FSS to prioritize Korea's 'economic powder keg' of construction funding risks

Financial Supervisory Service (FSS) Gov. Lee Bok-hyun speaks during a press conference held on Monday at the FSS headquarters in western Seoul. [YONHAP]

Korea’s financial watchdog has prioritized addressing potential liquidity risks stemming from construction project funding, the country’s "economic powder keg," with its governor on Monday promising “a prompt restructuring” within the sector this year.

Rooting out malpractices such as illegal short sales by global investment banks and inappropriate selling of high-risk products — which came into the spotlight due to the controversial Hong Kong-tied equity-linked securities (ELS) situation — were also named some of the top priorities by the Financial Supervisory Service (FSS).

“With the internal and external economic slowdown persisting and the latent risks becoming visible, the economic situation is likely to remain unfavorable this year,” said FSS Gov. Lee Bok-hyun during a press conference on this year’s policy plan held at the agency’s headquarters in western Seoul.

The governor cited “stability, household economy, trust and future” as four keywords for the FSS’s policy initiative in 2024.

“Regarding the real estate project financing, which has become our economic powder keg, we will facilitate a prompt restructuring by looking thoroughly into risk factors through a close assessment of each operation, while also helping financial firms enhance their loss-absorbing capabilities,” said Lee.

In a road map released Monday, FSS pledged to mandate companies to recognize predicted losses in their financial report, and facilitate restructuring of unprofitable businesses through auction or public sales.

For a further investigation into illegal short sales by global investment banks, the Korean government will work with Hong Kong’s financial authorities, the FSS chief said.

Working-level officials from Korean financial authorities plan to visit Hong Kong, where many global investment banks have their Asian headquarters, in February to discuss a potential joint probe.

Regarding the recent controversies surrounding the troubled Hong Kong-tied ELS, Lee said that “a guideline on compensation standards” will likely come out by the end of February for investors who lost money after investing in Hong Kong-tied derivative financial products without a proper or sufficient explanation from the sellers, as the price of ELS tied to the Hang Seng China Enterprises Index has plunged to half that of its 2021 peak ahead of the maturity of the products.

The governor floated the idea of voluntary compensations for a certain portion of losses from the sellers of the product, including local banks and brokerage firms, but added that “there will be no penalty against firms that wouldn’t be voluntarily paying compensations.”

The financial watchdog is tightening its grip on regulatory practices in the market this year, said Lee, stressing that “starting this year, we will take a decisive action toward companies that have been making wrong decisions such as delaying the recognition of losses, ignoring customer interests or shirking their responsibilities as a financial institution, up to and including a removal from the market.”

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]