'Bank fund' slated to set sail in Q1

(ATTN: CHANGES headline, lead; ADDS household lending rescheduling in last 2 paras)
SEOUL, Jan. 12 (Yonhap) -- The government plans to launch a special fund in the
first quarter to help local banks improve their worsening financial health amid a
sharp economic downturn, the financial watchdog said Monday.

The Financial Services Commission (FSC) is seeking to set up a 20 trillion won
(US$14.7 billion) fund to be used to buy preferred stocks, subordinated bonds and
hybrid debt from lenders. Local banks can tap the fund on a voluntary basis.
The move comes as lenders are struggling to jack up their falling capital
adequacy ratio, a key barometer of financial soundness that measures the
percentage of a bank's capital to its risk-weighted credit.
"The government plans to start providing help to local banks through the fund
during the first quarter," said the FSC in a report to the National Assembly.
"The government plans to decide whether to provide additional support, given the
progress in their efforts to push corporate restructuring and financial health."

The government is calling for local banks to raise their capital ratio, which
would help them increase lending to cash-strapped smaller firms in the aftermath
of the U.S.-sparked financial turmoil.
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 the FSC, the fund is expected to be used mainly to buy hybrid bonds,
whose sales will help raise the so-called tier one ratio, a barometer of core
capital. Hybrid bonds are securities that combine the properties of debt and
equity.
"The government will minimize possible interference of managements for banks
which dip into the fund, but it plans to levy necessary but minimal conditions
for them to increase lending in return for getting help," the FSC added.
Local commercial banks are reluctant to tap the envisioned fund due to fears it
may tarnish their credibility.
Last week, Woori Bank, the banking unit of Woori Finance Holdings Co., said it
would tap the fund as part of efforts to raise about 2 trillion won in capital.
Woori Finance is 72.97 percent owned by the government.
Meanwhile, the government plans to take proactive measures to prevent possible
defaults of household loans from weighing on the real economy.
As of the end of September, local financial institutions' lending to households
stood at 617 trillion won, out of which such loans by banks accounted for 62
percent, the watchdog said.
sooyeon@yna.co.kr
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