The long-standing flashpoint over banks conducting their own collateral appraisals has deepened into a conflict between banks and the appraisal industry. Banks argue they can make their own assessments for collateral with clear market prices, while the appraisal industry counters that it is illegal and poses risks of circumvention and illicit lending.
According to the investment banking industry on the 2nd, the Korea Association of Property Appraisers issued an unusually public explanatory statement recently and objected to reports that the Financial Services Commission is operating a task force (TF) to discuss mandatory external appraisals of collateral, saying "it is inappropriate to reexamine an issue already deemed illegal." It added, "We have not received any invitation to participate from the Financial Services Commission to date."
The association said it would not participate even if asked. It argued that it would be inappropriate for a TF that includes banks — parties judged to have acted illegally by the government — to reexamine the issue after the government has already issued a legal interpretation finding the related conduct illegal. The Ministry of Land, Infrastructure and Transport earlier issued a legal interpretation on the 19th of last month that a bank hiring an appraiser to evaluate collateral directly constitutes an "appraisal" under the Appraisal Act and violates Article 5, paragraph 2 of the Appraisal Act.
The practice of banks conducting their own collateral appraisals, frequently raised during parliamentary audits, is an old source of conflict. Financial institutions conduct appraisals to assess the value of collateral when making loans. To save on external appraisal expenses, they sometimes hire appraisers in-house to determine collateral value. According to the Korea Research Institute for Human Settlements, as of 2022 the proportion of appraisals conducted in-house by financial institutions reached 68%.
Article 5, paragraph 2 of the Appraisal Act stipulates that when financial institutions, insurance companies, trust companies or other institutions designated by presidential decree intend to appraise land and other items in relation to lending, purchase·sale·management of assets, preparation of financial statements including those under the Act on External Audit of Stock Companies, and other matters, they must request appraisal services from an appraisal corporation or similar entity.
Following the Ministry of Land, Infrastructure and Transport's legal interpretation and with the parliamentary audit season approaching, appraisers have stepped up their offensive. On the 29th of last month, the Korea Association of Property Appraisers held a rally in front of the new building of Kookmin Bank in Yeouido, Seoul, titled "Condemnation rally against Kookmin Bank's illegal invasion of the appraisal market through appraisers it hires." They claimed that Kookmin Bank selectively appraises mainly high-value properties to cut costs and hastily appraises high-priced real estate averaging 12 billion won in a single day.
According to the association, Kookmin Bank's self-appraised amounts were 26 trillion won in 2022, 50 trillion won in 2023 and 75 trillion won in 2024, nearly tripling in three years. Kookmin Bank's in-house appraisal performance equates to appraisal fees of 55 billion won, which is 20 billion won more than the appraisal corporation with the largest collateral appraisal performance (35 billion won).
An industry source said, "Appraisers employed by banks inevitably face pressure to meet loan performance targets, which can lead them to overvalue collateral," adding, "Banks even select high-value real estate for their own appraisals and pass lower-fee, more complex properties to external appraisal firms, harming the industry."
Kookmin Bank and other banks stressed that the measures are meant to improve the efficiency of procedures for determining collateral value for loan execution and to reduce costs. A commercial bank official said, "If external appraisals are mandated unconditionally, those costs will ultimately be passed on to customers through loan rates and other means," and added, "Allowing customers to choose between requesting an external appraisal firm or an in-house appraisal based on their preference seems more reasonable."