(LEAD) Banks urged to improve financial soundness: watchdog chief

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SEOUL, Aug. 28 (Yonhap) -- South Korea's financial watchdog will urge local banks
to dispose of their problem loans and put aside more loan-loss reserves to brace
for a possible economic deterioration, its head said Friday.

"Banks need to refrain from aggressively expanding their assets and should make
efforts to beef up both their financial soundness and profitability," Chin
Dong-soo, chairman of the Financial Services Commission (FSC), told reporters.
His remarks came as the FSC called for local lenders to lower their bad loan
ratio to below 1 percent by year-end, saying they need to bolster financial
soundness preemptively amid lingering economic uncertainty.
As of the end of June, banks' problem loans totaled 19.6 trillion won (US$15.7
billion), or 1.5 percent of total lending, up from 19.3 trillion won three months
earlier. The ratio is the rate of nonperforming loans to aggregate lending.
Chin also said the watchdog plans to closely monitor short-term money flows and
the housing market, and will draw up policy measures if problems are spotted.
Amid signs of an economic recovery and record-low borrowing costs, home-backed
loans have jumped, raising concerns over a spike in housing prices and possible
asset inflation.
According to the watchdog, bank mortgage lending surged by a monthly average of 3
trillion won this year, similar to levels seen in 2006 when lenders were
scurrying to extend home-backed loans.
"We are studying whether to strengthen regulations on home-backed lending. A
sharp gain in housing prices is limited to some districts in Seoul or
metropolitan areas," Chin added.
In early July, the watchdog strengthened its grip on home-backed regulations amid
rising housing prices. The regulator allows local banks to extend mortgage
lending amounting to up to 50 percent of the value of a residence in Seoul and
its adjacent areas, down from 60 percent.
Vice Finance Minister Hur Kyung-wook told a radio program earlier in the day that
if housing markets get overheated, the government is considering levying some
regulations on certain limited areas where home prices have excessively shot up.
sooyeon@yna.co.kr
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