S. Korean banks urged to boost capital base amid economic slump

(ATTN: REWRITES headline, lead; RECASTS throughout)
SEOUL, Jan. 5 (Yonhap) -- South Korea's central bank will support local banks'
efforts to bolster their capital base, which would help them increase lending to
cash-strapped companies and households, its chief said Monday.
Local lenders have been increasingly reluctant to lend money to companies and
households as the deepening economic slump and a credit crunch are increasing the
amount of bad debt.
As a result, many are struggling to jack up their declining capital adequacy
ratio, a key barometer of financial soundness that measures the percentage of a
bank's capital to its risk-weighted credit.
"A slowing economy is deepening financial jitters. In turn, the economy is facing
the risk of further deterioration," Bank of Korea (BOK) Gov. Lee Seong-tae said
in his New Year message to leading officials at financial firms.
"To head off economic difficulties, it is all the more important that the
mechanism of bank lending works smoothly."
To give a boost to their efforts to increase capital, the government is set to
form a 20 trillion won fund (US$15.4 billion) this month aimed at helping lenders
increase their capital base.
The fund will be used to buy preferred stocks, subordinated bonds and hybrid debt
sold by lenders. The central bank is considering providing half of that amount.
The average capital adequacy ratio of 18 commercial and state banks came in at
10.86 percent as of the end of September, down 0.5 percentage point from three
months earlier, according to recent data from the financial watchdog.
The ratio is widely expected to fall further as local lenders are forecast to
face increased bad loans down the road in tandem with a deepening economic slump.
Jun Kwang-woo, chairman of the Financial Services Commission -- the financial
regulator, echoed a similar view.
The top financial regulator called on local lenders to restructure troubled
companies as quickly as possible in order to ensure the supply of much-needed
funds to viable firms.
Local banks have been slow in forcing failing companies out of the market, while
government policymakers say such swift action is necessary to head off an
economic crisis.
The financial watchdog said on Dec. 23 that the government will seek to overhaul
struggling construction companies and shipbuilders starting in January, to
prevent fallout from their potential bankruptcy from spilling over into the real
economy.
"The local banking sector should aggressively back up efforts to revive the
slowing economy by supporting well-managed companies suffering a temporary
liquidity squeeze while expediting the swift restructuring of unhealthy firms,"
Jun said.
Analysts say a swift corporate revamp would give local lenders room to lend money
to companies which are quite healthy, but facing a temporary credit squeeze due
to the faltering economy.
"It is the time (for local banks) to beef up their fundamentals and health
because only when they can secure adequate capital can they play a role in
contributing to overcoming the economic crisis," Jun added.
sooyeon@yna.co.kr
(END)