S. Korea to pump 12 tln won into banks in March

(ATTN: ADDS more remarks by watchdog official and details throughout)
SEOUL, Feb. 25 (Yonhap) -- South Korea's financial watchdog said Wednesday the
government will initially inject 12 trillion won (US$7.98 billion) into local
banks in March to bolster their capital bases and encourage risk-averse lenders
to expand loans.
The move comes as banks are increasingly reluctant to lend money to cash-strapped
companies on fears that a deepening economic slump may result in more bad loans,
compromising their financial soundness.
The Financial Services Commission (FSC) said the money will come from a 20
trillion won bank recapitalization fund to be used to buy subordinated bonds and
hybrid debt from lenders. Local banks can apply for the funds by the end of this
month.
The amount of capital injection will be determined by the size of a bank's assets
and will be adjusted according to changes in its so-called capital adequacy ratio
and track record of lending to smaller firms, the watchdog said.
"The fund will set sail in a bid to prompt banks to give support to the real
economy and accelerate the corporate restructuring drive," Kim Kwang-soo,
director-general at the financial services bureau of the FSC, told a press
conference. "Management interference (by the government) will be excluded."
Since late last year, local banks have been struggling to raise their falling
capital adequacy ratio, a key barometer of financial health, as the slowing
economy and the corporate restructuring drive are increasing the amount of bad
loans.
The government has said that local banks can tap the recapitalization fund on a
voluntary basis, but banks are wary of using the fund due to fears it may tarnish
their credibility.
But in a meeting with Chin Dong-soo, chairman of the FSC, nine heads of local
banks agreed in principle to use the fund, through which they would increase
lending to cash-strapped smaller firms and brace for the slowing economy and a
corporate revamp.
Local banks' lending to smaller firms dipped by 1.8 trillion won in December
before increasing by 3.1 trillion won in January, according to data compiled by
the watchdog.
According to the FSC, the Bank of Korea (BOK), the country's central bank, will
inject up to 10 trillion won into the proposed fund. State-run Korea Development
Bank (KDB) will chip in 2 trillion won and other institutional and retail
investors plan to contribute the remainder.
In a separate statement, the BOK said it will contribute to the fund by extending
loans to KDB, which in turn will re-lend the money to the recapitalization fund.
As of the end of last year, the average capital adequacy ratio of 18 commercial
and state banks came in at 12.19 percent as of the end of December, up 1.33
percentage points from three months earlier, as they made efforts to boost their
capital bases through share and bond sales.
As of end-December, the capital adequacy ratio of nine local banks was below 12
percent, the minimum recommended by the Financial Supervisory Service. Twelve
lenders' tier one ratios, a barometer of core capital, fell short of the advised
9 percent.
sooyeon@yna.co.kr
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