SEOUL (South Korea) - SOUTH Korea said on Thursday it plans to establish a 20 trillion won (S$22.3 billion) fund with central bank support next year to help shore up banks and encourage them to lend.
The fund, set to start operations from Jan 1, is aimed at helping lenders boost their capital adequacy ratios by purchasing certain shares and bonds, the Financial Services Commission announced.
Participation is available to banks on a voluntary basis, according to the commission, which serves as South Korea's financial regulator.
The plan calls for the Bank of Korea to contribute 10 trillion to the fund at low interest rates. State-backed Korea Development Bank would contribute 2 trillion won with private institutional investors such as the national pension fund and others providing the rest.
The Bank of Korea said in a statement it was considering participating.
Rhee Chang-yong, FSC vice chairman, said that the only string attached for banks that want to draw on the fund is that the money be used to expand lending, which has crumpled amid the global credit crunch.
Analysts consider the South Korean banking sector to be one of Asia's weakest due to high loan-to-deposit ratios as a result of aggressive lending in recent years.
Other challenges banks face include worries about how an expected increase in non-performing loans may affect balance sheets.
Mr Rhee said that the situation facing banks is 'not that bad' with major lenders having a capital adequacy ratio of 10.86 per cent as of the end of September.
He said the government envisions the plan boosting those ratios by 2.6 percentage points.
Capital adequacy, or the ratio of a bank's capital to its outstanding loans, is a key measure of financial health. Eight percent is the minimum international standard. -- AP
