Korean financial authority will next week launch special inspection on lenders and brokerage houses amid fears of losses in derivatives-linked to German and British assets spreading to other private equity funds.

The Financial Supervisory Service (FSS) said it would conduct an inspection on interest-backed derivatives on sale and management by commercial banks, brokerages and asset managers next week upon alarm about risks in equity funds whose balance has swelled to 390 trillion won ($321 billion) amid eased regulations.

To offer greater returns against low-interest environment, the funds invest more on derivatives and alternative assets than traditional securities like stocks and bonds.

Real estate-backed funds reached 80.74 trillion won by the end of June, exceeding bond-backed fund balance of 79.64 trillion won.

The FSS scrutiny comes amid reports that some funds have incurred losses. Funds that have invested in German bonds have lost money with the government yields falling deeper into the negative territory amid heightened concerns about global and euro-zone recession. The state employment insurance fund reportedly has incurred 47.6 billion won in losses because 81 percent of its investment was exposed to German government yields.

KEB Hana Bank and Woori Bank are believed to have sold 400 billion won worth and 350 billion won worth derivatives-linked funds.

By Lee Sae-ha and Lee Ha-yeon

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