S. Korea eyes 40 tln won restructuring fund

(ATTN: RECASTS headline, lead, para 2; UPDATES with details and remarks by top
financial regulator in paras 4,8,10,12-14)
SEOUL, March 13 (Yonhap) -- South Korea's financial watchdog said Friday it will
seek to set up a 40 trillion won (US$26.9 billion) fund to buy bad debts from
local financial firms and purchase assets from ailing companies.
It also said the government plans to establish a special fund that will help
almost all financial firms looking to recapitalize as a backup measure to cushion
rising defaults and the impact of the sharp economic downturn.
The move comes as local banks grow increasingly wary of expanding loans to
households and smaller firms. The slowing economy and a credit crunch have led to
a pileup in bad loans, compromising lenders' financial health.
"It is important to swiftly buy and clear bad loans held by financial firms to
preemptively brace for the economic slump," Chin Dong-soo, chairman of the
Financial Services Commission (FSC), told a press conference.
To this end, the watchdog said in April it plans to submit a bill to allow the
government to sell up to 40 trillion won in debt to finance the fund, which will
be set up under the Korea Asset Management Corp. (KAMCO). The fund will operate
until the end of 2014.
Experts say the launch of the fund will be tantamount to reviving the injection
of public funds. The government poured massive amounts of public money into
financial companies to rescue them from bankruptcy in the wake of the 1997-98
Asian financial crisis.
KAMCO, established in late 1997, is in the process of buying bad debt worth 1.3
trillion won related to property loans extended by local savings banks. The
state-run agency will also clear distressed property loans given by domestic
banks in April and May.
Bad loans in the local banking sector reached 14.3 trillion won as of the end of
last year, down from 33.6 trillion won at the end of 1998, but Korean financial
firms' total lending almost tripled to 1,629 trillion won, data compiled by the
watchdog showed.
Meanwhile, the FSC said it will also seek to establish a special fund which helps
even healthy financial firms recapitalize. The fund will be used to provide
lending and credit guarantees to a wide range of local financial firms, including
credit financing companies. Financial institutions can apply for the fund on a
voluntary basis, it added.
"The fund is a backup measure to boost local financial firms' health, similar to
the bank recapitalization fund," Chin said. "The government's management
interference will be minimized."
Separately, South Korea plans to inject an initial 12 trillion won into local
banks in March out of a 20 trillion won bank recapitalization fund that will be
used to buy subordinated bonds and hybrid debt from lenders.
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.
Fitch Ratings estimated that Korean banks may suffer a combined 42 trillion won
in additional capital losses by the end of 2010, adding that the proposed bank
recapitalization fund is not enough to boost their capital bases.
The FSC rebutted that local banks have their own capacity to raise capital and
that the government will take aggressive and preemptive measures to brace for
further economic deterioration.
sooyeon@yna.co.kr
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