South Korean financial regulators are readying to tighten control over securities-backed loans at savings banks over concerns of increased risks to local financial market.

According to financial industry sources on Sunday, the Financial Supervisory Service has been looking into 79 savings banks in the country to examine their status on securities-backed lending business. Securities-backed lending refers to making loans using securities such as stocks, convertible bonds, and bonds with warrants, as collateral.

The financial authority has been reviewing a plan to adjust the cap for securities-backed loans at savings banks from current 20 percent.

The action is part of efforts to prevent market manipulation with abusive use of securities-backed loans. There have been 42 merger and acquisition deals suspected to involve corporate raiders, who buy companies without its own equity but with borrowings from others. Of the total, 20 deals were made with securities-backed loans, according to a finding by Bareunmirae Party lawmaker Lee Tae-gyu.

Such transaction is not illegal but an M&A through securities-backed loans could disturb the market as ill-minded buyer may be tempted to manipulate stock prices to afford the high interest expenses.

In addition, nearly half of securities-backed loans extended by savings banks in the country were made through just a few lenders, which increase the risk to hurt the overall market health when one goes bad.

By Lee Sae-ha and Cho Jeehyun

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