Authorities extend scrutiny into savings banks amid growing risk of financial instability

A customer in seen at a savings bank in this undated photo. Yonhap

Financial authorities are accelerating measures to improve the management stability and asset soundness of savings banks amid growing concerns that their capital adequacy ratio, known as the BIS ratio, may fall below recommended standards in light of ongoing domestic and international economic uncertainties.

According to officials, Thursday, the Financial Supervisory Service (FSS) and the Korea Deposit Insurance Corp. have launched a joint inspection of major savings banks in the Seoul metropolitan area.

This inspection is part of preemptive measures, as the BIS ratios of some savings banks in the area have fallen below the recommended standards, raising worries about potential financial instability.

The FSS can guide management improvements if a savings bank’s BIS ratio falls below 7 or 8 percent, depending on assets. Savings banks with assets under 1 trillion won ($748 million) must maintain a BIS ratio of at least 7 percent, while those with assets of 1 trillion won or more are required to maintain a ratio of at least 8 percent.

The financial watchdog adds a 3-percentage-point buffer to these thresholds, setting the recommended standards at 10 percent and 11 percent, respectively. Savings banks with BIS ratios below these recommended levels are required to submit capital procurement plans, including capital expansion measures, paid-in capital increase plans and financial structure management strategies.

Domestic savings banks have faced multiple factors that could worsen their BIS ratios. The top 10 banks by asset size, including SBI Savings Bank, reported a net loss of 161.5 billion won in the first half of this year. This loss amount has more than doubled compared to the same period last year.

Additionally, the total amount of non-performing loans that are more than three months overdue among these banks has reached 5.48 trillion won, a 54.8 percent increase from the previous year.

“The timing for improving profitability depends on the speed and extent of restructuring weak banks,” Oh Hwa-kyung, chairman of the Korea Federation of Savings Banks, said during a meeting with reporters, Aug. 30.

“Based on current expectations, it will be difficult to overcome deficits within the next year. If things proceed quickly, losses might be sustained until the end of this year or possibly into the first half of next year.”

Given the mounting concerns about financial instability in the sector, inspections by the authorities could be expanded in the second half of this year.

The FSS has already requested capital procurement plans from four savings banks which had their BIS ratios fall below the recommended standards.

In June, the FSS also conducted management evaluations on three savings banks with high delinquency and non-performing loan ratios. At the end of last month, these evaluations were extended to four additional savings banks.

Management evaluations are supervisory procedures conducted for financial institutions whose soundness indicators fall below certain levels.

“Although the savings banks have not yet fallen below the legal BIS ratio standards, we are preemptively guiding those below the recommended levels,” a FSS official said.