EDITORIAL from The Korea Times on Nov. 10)

Worries about banks

Policymakers have been rolling up their sleeves to stave off the global financial
crisis and minimize its effect on the real economy. But they are finding it ever
more difficult because of the rapidly spreading effects of the crisis. The Lee
Myung-bak administration has come up with a series of economic stimulus packages
to ride out the credit tsunami originating from Wall Street. The packages of tax
cuts and expanded budget spending total 33 trillion won, or 3.7 percent of the
nation's gross domestic product (GDP).
In a nutshell, the government is injecting an astronomical amount of the state
budget into public infrastructure projects and the ailing construction sector to
counter an economic slowdown. But for now, these measures seem insufficient in
avoiding the global financial and economic firestorms. Policymakers focused on
stabilizing the banking system and financial markets. Then, they shifted to
preventing the credit crisis from spilling over to the economy. Again, their
concerns turn back to the shaky financial system.
The Bank of Korea (BOK) cut its key short-term interest rate twice last month
from 5.25 percent to 4.25 percent in a desperate bid to ease an acute shortage of
liquidity at banks and other financial companies. The central bank again slashed
the rate by 0.25 percentage points to 4 percent last Friday. However, the bold
action has failed to ease the credit crunch because market interest rates show
little sign of decline. Banks' lending rates have climbed on persisting fears of
a liquidity crisis.
The real problem is that banks and other financial institutions are refraining
from increasing lending to corporations, especially cash-strapped small and
medium businesses as well as consumers. Local banks in particular are faced with
deteriorating asset quality and falling profitability in the aftermath of
swirling worldwide financial turmoil. More than half of household loans are
collateralized housing credits. Thus, a potential plunge in home prices could
bring about a chain reaction of builders' bankruptcy and a huge loss to lenders.
Local banks' financial health has already begun to deteriorate. Kookmin Bank, the
nation's top lender, saw its capital adequacy ratio recommended by the Bank for
International Settlements (BIS) drop to 9.76 percent in the third quarter of the
year from 10.49 percent in the previous quarter. It marked the first time since
2002 that Kookmin's BIS ratio has fallen below 10 percent. More worrisome is that
the figure might continue to go down. The bank's third-quarter net profit shrank
28.6 percent year-on-year, while Shinhan Bank suffered from a 32.2 percent plunge
in net profit.
Adding to the gloom are international credit rating agencies that are likely to
cut ratings of local banks. Moody's Investors Service changed its financial
strength rating on Korea Exchange Bank (KEB) to ``negative" from ``stable"
Friday, citing anticipated deterioration in its creditworthiness. Moody's already
did the same to four major local banks ??? Kookmin, Woori, Shinhan and Hana ???
on Oct. 1.
Against this backdrop, market sources estimate the banking sector's risky loans
at 301 trillion won, including 63 trillion won for the construction of unsold
homes, 60 trillion won for mortgage credits and 30 trillion won for project
financing. If these credits become sour, the nation might face a financial
meltdown. Thus, policymakers and bankers should go all-out to prevent such
unpredictable consequences.
(END)