(ATTN: CHANGES headline, lead to para 8 to highlight remarks on KEB sale, KDB's talks with Lehman; TRIMS throughout)

SEOUL, Sept. 11 (Yonhap) -- South Korea's top financial regulator said Thursday it would be difficult for the watchdog to give regulatory approval to HSBC's deal to buy Korea Exchange Bank (KEB) within the month.

Last September, HSBC Holdings Plc agreed to buy a 51.02 percent stake in South
Korea's No. 5 lender from Lone Star Funds, but the deal has been deadlocked as
the financial watchdog is withholding its approval, citing legal disputes over
Lone Star's 2003 purchase of KEB.

"It is not easy for the financial watchdog to give its thumbs-up on the deal
within September as the the process for reviewing additional documents to be
submitted by HSBC is needed," Jun Kwang-woo, chairman of the Financial
Services Commission (FSC), told reporters after giving a speech at a recent
forum.

His remarks came three days after the FSC said it may approve HSBC's offer to buy
KEB "at an appropriate time," if serious problems are not found in
additional documents to be submitted by HSBC. On Monday, he declined to disclose
the specific timing of a possible regulatory approval.

A second deadline for closing the US$6.3 billion deal expired on July 31, with
HSBC and Lone Star discussing the next step for the deal.

Prosecutors are looking into allegations that former government officials and a
former president of KEB colluded to "artificially" understate KEB's
financial health in a bid to help Lone Star purchase the lender at a below-market
price. A verdict on the case is expected by the end of September at the earliest.

Meanwhile, when asked whether the state-run Korea Development Bank's (KDB) talks
to buy stakes in Lehman Brothers Holdings Inc. have completely broken down, Jun
said, "It is not proper to make a comment that could affect the
market."

KDB said Wednesday it has suspended talks with Lehman Brothers on a possible
investment due mainly to differences over deal terms.

Jun said at the forum that the financial health of local banks remains sound,
despite the increasing uncertainty of global financial markets and the slowing
economy.

"The possibility that local banks' lending to smaller firms would go sour is
rising. But as long as the economy does not sharply cool down and the downturn is
not prolonged, I think lenders have enough capacity to absorb possible losses
themselves," Jun said. "The health of household loans and their
capacity to cope with losses remains sound."

His remarks came as the slowing economy is feared to raise loan default rates for
small and medium enterprises (SMEs). With Asia's fourth-largest economy losing
steam amid sluggish domestic demand, the credit risks of SME loans are likely to
increase in the third quarter, the central bank said in a report issued in early
July.

According to the Bank of Korea, the growth of South Korean bank loans to
companies slowed sharply in August as lenders, looking to strengthen their risk
management, tightened their grip on lending to smaller firms.

Regarding capital flight fears, Jun said, "The speculation proves to be
groundless... The government will make efforts to prevent groundless rumors from
denting investor sentiment by beefing up its monitoring of market
situations."

South Korea has been gripped by fears over the possibility of a financial crisis
as overseas investors are rumored to be set to withdraw their capital from the
local bond market en masse this week. Foreigners, who hold South Korean bonds
worth $6.71 billion that matured on Tuesday and Wednesday, snapped up a net 2.1
trillion won ($1.97 billion) worth of local bonds in September, according to the
Financial Supervisory Service.