Korea’s financial authorities to expand saving bank checks to prevent insolvency

[Photos by Kim Ho-young]

South Korea’s financial authorities will drastically reform the country’s 10-year-old system to better manage and supervise savings banks as the failures of U.S. Silicon Valley Bank and Credit Suisse Group AG have heightened uncertainties in the global financial market and concerns over non-performing real estate project financing loans in the country, according to sources from the financial circle on Sunday.

The Financial Supervisory Service is considering expanding the scope of its inspection to include savings banks with potential insolvency risks by shifting the inspection criteria from asset size to financial soundness, profitability and liquidity indicators. The FSS is likely to first adopt the Bank for International Settlements’ capital adequacy ratio, a key gauge of financial soundness at banks. In this regard, the saving banks whose BIS ratios are at the bottom of the industry are highly likely to be subject to inspection, even if they exceed the regulatory standard of 8 percent.

Currently, the FSS and the Korea Deposit Insurance Corp. jointly inspect savings banks with total assets of 2 trillion won ($1.53 billion) or more every two years. The system was created to strengthen supervision on large savings banks after a savings banks crisis in the early 2010s.

At that time, there were only two saving banks subject to the mandatory inspection, SBI Savings Bank Inc. and Acuon Capital Corp. However, the local savings bank industry grew rapidly amid interest rate hikes following the outbreak of the Covid-19 pandemic and the number of those subject to the inspection increased to 20 at the end of last year.

Under the current system, the FSS and the KDIC must inspect all of the large banks in 2024. Given that the Korea Federation of Savings Banks has 79 members now, 25 percent of all savings banks are subject to inspection. Furthermore, there are eight savings banks that can soon be subject to mandatory inspection as their assets are more than 1.5 trillion won and less than 2 trillion won.

“After channeling manpower and resources into the inspection of all these large savings banks, it will be physically impossible to inspect the remaining savings banks,” an FSS official expressed concern. “Furthermore, given that the number of savings banks with assets of more than 2 trillion won is expected to increase further, we may face a situation soon in which we cannot complete our inspections even if we inspect only large savings banks throughout the year.”