South Korea’s ‘Bad Bank’ Faces Low Uptake From Lenders

Seoul, South Korea – February 19, 2026 – South Korea’s Recent Leap Fund, a government-backed “bad bank” designed to alleviate debt burdens, is experiencing lower-than-expected participation from key financial institutions, raising questions about its effectiveness. While the fund has purchased ₩7.7564 trillion (approximately $5.7 billion USD) in long-term overdue bonds since its launch in October, a significant portion of these purchases have been from public institutions, with limited engagement from mutual finance companies and lending firms.

The New Leap Fund: Aims and Mechanics

The New Leap Fund was established to address the issue of long-term delinquent debt, specifically targeting debts under ₩50 million (approximately $36,700 USD) that have been overdue for more than seven years. The fund operates by purchasing these non-performing assets from financial institutions, allowing individuals to potentially have their debts adjusted or written off. The initiative aims to provide financial recovery support to vulnerable populations struggling with debt.

Low Participation Rates: A Deep Dive

Data released by the Korea Asset Management Corporation (KAMCO) reveals a stark disparity in participation rates. Mutual finance companies have not purchased any bonds through the New Leap Fund, despite holding ₩605 billion (approximately $444 million USD) in eligible debt. Lending companies, which hold the largest share of private sector overdue bonds – ₩6.7291 trillion (approximately $4.94 billion USD) – have only sold ₩379.3 billion (approximately $278 million USD) worth of bonds to the fund, representing roughly 7% of their eligible holdings. [1]

In contrast, credit card companies have been the most active participants, purchasing ₩789.7 billion (approximately $578 million USD) in bonds, followed by banks (₩541 billion / $396 million USD) and capital companies (₩259.2 billion / $189 million USD). [2]

The Price Point Problem

A key factor contributing to the low participation rate among lending companies appears to be the proposed purchase price. Lenders have reportedly indicated that the government’s suggested purchase rate of around 5% is significantly lower than their average bond purchase price rate, which is around 25%. This discrepancy creates a disincentive for lenders to participate, as selling bonds at such a low price would result in substantial losses. [1]

Government Response and Incentives

The Financial Services Commission is attempting to address the low participation rates by offering incentives, such as allowing lending companies that voluntarily agree to participate in the New Leap Fund to qualify for bank loans. [3] However, only 13 of the top 30 lenders have signed up for voluntary agreements, with an overall subscription rate of just 43.3%, significantly lower than the over 90% subscription rate seen in other industries. [1]

Concerns and Future Outlook

The limited participation of mutual finance and lending companies raises concerns about the New Leap Fund’s ability to achieve its policy goals of providing debt relief to vulnerable individuals. Some lawmakers have even raised suspicions of coercion being used to encourage participation, highlighting the need for a more collaborative and incentive-driven approach. [1]

The Financial Services Commission maintains that it is “purchasing overdue bonds sequentially,” suggesting a gradual approach to implementation. However, a more proactive strategy, including addressing the price point concerns and offering more compelling incentives, may be necessary to ensure the New Leap Fund effectively addresses the debt burden of vulnerable populations in South Korea.