FSS and 19 distributors of Lime's funds including banks and brokerages began talks last week to set up the entity, which will liquidate Lime's assets to minimize losses for investors.

"It appears there are differing opinions among firms, but these will likely be resolved within May," FSS Governor Yoon Suk-heun told reporters in a written interview. The interview was held marking two years since he took office in May 2017.

Lime is alleged to have covered up massive losses and continued to draw investors for its funds. Investors face huge losses due to the firm's poor management of assets. About 1.67 trillion won of investors' money is in Lime's funds, for which redemptions were halted.

Regarding sanctions for Lime, Yoon said, "The process could begin in June, at the earliest."

Lime is expected to see its registration revoked, considering the weight of the case.

Lime and another scandal that erupted last year involving banks' mis-selling of financial derivative products referred to as derivative-linked funds (DLFs) has put the FSS under scrutiny. This was based on the agency's failure to properly monitor the market and ensure that financial firms had functioning internal control systems, despite Yoon's emphasis on consumer protection.

"Reflecting on these cases, there is a need to strengthen the monitoring system and conduct inspections on financial firms as a comprehensive means of supervision," Yoon said.

He also said financial firms need to offer mid-risk, mid-return investment options, to prevent massive losses for investors in the future.

"Korea has a lot of liquid assets and investment options are needed as the interest rate continues to fall and real estate is regulated. Financial firms are failing to offer decent investment options for pension assets," he said.

"This is why investors flock to the stock market or exchange-traded notes (ETN). This can lead to systematic risks."

An ETN is a debt instrument issued by a financial institution linked to the performance of an index. The volatility in the crude oil market has had investors flocking to ETNs offering outsized exposure to the commodity.

The chief of the supervisory body attributed the scandals that broke out in the past year to demand for high-risk, high-return investments, and financial firms taking advantage of such demand, through means such as mis-selling.

"Financial firms should come up with mid-return investment options to balance out possible losses. They have not been good at this," he said.