Time for banks to act

The Financial Supervisory Commission has decided to raise a 20 trillion won ($15.2 billion) fund to complement capital for banks in January next year.

Although the measure is belated, it has finally decided that the Bank of Korea will invest 10 trillion won, the Korea Development Bank 2 trillion won and institutional or ordinary investors, 8 trillion won.

This will protect banks’ soundness from problems that might emerge with the looming downturn in the real economy and in the course of restructuring.

According to the FSC, if the entire 20 trillion won fund is provided to banks, domestic banks’ BIS ratio, which was 10.86 percent as of the third quarter this year, will go up by 2.65 percent. That means banks will become stronger and more capable of lending money to companies.

On top of this, the Korea Housing Finance Corporation has decided to buy mortgage-backed bonds of up to 7 trillion won from financial companies. The Korea Asset Management Corporation has also decided to buy nonperforming loans worth 3 trillion won.

These moves are aimed at pre-emptively eliminating factors that might make banks unhealthy. As their capital is complemented and pressure from potential nonperforming loans is cleared, banks should become stronger.

The next step is for banks to face up to the economic crisis. Banks have refrained from lending in fear of potential defaults, which would drag down their capital adequacy ratios.

This caused a credit crunch and no matter how much the central bank lowered the key interest rate, market interest rates have not gone down. Banks can now stop worrying about such concerns and can carry out their function as mediators of capital in the market.

Banks should no longer sit on their capital. They need to take a more active role in restoring companies and reviving the economy.

This doesn’t mean that banks should carelessly provide any company with capital without going through the proper risk assessment. Banks must discern what is an essential and healthy business from what is not.

But banks should provide capital more actively. There is a need to establish regulations that civil workers and bank employees who work for the supply of capital and restructuring won’t be held accountable later for their work and its results.