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SEOUL, March 19 (Reuters) - South Korea's central bank andfinancial regulator are inspecting units of four foreign banks,sources told Reuters on Wednesday, as authorities worry aboutpotential systemic risks from the rapid growth inyuan-denominated deposits.
Yuan deposits by South Korean residents were the equivalentof $7.62 billion at end-February, up from $310 million sixmonths earlier as Chinese banks aggressively raise fundsoverseas in response to tighter credit conditions back home.
Some regulators are concerned the surge in deposits couldincrease South Korea's external liabilities and pose systemicrisks if there were large foreign currency outflows or the fundswere used to make risky loans in China.
"This inspection doesn't mean that some measure onsuppressing yuan deposits is on our minds," one of the sourcestold Reuters, adding that it would take considerable time forthe regulators to assess the impact of yuan deposit growth.
"This is about fact-finding."
The four banks being inspected are Bank of China Ltd., Industrial and Commercial Bank of China Ltd., China Construction Bank Corp andBarclays PLC, two sources familiar with the mattersaid. The sources declined to be identified because of thesensitivity of the issue.
The Bank of Korea and the Financial Supervisory Service(FSS) are jointly conducting the inspection, which is due to rununtil March 28, the sources said. Both the central bank and theFSS declined to comment when contacted by Reuters.
An official at Industrial and Commercial Bank of China'sSouth Korean subsidiary said it would cooperate with regulators.Local branches of the Bank of China and China Construction Bankcould not be immediately reached for comment, and a Barclaysmedia official could not immediately comment on the inspection.
LOAN RISK
The foreign banks are authorised to raise foreign currencydeposits. The FSS instructed the Chinese banks to slow theiryuan deposit-building late last year. The regulator also wantsto limit how much of the funding can be used overseas, though itis unclear whether such a measure will be implemented.
Authorities have previously said that Chinese banks weresending the money they raised back to China. Some officials areconcerned about the safety of the deposits if they are used tofund loans in China that subsequently go sour.
On March 7, China recorded its first domestic bond default,when Shanghai Chaori Solar Energy Science and Technology Co Ltd missed an interest payment.
Because the won can't be directly converted intoyuan, the deposits are built through a structured product schemeusing dollar-won and dollar-yuan swaps.
The structured products have been popular with institutionalinvestors in South Korea. Yuan deposits pay higher interestrates than won deposits, and currency rates can further increasereturns. (Reporting by Joyce Lee, Christine Kim and Lee Shin-hyung;Writing by Se Young Lee; Editing by Choonsik Yoo and John Mair)
