The financial authorities will relax regulations for savings banks that invested funds exceeding limits during the process of managing distressed real estate project financing (PF) bonds for an additional six months. Although some savings banks faced controversy after being caught leveraging the relaxation of investment regulations to contribute funds to the PF normalization fund and profiting unfairly through tricky sales of distressed bonds, it appears that the authorities have judged that the delay in PF normalization and the resulting deterioration of the capital soundness of savings banks is of greater concern than these side effects.
According to the financial sector on the 27th, the Financial Supervisory Service (FSS) decided on the 24th to extend the relaxation measures for savings banks' capital regulations, which are set to expire at the end of this month, until June 30 of next year. The FSS had previously relaxed regulations to exempt related measures until the end of the year, even if investments were made beyond limits, in order to encourage savings banks to supply 'new money' for the restructuring and management of real estate PF establishments.
According to the Mutual Savings Bank Act and regulations governing the supervision of mutual savings banks, the investment limit for securities by savings banks is within 100% of their equity, while the limit for collective investment securities is within 20% of their equity. However, the investment amounts exceeded their equity during the process of funding real estate PF normalization funds. Among major savings banks, JT Savings Bank's investment in securities recorded 1.9 times its equity as of the end of June.
The FSS set the condition for relaxing investment regulations as 'when the genuine sale criteria are met.' In September, a savings bank was caught profiting unfairly by selling distressed bonds at inflated prices to the PF normalization fund it had invested in, which led to controversy over 'tricky sales' and 'self-sales.' If the bonds were transferred through compulsory bidding, they would have to be disposed of at a discounted price, but by selling them to the normalization fund, they could receive a much higher price and also have provisions returned, resulting in improved performance.
A genuine sale is an accounting judgment on whether a sale and purchase actually occurred, and the FSS's view is that it is difficult to consider a savings bank selling distressed bonds at high prices to a fund it created with its own investment as an actual sale. In the case of the second PF normalization fund, both the investor and the seller of distressed bonds were confirmed to be the same. It has been revealed that they sold distressed bonds they were holding through this fund and then repurchased them.
However, it remains uncertain whether savings banks will actively create PF normalization funds and engage in the management of distressed bonds due to the extension of regulatory relaxation. Discussions on the third normalization fund have been temporarily halted due to the authorities' intervention, and there is a demand to source more than half of the fund's investment from external investors due to the genuine sale controversy. A savings bank representative noted, 'If external investors come in, there is a possibility that assets will be sold at bargain prices to meet the required revenue, so interests are expected to be sharply opposed.'
As the management of real estate PFs is delayed, the soundness of savings banks is deteriorating day by day. On the 24th, the Financial Services Commission decided to impose a 'management improvement recommendation' on Anguk Savings Bank and Raon Savings Bank, which have experienced declining soundness indicators during the real estate PF normalization process. This is part of the corrective measures that the financial authorities impose on distressed financial institutions as timely corrective measures. Both savings banks must implement measures such as disposal of distressed assets, capital increase, and restrictions on profit distribution. As of the end of September, the arrears rate for the two savings banks stood at 19.4% and 15.8%, respectively, significantly exceeding the industry average of 8.7%.