S. Korea to toughen rules on loan-deposit ratios

SEOUL, Dec. 16 (Yonhap) -- South Korea's financial watchdog said Wednesday it
plans to stiffen rules on the loan to deposit ratio of local banks in a bid to
encourage them to beef up their financial soundness and liquidity management.

The ratio, a gauge of a bank's solvency, measures the percentage of its
outstanding loans against deposits. A higher reading means that a bank has
extended loans exceeding the value of funds it has raised, increasing the
possibility that it could see deteriorating financial soundness.
The Financial Services Commission (FSC) said in a policy report for next year
that it is considering a measure that would require banks to keep their loan to
deposit ratio, excluding certificates of deposit (CD), below 100 percent. Banks
would be given a four-year grace if the regulation goes into effect.
"The watchdog plans to toughen regulations on lenders' loan to deposit ratios in
a bid to prevent them from excessively accumulating assets and to minimize
liquidity risks," Kwon Hyouk-se, vice chairman of the FSC, said in a press
briefing.
"The grace period will be given to lenders because a swift introduction of the
regulation could cut back on bank lending."
Kwon said banks would be required to report on the progress they've made and
other detailed plans related to lowering the ratio to the watchdog during the
grace period.
The move comes as Korean banks, saddled with high short-term debt, suffered from
a severe liquidity squeeze last year as they were hit by the U.S.-sparked global
financial crisis. Local banks' loan to deposit ratios have hovered around 100
percent in recent years amid heated competition to increase asset size, which was
cited as a major risk to liquidity during the recent financial turmoil.
According to the FSC, local lenders' loan-deposit ratio stood at 112 percent as
of the end of September. If certificates of deposit are included, the ratio
reached 98 percent.
Meanwhile, the FSC said the government will make efforts to accelerate the sale
of Woori Finance Holdings Co. and is open to various options to sell its
controlling 50 percent stake plus one share.
The state-run Korea Deposit Insurance Corp. (KDIC) holds a 66 percent stake in
South Korea's No. 2 financial services company after unloading a 7 percent
interest on Nov. 24 through a block trade. Excluding the majority stake, the
agency plans to sell the remaining 16 percent via a block trade next year.
"The government plans to unload the minority stake through a block trade and will
consider various options to sell the controlling stake," Kwon said, adding that
the timing of the privatization will depend on market circumstances.
The watchdog is considering a merger with other financial services companies and
selling Woori Finance to a number of investors by splitting the controlling
stake. The government is also mulling selling affiliates of Woori Finance by
piece in a bid to make it easier for the holding company to be privatized.
South Korea injected 12.8 trillion won (US$11 billion) in public funds to Woori
Finance to save it from near-bankruptcy in the aftermath of the 1997-98 Asian
financial meltdown. The KDIC has retrieved 4 trillion won in public funds so far.
Regarding support measures for small and medium enterprises, the FSC said the
government plans to provide a combined 94 trillion won through state-owned
lenders and the state-run credit guarantee agency.
As the Korean economy is recovering at a faster-than-expected pace, debate over
how and when to roll back emergency steps put in place to combat the economic
downturn has heated up.
The government is seeking to ease the transition as a swift implementation of an
exit strategy could prompt a possible funding squeeze for smaller firms.
The regulator said it will extend the deadline on state loan guarantees for
smaller companies by an additional six months until the first half of next year
and plans to gradually lower the portion of state-credit guarantees to 85
percent.
Currently, the government provides guarantees for lending to smaller firms by up
to 95 percent.
sooyeon@yna.co.kr
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