Kim Seok-dong, the newly appointed chairman of the Financial Services Commission, has established a reputation as a troubleshooter. Since the mid-1990s, he has led many task forces formed to resolve crises in the financial and real estate markets. Kim’s appointment comes at the right time, since the domestic financial sector faces a host of problems.

In the first place, Kim needs to address the drawn-out bad loan problem of the savings bank sector. Savings banks basically serve people who have difficulty accessing banks due to their low credit ratings. But in recent years, many of the nation’s 100 or so savings banks focused on providing project-financing loans to property developers. This practice backfired as construction firms, hit by recession from 2008, began to default on their loans.

To prevent the banks from collapsing, the government purchased 1.7 trillion won worth of nonperforming project-financing loans from savings banks in 2008 and 2009. In June last year, the government again spent 2.5 trillion won to take over bad loans from them.

Despite these rescue efforts, the crisis is not over. The sector’s aggregate bad loans are expected to total 6.7 trillion won this year, with project-financing loans accounting for 3.9 trillion won. As a result, the government has set aside another 3.5 trillion won to help the banks dispose of distressed assets.

The root cause of the problem is moral hazard among the owners of the savings banks. Since the deposits at savings banks are covered by the Korea Deposit Insurance Corp. for up to 50 million won per account, these banks engaged in risky businesses in the belief that even if things go wrong, they would be bailed out by the government.

Given the systemic risks posed by the troubled savings banks, government bailouts are inevitable. The new FSC chairman needs to take prompt action to put an end to the mess. At the same time, he needs to punish the owners of the savings banks for creating the problem and forcing the government to use taxpayers’ money to rescue their businesses. Punitive steps should also be taken against financial regulators who failed to warn the immoral bank owners of the trouble they would run into by focusing on project-financing loans.

Another important job Kim should carry out this year is to curb the rapid growth of household debts. Household borrowings from banks and nonbank financial institutions totaled 770 trillion won in September last year. This year, household debt growth could accelerate as competition among financial companies is expected to intensify.

In particular, the top four banks ― Kookmin, Woori, Shinhan and soon-to-be-merged Hana and Korea Exchange Bank ― are likely to vie fiercely to emerge as the leading bank. They are determined to increase assets by offering more loans to households.

Despite the rapid rise in household debts, the loan delinquency rate remains low. But this is largely because most households simply pay the interest on their loans without repaying the principal. Banks keep extending grace period for their customers who cannot repay the principal. But this expedient practice cannot go on forever.

Financial regulators need to closely monitor markets and make sure that excessive competition among financial companies does not lead to a surge in household debts. They also need to encourage banks to extend loans to households at longer-term, fixed rates and induce borrowers to reduce their debts by paying off principal in installments.