"Loss if Sold"... Commercial Banks' Dead Mo Fund

Outstanding Sales Balance of 21.8667 Trillion Won at End of June
Reduced by Over 7 Trillion Won in One Year
5 Major Banks' Fee Income of 330 Billion Won Over 5 Years
Compensation Exceeds 1.3 Trillion Won Following Lime and DLF Scandals
Provisions Increased by 500 Billion Won in Q2 This Year
Hana and Woori Banks Effectively Halt Sales

[Asia Economy Reporter Kangwook Cho] Commercial banks have started to 'distance themselves' from private equity funds. Initially, the government's deregulation of private equity funds and banks' efforts to expand non-interest income led to a rapid increase in sales. However, due to continuous incidents such as Lime, overseas interest rate-linked derivative-linked funds (DLF), and Optimus, the 'commission income' was outweighed by the 'compensation for losses.' As a result, private equity fund sales have effectively been halted in the banking sector.

According to the Korea Financial Investment Association on the 4th, the outstanding balance of private equity fund sales by domestic commercial banks stood at 21.8667 trillion KRW as of the end of June this year, a decrease of over 7 trillion KRW compared to a year ago. The outstanding balance of private equity fund sales, which was 13.87 trillion KRW at the end of June 2015, five years ago, rapidly increased thanks to government policies aimed at revitalizing private equity funds through deregulation, peaking at 29 trillion KRW at the end of July last year, and has been steadily declining since. The decrease this year has reached 3.5 trillion KRW.

According to data received by Park Yong-jin, a member of the National Assembly's Political Affairs Committee from the Financial Supervisory Service, the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?sold private equity funds worth over 70 trillion KRW over five years from 2015 to 2019. During the same period, the sales commission income from private equity funds also increased annually, with the five major banks receiving a total of over 330 billion KRW in sales commissions over five years.

However, a series of incidents related to private equity funds turned this into a boomerang. Last month, the Financial Supervisory Service recommended the full refund of investment funds to the sellers of the Lime trade finance fund. This is the first time a 100% refund recommendation has been made. Previously, in December last year, compensation for DLF-related losses was up to 80% of the loss amount. If banks and securities firms accept the authorities' demands, the compensation amount is estimated to exceed 1.3 trillion KRW. However, there is no legal obligation to accept the decisions of the Financial Supervisory Service's Dispute Mediation Committee.

The provisions banks have set aside for private equity fund compensation have already far exceeded the sales commissions. In the second quarter of this year, the four major financial groups?KB, Shinhan, Hana, and Woori?set aside more than 500 billion KRW for private equity fund-related costs and provisions. As of the first half of this year, Shinhan Financial set aside the largest amount at 201.6 billion KRW, Woori Financial 160 billion KRW, Hana Financial 118.5 billion KRW, and KB Financial 29 billion KRW for compensation related to private equity funds.

Because of this, banks appear to be seriously considering suspending private equity fund sales. In fact, Hana Bank, which went through turmoil due to the DLF incident, has not resumed private equity fund sales yet. Hana Bank's new private equity fund sales were suspended for six months due to sanctions from the Financial Supervisory Service related to DLF, but on June 29, a provisional injunction suspending the effect of the related disciplinary action was granted, allowing the resumption of private equity fund sales. It is even understood that the bank is considering a complete suspension of private equity fund sales in the future. Woori Bank also plans not to resume private equity fund sales after the DLF-related sanctions end in September. Nonghyup Bank has suspended private equity fund sales since November last year.

A financial industry official said, "Initially, financial authorities advocated fostering venture capital and promoted the revitalization of private equity funds, but now they are placing all responsibility solely on the sellers," adding, "In an atmosphere where private equity fund sales are stigmatized, the only option is to either completely stop sales or reduce them to a minimum."

This content was produced with the assistance of AI translation services.