FSC to create fund to back up banks

The Financial Services Commission, the top financial policy maker, said yesterday it will create a fund to provide public money even to financial companies with a sound capital base.

The fund, tentatively named “Finance Stability Fund,” will be created if the revision of relevant laws passes the National Assembly next month, the FSC said. “[Local] financial companies currently have a sound capital base, but given the economic situation, nobody can forecast what will happen,” said Chin Dong-soo, FSC chairman, during a press conference. “As a contingency plan, we are creating this finance stability fund.”

Currently, the government is allowed to inject public money to banks only after their capital adequacy ratio falls below 8 percent. The 8 percent capital adequacy ratio is the threshold set by the Bank for International Settlements.

If the fund is created under the revised acts, the money will be available to any financial company applying for funds, the FSC said.

The fund, to be financed by government-guaranteed bonds, will be used to provide lending and credit guarantees to financial firms, including credit financing companies.

It is a back-up measure to the bank recapitalization fund, the FSC said, referring to the 20 trillion won ($13.5 billion) fund it plans to use soon.

The bank recapitalization fund, created in an agreement between the FSC and banks last month, is designed as a buffer against rising bad loans and to shore up banks’ capital adequacy ratio by buying subordinated bonds and hybrid debt from banks. The FSC said it will funnel 12 trillion won first from the fund into banks this month.

The measure arrived hours after Fitch Ratings, a major global credit rating agency, announced the result of its “stress test” on local banks, raising concern over their capital condition.

Fitch estimated Korean lenders may suffer a combined 42 trillion won in additional losses by the end of 2010, due to their high-risk loans and exposure to foreign currency assets.

The FSC disputed the Fitch result, saying that, “Unlike banks in major developed countries, Korean lenders are able to boost their capital bases through common share offerings and have their own capacity to raise capital.”

The association of local banks also reacted, saying it could file a lawsuit against Fitch. The association said by announcing “negative results based on an uncertain presumption,” Fitch could hurt the credibility of local banks, even ones with a sound capital base. “We cannot accept the result of Fitch’s stress test on Korean banks. We will positively consider legal action including litigation,” said Shin Dong-kyu, Korea Federation of Banks chairman, in a press conference yesterday. The average capital adequacy ratio for local banks was 12.2 percent as of the end of last year. Separately, the FSC said it will set up a 40 trillion won fund and buy bad assets from local financial and non-financial firms.

By Moon Gwang-lip Staff Reporter [joe@joongang.co.kr]