FSC Chairman Kim Byoung-hwan speaks at a roundtable on strengthening the role of savings banks at the Government Complex Seoul on March 20. (Yonhap)

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South Korea’s financial regulator will ease merger and acquisition (M&A) restrictions on savings banks to accelerate industry restructuring. The move comes amid worsening financial conditions at some savings banks and the broader decline in sector soundness and is driven by risks linked to real estate project financing (PF).

The Financial Services Commission (FSC) held a meeting with savings bank representatives, where it unveiled measures to strengthen the role of savings banks, on Thursday. These include temporarily expanding eligibility criteria for acquisitions over the next two years to encourage voluntary M&As.

In addition to institutions under prompt corrective action, including deferred cases, savings banks that have received a substandard asset quality rating (Grade 4 or lower) in quarterly management evaluations over the past two years will now also be subject to restructuring. The criteria for classifying a bank as part of the “Gray Zone” of distressed institutions eligible for M&A have been relaxed, raising the Bank for International Settlements (BIS) ratio requirement from 9 percent to 11 percent.

The regulator also expanded the scope of savings banks eligible for restructuring. Intervention was previously limited to cases of large deposit withdrawals or a forced divestment order from financial authorities. Moving forward, savings banks whose major shareholders have been convicted of violating financial, fair trade, or tax laws and fined at least 10 million won ($6,820) will also be subject to restructuring. A financial regulatory official stated that at least 10 savings banks will now meet the new M&A criteria.

To encourage financial holding companies to acquire savings banks even further, the FSC will also exempt them from the mandatory major shareholder eligibility review under relevant laws.

“We will rationalize the excessively strict M&A regulations to include more struggling savings banks in the Seoul metropolitan area as eligible acquisition targets,” FSC Commissioner Kim Byoung-hwan said. The regulator has imposed strict M&A restrictions to prevent reckless expansion since the 2011 collective savings bank suspensions and while it eased some regulations in 2023, stringent conditions have continued to hamper M&A activity, resulting in no completed deals.

A mere five savings banks - SBI Savings Bank, OK Savings Bank, Korea Investment Savings Bank, Welcome Savings Bank, and Acuon Savings Bank- held assets exceeding 5 trillion won as of late 2024. The combined net profit of these five large savings banks increased by 106.3 billion won year-on-year to 237.4 billion won, while small and mid-sized savings banks posted losses for a second consecutive year, and regional savings banks continue to struggle financially.

Meanwhile, the FSC is expanding the role of savings banks in local and low-income financing. The eligibility for loans to mid- to low-credit borrowers backed by Seoul Guarantee Insurance will be expanded from the bottom 30 percent to the bottom 50 percent of credit scores. Incentives will also be introduced to promote the supply of government-backed microfinance products.