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.

"They will likely use all the possible policy weapons first and then rely on rate hikes as the last resort, which will likely take place late this year or early next year," he added.

Regulators started voicing worries about the mortgage loan growth this month, with government officials playing down expectations of an economic recovery as premature although they agreed that the economy had passed the worst of the downturn.

The government also plans to fine tune micro policies to stabilise property prices, although it would not carry out macro economic policies, Deputy Finance Minister Noh Dae-lae said.

Data released on Friday by Kookmin Bank, the nation's largest lender, showed the latest apartment prices across the nation rose for a third week with a 0.1 percent gain, the longest run of gains since July 2008.

The government said in a joint statement on Thursday that it would take pre-emptive measures, such as tightening lending criteria, if necessary to cope with a rise in home-backed securities.

The finance ministry said the government and the central bank will call in all foreign currency liquidity support they have provided by the end of August, while the Bank of Korea agreed with the Federal Reserve to extend a $30 billion currency swap deal.

The Bank of Korea has already started to drain liquidity via repurchase agreements and bond selling operations.

But South Korea's economy is not ready for policymakers to exit from accommodative policy measures as the private sector is still too frail, deputy minister Noh told Reuters.[ID:nSEO318083]

Forecasts for economic data support the view that the central bank is expected to maintain its benchmark interest rate at a record low with inflation in June seen falling to a 21-month low. [ID:nSEO311245]

Earlier, central bank data showed the country's seasonally adjusted current account surplus in May more than halved from April on smaller goods account surplus and higher services account deficit. [ID:nSEO309199] ($1=1281.1 Won) (Additional reporting by Cheon Jong-woo and Seo Eun-kyung; Editing by Jonathan Thatcher & Kazunori Takada)