[EDITORIALS]Be Careful How the Bank Is Used

There are mounting fears of insolvency at the state-run Korea Development Bank, which plays the role of firefighter, dousing financial blazes that erupt from government policy. The government ordered Thursday the Korea Development Bank to guarantee 19 trillion won in debts of the Korea Electric Power Corporation to expedite privatization of the utility. The government in return agreed to invest 3 trillion won ($2.3 billion) from its own holdings of Korea Electric Power in the state-run bank to prevent its capital adequacy ratio from falling.

The debt guarantee by Korea Development Bank is unavoidable because creditors are demanding these assurances by a state-run bank before privatization proceeds. However, we cannot stop worrying because other public companies, including Korea Gas Corporation, have problems similar to Korea Electric Power, and the government-run banks will have to guarantee their debts, also. The state-run banks will be held responsible in case of a possible collapse of the public companies they back.

State-run banks have taken on the burden of the government's financial policy since the foreign exchange crisis. The buying of corporate bonds issued to redeem maturing bonds, an activity led by the Korea Development Bank since the end of last year, is one example. The Bank has to buy 6 trillion won of corporate bonds this year, and hold in reserve more than 200 billion won to cover possible loan losses. The state-run bank poured 1.3 trillion won into Daehan Investment Trust and Korea Investment Trust on behalf of the government in January last year, and it bought 100 billion won of Hyundai Merchant Marine bonds a few days ago.

The government may use the state-run bank to execute its policy, but it should use moderation in such a practice. The Korea Development Bank recorded 1.4 trillion won of net losses last year, and the government had to fund the bank with nine trillion won of public money. The government should never consider the state-run bank as an easy way to satisfy its policy. It should always employ the state-run bank in a serious manner to deal with the unavoidable cases. The government should maintain transparency, evaluate risk and guarantee profits if it has to employ the state-run bank to advance its policy. We urge the government to review its plan for the state-run bank for the long-term.