Watchdog to allow banks more hybrid bond sales to boost capital

SEOUL, Dec. 23 (Yonhap) -- Local banks will be allowed to double the amount of their hybrid bond sales in a bid to help bolster falling capital adequacy ratios, the nation's financial watchdog said Tuesday.

The Financial Supervisory Service (FSS) said it will permit lenders to issue
hybrid bonds worth up to 30 percent of their so-called tier-one capital from the
current 15 percent. Hybrid bonds are securities that combine the properties of
debt and equity.
If a lender sells hybrid bonds with a maturity of more than 30 years, the
proceeds will be recorded as core capital, it said.
"The move will expand lenders' capacity to increase their capital base by 15
trillion won (US$11.2 billion)," the FSS said.
The measure comes as South Korean lenders are struggling to bolster their
declining capital adequacy ratios, a key barometer of financial soundness that
measures the percentage of a bank's capital to its risk-weighted credit.
The average capital adequacy ratio of 18 commercial and state banks came to 10.79
percent as of the end of September, the lowest in more than seven years and down
from 11.36 percent three months earlier.
According to the FSS, the loan default rate by companies and households hit a
three-year high in November. The ratio stood at 1.18 percent at the end of
November, compared with 1.14 percent a month ago, adding to worries over lenders'
soundness.
If banks sell hybrid bonds up to the cap, the average capital adequacy ratio is
expected to gain 2.03 percentage points to 12.82 percent and the tier-one ratio,
a core barometer of a bank's financial strength, will increase the same amount to
10.31 percent, according to the FSS.
Last week, the government said it will set up a 20 trillion won fund aimed at
helping local banks raise the capital base. The fund will be used to buy
preferred stocks, subordinated bonds and hybrid debt sold by lenders.
sooyeon@yna.co.kr
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