Korean banks could face more losses from exotic derivatives sales

Korean banks could face more damage suits after they were ordered to cover up for most of the consumer losses over derivatives-linked funds as other products connected to German Heritage derivative-linked securities (DLS) and other exotic products continued to incur huge losses.

German Heritage DLS is based on funds managed by Singapore’s Banjaran Asset Management that invest in historic site remodeling projects conducted by German Property Group, formerly Dolphin Trust. But the company failed to pay the investments back and keeps extending maturities due to the delay in receiving authority’s approval for the projects.

Shinhan Bank and Shinhan Financial Investment are estimated to have sold 400 billion won ($341.4 million) worth such products, KEB Hana Bank 50 billion won and Woori Bank 23 billion won, according to sources.

The country’s top hedge fund Lime Asset Management Co. is also under investigation after it failed to make payment obligations on 1.5 trillion won worth funds due to liquidity problems following massive losses in derivatives backed by overseas securities. Market sources found that Woori Bank was responsible for selling 800 billion won worth such funds and Shinhan Bank 490 billion won. The probe is currently faced with a hurdle as the company’s former vice president Lee Jong-phil has gone into hiding.

Earlier this month, Woori Bank and KEB Hana Bank were advised to compensate up to 80 percent on losses from their mis-selling of derivative-linked funds (DLFs) tied to 10-year German Treasury bond. The banks are accused of selling the risky funds to mostly elderly and novice investors without fully explaining on potential risks of the products.

In the aftermath of the incident, the nation’s financial authorities announced that it will ban commercial banks from selling high-risk private equity funds and “complex” products. The authorities are now looking into the recent investments in overseas real estate by local brokerages as they also carry high risks.

The protracted low interest rate is partly blamed for a series of mishaps by the financial sector, industry experts pointed out. Financial institutions increasingly find it hard to raise profits due to the historic low key rate at 1.25 percent, thus they are forced to look into high-risk and high-return products backed by overseas securities to offset the fall in interest income.

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