(Updates with quote in the fourth paragraph.)
July 4 (Bloomberg) -- South Korean regulators will begin assessing the financial condition of savings banks this month to determine whether they are sound enough to receive government aid or should be sold.
The government will review 85 of the 98 savings banks operating now and announce the results of the inspection by late September, the Financial Services Commission said in an e-mailed statement today.
South Korea is tightening supervision of small lenders after construction loans soured following a real-estate market slump. The National Assembly on June 1 agreed to conduct a probe of savings banks amid growing speculation that regulators overlooked illicit activity at the lenders.
“Unless there are excessive deposit withdrawals causing a liquidity crunch, we won’t suspend any savings banks because of financial weakness until late September when we announce the results of the review,” the FSC said in the statement.
Lenders with a capital-adequacy ratio higher than 5 percent under Bank for International Settlements criteria will be able to receive state funds if they want, the regulator said. The government may sell bonds to help fund the recapitalization, it said, without elaborating.
State guarantor Korea Deposit Insurance Corp. will seek swift sales of non-viable savings banks after the review, according to today’s statement. Banks with a BIS capital ratio below 5 percent may be shuttered unless their financials improve within six to 12 months.
Regulators suspended eight savings banks earlier this year because of bad loans. The government has ordered the sale of seven of those lenders, while Woori Finance Holdings Co. took over some assets of Samhwa Mutual Savings Bank in March.
Combined assets at the country’s savings banks dropped 2 percent to 74 trillion won ($70 billion) at the end of March from three months earlier, and deposits fell 2.8 percent to 64.4 trillion won, today’s statement showed.
The banks had combined losses of 48.7 billion won for the nine months ended March, compared with 333.3 billion won of losses posted in the year ended June 2010, the FSC said today. Some 68 percent of the lenders posted profits.
--Editors: Russell Ward, James Gunsalus
To contact the reporters on this story: Seonjin Cha in Seoul at firstname.lastname@example.org
To contact the editors responsible for this story: Chitra Somayaji at email@example.com