WRAPUP 1-S.Korea asks banks to control mortgage loan growth

* Banks advised to restrain home-backed loans

* Speculation of monetary policy tightening

* Government not ready to quit accommodative policy

By Kim Yeon-hee and Lee Shin-hyung

SEOUL, June 26 (Reuters) - A South Korean regulator has advised banks to refrain from home-backed lending, an official said on Friday, with growing signs of asset price bubbles and speculation of possible tightening of monetary policy.

Despite concerns that a rush of liquidity might already be starting to cause problems, the government repeated its pledge to maintain an expansionary policy to ensure a recovery in Asia's fourth-largest economy.

A string of interest rate cuts and government spending since late last year has boosted liquidity in financial markets, some of which is believed to be flowing into the closely watched and volatile real estate sector.

Stable borrowing costs and loosened rules over property transactions started to drive home prices higher from April, sparking speculation of an interest rate hike and sending the benchmark government bond yield to a six-month high early this month.

"We advised them to restrain themselves," a senior official of the Financial Supervisory Service (FSS) told Reuters.

"The recent (home-backed) loan growth has been heavy, and some property markets have shown signs of overheating. We are concerned about herd behaviour towards home-backed lending and asset quality."

Home-backed loans owed by financial services firms in the country totalled 328.7 trillion won ($257 billion) as of the end of May, including a net 14.9 trillion won expansion since the start of this year, according to FSS.

The Korea Economic Daily reported that the FSS had recently convened a meeting with executives of banks overseeing mortgage loans and urged them to control loan expansion.

As the government push for lending to small and medium-sized companies seems to have run its course, South Korean banks have turned to home-backed loans to meet demand for new home purchases and from households switching from credit loans.

RESTRAINT

It was the first time in months that the financial industry regulator has used the word "restraint" in relation to bank lending.

"Property prices have recently rebounded fast enough to worry policymakers. An asset price bubble would hamper the government's unprecedented efforts to revive the economy," said Song Jae-hyeok, an economist at SK Securities.