The financial authorities completed a field inspection of OK Savings Bank over five weeks until the end of June and have now commenced an inspection of Daol Savings Bank. The authorities had previously announced plans to conduct relay field inspections on up to 10 institutions by the end of the year, and it is reported that criteria for selecting savings banks for inspection include the level of arrears, the scale of non-performing loans, and the proactive participation in the normalization joint fund.
According to the financial industry on the 9th, the Financial Supervisory Service (FSS) began a field inspection of Daol Savings Bank on the 7th. A field inspection typically takes about 1-2 weeks, but, similar to the case of OK Savings Bank, it could be extended for several more weeks. Accordingly, during this inspection, the FSS is comprehensively verifying the process of resolving non-performing real estate project financing and the management of loan soundness.
Until the time OK Savings Bank was being inspected, it was not determined whether Daol Savings Bank would be the next institution to be inspected. The next savings bank to be inspected after Daol Savings Bank is also expected to be decided after the field inspection is completed. Typically, the selection of institutions for inspection is determined by comparing the performance of each savings bank, the latest arrears rates, and the scale of non-performing real estate project financing.
In addition, the FSS is reportedly considering the participation of savings banks in the normalization joint fund conducted by the Korea Savings Bank Association in March when deciding on inspection targets. The normalization joint fund is a fund established by the savings bank sector to address non-performing project financing. The association investigates the demand for the sale of non-performing loans from individual savings banks and connects them with asset management companies willing to purchase these loans.
When savings banks participate in the fund overseen by the Korea Savings Bank Association, they will no longer need to directly contact or negotiate with asset management companies. The association disclosed that it resolved about 200 billion won in non-performing loans through the third joint fund in the first quarter and an additional 1.2 trillion won through the recently conducted fourth joint fund.
However, not all savings banks wish to participate. By participating in the fund, they will inevitably have to engage actively in the sale of bonds, which may sometimes lead to them selling bonds at a price lower than that set by each bank, incurring losses. Alternatively, for non-performing business sites that seem viable for recovery, savings banks may choose to invest funds or change the business owner. Therefore, savings banks that have sufficient capital to bear non-performance and arrears may choose not to participate in the joint fund.
On the other hand, the financial authorities, responsible for managing the soundness of the savings bank sector, have no choice but to pay more attention to savings banks that are not actively participating in sales than to those that are. Since last year, the FSS has been conducting spot inspections of the savings bank sector, and this year it has intensified inspection strength, spending more than a month on one savings bank. This is due to the rapidly increasing non-performance in loans to self-employed individuals and households.
The FSS identified non-performing assets worth 23.9 trillion won through a comprehensive inspection of financial sector project financing from June of last year, and by the end of March this year, it resolved 9.1 trillion won. During this inspection, the FSS plans to comprehensively review the recovery strategies of savings banks, their internal risk management systems, and the adequacy of provisions, and will demand additional risk management measures if necessary.