KDB may buy commercial lenders' subordinated debts: sources

SEOUL, Nov. 3 (Yonhap) -- The government is considering allowing state-run Korea Development Bank (KDB) to buy subordinated debts to be sold by commercial banks to help bolster their capital adequacy ratio, sources said Monday.

The ratio, a key barometer of financial soundness, measures the percentage of a
bank's capital to its risk-weighted credit. Basel, a Swiss-based Bank for
International Settlements (BIS), advises lenders to maintain a ratio of 8 percent
or higher.
All local lenders are obliged to abide by the New Basel Capital Accord, also
known as Basel II, which starts this year and calls for more rigorous risk and
capital management requirements.
"The government is mulling allowing KDB to buy subordinated debts to be issued by
local banks as a way to stabilize the market. The government may consider the
plan if their BIS ratios dip below 10 percent," the source said.
If a lender sells subordinated debts, proceeds from the debt sale are recorded as
capital, which helps raise its capital adequacy ratio.
The government also plans to increase KDB's capital base of by a combined 1
trillion won (US$791.1 million) until next year in a bid to beef up KDB's policy
lending capability. KDB, established in 1954, engages mainly in providing local
companies with loans for capital spending.