Six South Korean banks are stepping up competition in the toxic asset market, by last week signing a preliminary deal to establish a private bank for holding assets such as troubled loans, The Financial Times reports.

Currently, there are some KRW5.0 trillion ($4 billion) worth of such loans in the country, with state-run Korea Asset Management having a near monopoly of the debt-clearing industry.

The six banks, Shinhan Bank, Kookmin Bank, Hana Bank, Woori Bank, the Industrial Bank of Korea, and Nonghyup Bank, are aiming to set up the new bad bank as an independent shareholder company by the end of September and operate it until 2014.

They will have a combined investment of KRW1.5 billion won, with Hana, Kookmin, IBK, and Shinhan each taking 17.5 per cent stakes in the project and Woori and Nonghyup taking 15 per cent each, the publication said.

The government welcomed the move, even issuing a reminder to the banks to ensure that the new entity stays financially stable at all times.

The FT quoted the Korea Federation of Banks' statement as saying, "If a bad bank buys bad loans at high prices, then its asset value would shrink. That would then decrease the value of the financing banks' stake, so the banks are not intending to offload bad loans for a high price."

The Financial Services Commission's spokesman Ernst Lee reportedly commented: "We hope the bad bank will speed up the restructuring process and improve the transparecny and pricing of bad assets. We hope it will be a sound competitor and supplement the role of Kamco."