Top financial regulator hints at banking revamp

(ATTN: RECASTS headline, lead, paras 2-3; UPDATES with more info throughout)
SEOUL, Nov. 20 (Yonhap) -- South Korea's top financial regular has said the
government should play an active role in tackling the current financial turmoil,
hinting at a possible overhaul of the local banking sector.
"The government should play a leading role in negotiating the crisis," Jun
Kwang-woo, chairman of the Financial Services Commission (FSC), was quoted as
telling reporters during his visit to New York on Wednesday. "Marriages between
local banks may be in the cards."
"Domestic banks have excessively focused on increasing their assets for the past
few years, while taking no heed of accompanying risks," he said.
His remarks came as South Korean lenders are suffering from declining
profitability and asset quality in the wake of the collapse of U.S. investment
bank Lehman Brothers Holdings Inc.
South Korean lenders have been increasingly reluctant to extend loans,
particularly to smaller firms, amid the slowing economy and a credit crunch.
In the aftermath of the 1997-98 Asian financial crisis, the local banking sector
underwent a painful restructuring process led by the government, which injected
over 86.9 trillion won (US$58.6 billion) of public funds into the industry.
A series of consolidations in the banking sector reduced the number of commercial
lenders to 18 from 33 prior to the turmoil.
"I expect local banks' capital adequacy ratios to rebound to around 11 to 13
percent by the end of this year," Jun added.
The average capital adequacy ratio of 18 commercial and state banks, a key
barometer of financial soundness, came in at 10.79 percent as of the end of
September, down 0.57 percentage point from three months earlier on rising bad
loans.
Meanwhile, Jun said the central bank needs to consider buying commercial papers
and cutting its key interest rates in a bid to ease a corporate funding squeeze.
"To help ease tightened credit conditions, the Bank of Korea (BOK) should
aggressively consider purchasing commercial papers issued by companies," he said.
"If the BOK actively cuts the policy rate to around 2 percent, market conditions
may improve."
His remarks came as President Lee Myung-bak called for the watchdog to draw up
measures to bring down market interest rates to match the falling policy rate.
In November, the BOK slashed its key interest rate for the third time in a month
to bolster the slowing economy. In a monthly policy meeting, the BOK lowered the
benchmark seven-day repo rate by a quarter percentage point to 4 percent, cutting
a combined 1.25 percentage point in the span of a month.
Despite the BOK's steep rate cuts, market interest rates have not fallen as
expected. Higher market rates are taking a toll on households and smaller
companies which are struggling to service their debts amid the global financial
turmoil and the economic slowdown.
The FSC also plans to set up a 10-trillion-won (US$6.8 billion) fund into which
existing institutional bond investors, such as banks and the state pension fund,
would pool money with the aim of buying a wide range of bonds, including
corporate debt.
sooyeon@yna.co.kr
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