Regulator to intensify monitoring of property-related financing, punish firms bent on short-term profits

SEOUL– South Korea will beef up monitoring of the money market for property development in a way that instability in the area will not spill over and undermine the health of the overall financial industry, the top official of the country’s financial regulator said Monday.

Lee Bok-hyun, head of the Financial Supervisory Service (FSS), also said he will hold financial firms accountable that have been bent only on making short-term profits without making proper efforts for risk management.

He made the remarks during a meeting with a group of reporters in Seoul amid growing worries that much of the project financing (PF) loans extended for real estate development could go sour due to fast-rising borrowing costs and a slowdown in the property market.

“In a way that the recent real estate project financing-related short-term money market conditions do not affect the soundness of financial institutions, we will make sufficient preparations to absorb any unexpected shocks from home and abroad by more thoroughly managing potential risks,” Lee said.

“At the same time, we will prevent moral hazards and stave off side effects from businesses excessively focused on profitability by taking steps to clearly hold responsible financial firms that have been bent on short-term achievements without making sufficient efforts for risk management in a preemptive manner,” he added.

Financial market volatility has risen sharply in the wake of a recent default of a municipal government-guaranteed debt related to the construction of the Legoland theme park, amplifying woes for investors already grappling with uncertainty from global monetary tightening and the economic recession.

With mounting anxiety over a credit crunch, financial authorities have unveiled a series of ways to pump tens of trillions of won worth of additional liquidity but worries that money is drying up in the short-term money market is persisting.

In particular, the fast-freezing real estate market, amid rising interest rates and a slowdown in transactions, has sparked concerns that possible defaults on debt raised through the so-called project financing (PF) could weigh on the asset soundness of financial firms and grow into a major systemic risk for the broad economy.

PF refers to lending based on a project’s future cash flows. It is widely used in the property development sector that requires a massive amount of funding before a project is completed.

Lee said the FSS is closely monitoring financial firms, including brokerages, deemed to be highly vulnerable to a downturn in the real estate market and working hard in cooperation with other related agencies to normalize “distortion” in the money supply process.

He, however, noted that financial companies as a whole are armed with high levels of soundness and enough liquidity to get over the current challenging situations, but the FSS will continue to induce them to set aside a sufficient amount of reserves so as to strengthen their shock-absorbing capacity.

Source: Yonhap News Agency

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