South Korea's financial regulator will sign agreements with distressed savings banks to boost their financial health and beef up their capital base amid alarming increases in property-loan delinquency, financial authorities said Sunday.
According to the authorities, the Financial Supervisory Service (FSS) found dozens of local savings banks vulnerable to a potential rise in loan defaults after conducting a test of their financial health.
In order to shield the banks, the FSS plans to sign memorandum of understandings (MOU) with the troubled banks by the end of the month, the authorities said.
The banks' project financing (PF) loans, extended to construction firms on the basis of the projected cash flows of their construction projects, have been blamed as the primary risk factor and the banks will be required in the MOU to write off soured PF lending and raise more capital to buffer against possible loan losses, they said.
The average default rate on savings banks' PF loans soared to over 10 percent this year as a rising number of unsold homes and falling housing prices have dried up builders' cash flows, derailing construction firms' repayment of loans.
"The MOUs are aimed at revamping savings banks' management to preemptively prevent the possibility of business deterioration," an FSS official said, adding the MOUs will include a variety of capital raising measures and other actions to bolster asset quality as well as merger and acquisitions in the sector.
Chin Dong-soo, chairman of the Financial Services Commission (FSC), the top financial rule decision body, said earlier in the week, excessive PF loans provided by savings banks and brokerage houses is a serious economic issue.
In June, the FSC spent nearly 2.8 trillion won (US$2.3 billion) of public money to buy soured loans from 61 local savings banks in a bid to protect them from escalating loan defaults triggered by a slumping housing market.
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