FSS Urges Real Estate Trust Company CEOs for "Proactive Soundness and Liquidity Management"

by Cha Minyoung

Published 01 Feb.2024 15:00(KST)

Meeting with 14 Trust Companies Held on the 1st

Financial Supervisory Service, Yeouido, Seoul. Photo by Younghan Heo younghan@

Financial supervisory authorities, amid growing concerns over the construction and real estate markets, met with representatives of real estate trust companies to urge proactive management of soundness and liquidity. They also called for thorough internal controls following the recent detection of embezzlement misconduct by employees related to real estate project financing (PF).

On the afternoon of the 1st, Ham Yong-il, Deputy Governor of the Financial Supervisory Service (FSS), held a meeting with CEOs of 14 real estate trust companies at the Korea Financial Investment Association in Yeouido, Seoul. He stated, "Due to the recent low pre-sale rates, there are concerns about expanding losses for trust companies, and the number of projects where the construction companies’ responsibility completion deadlines have passed is increasing," urging real estate trust companies to proactively manage soundness and liquidity.

This meeting was arranged to strengthen risk management of real estate trust companies and discuss measures for healthy industry development amid instability in the real estate market caused by construction company workouts and PF insolvencies.

The FSS requested real estate trust companies to ▲strengthen soundness and liquidity management ▲cooperate in normalizing distressed projects ▲ensure thorough internal controls to enhance financial market stability.

First, the FSS emphasized strict risk management for projects where trust companies face expanding losses due to low pre-sale rates or where the construction companies’ responsibility completion deadlines have passed. For loan-type land trusts, it urged prompt recognition of 100% expected losses on non-viable projects and swift sale or liquidation, as well as conservative valuation of real estate collateral during public auctions. For responsibility-completion-type land trusts, since large compensation liabilities may arise if the construction company goes bankrupt, the FSS requested diligent progress management for each project and securing sufficient loss absorption capacity by assuming worst-case scenarios.

Normalization of distressed projects was also a key request. In the recent high-interest-rate environment, trust companies face difficulties negotiating with major creditors over increased construction costs, while some dissatisfaction has been raised regarding trust companies’ business practices during land sales for project liquidation. The FSS asked trust companies to take a more proactive stance on resolvable issues in response to government restructuring efforts such as the recently launched Korea Asset Management Corporation (KAMCO) and sector-specific PF normalization funds.

Requests to strengthen internal controls were also made. Given the nature of real estate projects involving large sums of money such as PF loans, the risk of financial accidents like embezzlement by trust company employees has increased. The FSS emphasized that since the CEO is responsible for internal controls, sufficient resources should be allocated to internal control organizations, and strict responses should be taken against illegal activities. The authorities also plan to strictly punish illegal and unfair acts such as employees’ pursuit of personal gain.

The FSS plans to initiate inspections to prevent deterioration risks in the soundness of real estate trust companies. It will strengthen monitoring of the soundness of trust companies regarding projects at risk of insolvency and conduct a comprehensive review of reserve fund accumulation. Institutional blind spots will be addressed to ensure that actual risks of trust businesses, such as contingent liabilities, are properly reflected in the Net Capital Ratio (NCR). To minimize disputes between parties to land trust contracts and establish a sound market order, standard operational methods such as obtaining consent from beneficiaries during public auctions will also be prepared.

Additionally, the FSS will seek reasonable solutions by listening to difficulties arising among stakeholders during the real estate project restructuring process.

Representatives of real estate trust companies expressed their willingness to actively cooperate with the authorities’ efforts to overcome the difficult market situation. They also requested institutional support to facilitate smooth project implementation, such as clarifying the scope of responsibility among participating parties during project execution.