The Financial Supervisory Service plans to tighten oversight of local banks’ overseas operations, diverting from its earlier position of eased regulations to encourage their making inroads into foreign markets.
The watchdog unveiled this year’s key regulatory policies during its meeting with financial market leaders at the Bankers’ Club in downtown Seoul on Tuesday.
Major banks, including the nation’s top three, Kookmin, Woori and Shinhan, have advanced into overseas countries over the past year and the necessity of bolstering their risk management is growing, according to FSS officials.
As an initial step, bank headquarters in Seoul will be obliged to enhance monitoring systems to control them more effectively.
The FSS, in coordination with regulatory bodies in foreign markets, will step up to inspect branches at high risk or those with sluggish performances.
With the 2008-2009 global financial crisis fading, local banks have been rushing abroad to get the upper hand in emerging markets such as Vietnam, Indonesia and China.
Their aggressive expansion abroad was attributable to limited profitability in the saturated local banking industry.
Banks are focusing on China and several Southeast Asian countries where the wealthy middle-income bracket has recently increased, buoyed by their rapid growth pace.
In particular, China has already become the most popular destination for Korean banks, as there is a possibility that it could be the world’s No. 1 private banking market dealing with wealthy customers in coming years.
Aside from the big three, the players in competition to capture the emerging markets are Korea Exchange Bank and the government-controlled Industrial Bank of Korea.
The 2011 financial regulatory policy also reflected the global agreement at the Group of 20 Seoul Summit last November.
The FSS said large-sized financial service companies will be subject to periodical probe more frequently from this year. The policy comes after G20 members agreed to strengthen oversight of the so-called “too big to fail” commercial banks.
The watchdog said it will “push for making inquiries into major financial groups which could see their financial soundness undermined due to their expansion-oriented business strategies.”
In addition, the regulatory body will introduce a regular test of banks’ foreign exchange positions in a bid to put lenders’ currency risks under control.
“Starting this year, we are scheduled to hold biannual or more likely annual tests of banks to grade their foreign currency health and foreign exchange liquidities as well as profitability of currency operations,” an FSS official said.
He said foreign exposure of local banks accounts for only 13 percent of their total operations. “But currency risks are largely blamed as a big threat to their health and profitability.”
Banks also should undergo tougher regulatory inspections of the household lending business and construction-related financing loans.
For the capital market sector, the FSS is considering enhancing monitoring of foreign investors’ trading of currency and stocks.
“Foreign influence on the domestic financial situation which includes stock prices, interest rates and foreign exchange rates has increased,” it said. “We will raise the level of fairness in the capital market.”
By Kim Yon-se (firstname.lastname@example.org