Major commercial banks should refrain from engaging in excessive competition to increase their assets as there is a possibility that they will face financial difficulties, a report said on Sunday.

The Korea Institute of Finance likened the current situation to that of the period between 2005 and 2008, when banks saw their profitability continue to worsen due to heated competition.

The cautionary advice from the think tank came weeks after a warning from Kim Jong-chang, outgoing governor of the Financial Supervisory Service, against banks and their CEOs.

In the report, KIF research fellow Lee Byung-yoon cited Hana Financial Group’s plan to take over Korea Exchange Bank for a main factor for the scenario of tougher rivalry this year.

While the nation’s big three financial groups ― Woori, KB and Shinhan ― post similar assets of more than 200 trillion won ($178 billion), Hana Financial’s merger with KEB will fan the competition for the No. 1 position, Lee said.

“From 2005 and 2008, the overdue loan ratio of banks surged as they pushed ahead with (reckless) loan issuances,” he said. “Banks’ management was also bent on short-term performance at that time.”

As a measure not to repeat the mistake, the economist advised the banking industry to focus on making inroads into overseas markets rather than sticking to a limited share of the domestic market.

Lee also stressed the role of financial regulators. “By strengthening monitoring of them, the financial authorities should instruct banks to diversify profit models.”

Earlier this month, outgoing FSS governor Kim, who finished his three-year term last Friday, said that symptoms of external expansion among several banks are emerging.

“Excessive banking expansion could lead to another financial crisis,” Kim said. “In that case it would be very difficult to overcome the crisis.”

The regulatory body FSS has said it would take stern action on CEOs of financial companies, attributing the 2008 global financial crisis to the inappropriate role of management.

By Kim Yon-se (kys@heraldcorp.com)