Watchdog asks local banks to raise capital base

SEOUL, Dec. 8 (Yonhap) -- South Korea's financial watchdog said Monday it has asked local banks to increase their capital base by early next year amid fears grow that more bank loans may turn sour as the economy slows.

The average capital adequacy ratio of 18 commercial and state banks came in at
11.36 percent as of the end of June, down from 12.31 percent at the end of last
year, the Financial Supervisory Service (FSS) said. The ratio, a key barometer of
financial soundness, measures the percentage of a bank's capital to its
risk-weighted credit.
"The watchdog has asked 13 commercial lenders to jack up their capital base by
around a combined 11 trillion won (US$7.52 billion) by the end of January," an
official at the FSS said.
The move came as South Korean lenders have been stepping up their efforts to
bolster the falling capital adequacy ratio by selling subordinated bonds.
Experts says if local banks are to raise the adequacy ratio, they may have to
refrain from extending year-end dividends or to increase the equity capital.
"Although local banks are issuing subordinated bonds, their financial soundness
will improve when they increase their core capital," the official said.
If a lender sells subordinated bonds, proceeds from the debt sale are recorded as
supplementary capital, which helps raise its capital adequacy ratio.
Meanwhile, local lenders said they plan to ask the government to raise the limit
on sales of hybrid bonds and include such debts in bond holdings for a proposed
bond fund worth 10 trillion won, aimed at stabilizing the local debt market.
If a bank issues hybrid debts, such bond holders can get interest payments like
bonds, but do not have the need for redemption. Proceeds of the debt sale can
also raise the capital base for banks.
"The government is considering buying hybrid bonds from banks through the bond
fund," said an official at the regulatory Financial Services Commission.