Korean banks need more deleveraging under Basel III

South Korean banks need to strengthen their balance sheets through more deleveraging in order to survive a set of new global capital requirements, a former Basel committee official said Monday.

“Complex securities and derivatives are proven less profitable for banks ... they need to turn to another direction and deleverage their balance sheets and comply with the Basel requirements,” Nout Wellink, the former chairman of the Basel Committee on Banking Supervision (BCBS), said an interview with Yonhap News Agency in Seoul.

His remarks came as banks worldwide have been told to bulk up additional capital buffers on top of the Basel capital adequacy ratio to qualify as sound financial institutions. The rules were endorsed by the BCBS in October last year and are set to be phased in through 2013-2016.

Four major local financial groups’ Tier 1 ratios averaged 9.3 percent as of late March. With stiffer Basel III rules, the ratio will likely decline.

Wellink emphasized that in the Basel III climate, lenders should go back to “traditional banking options,” such as deposits and loans, since excessive investment in highly risky assets has proven to be a flaw, contributing to potential financial turbulence.

He noted that there will be pressure on Korean banks to pursue traditional business models, as growing household debts has emerged as a major drag on the real economy.

“Lack of confidence on consumer banking is a problem ... but it’s inevitable now that banks have to strengthen their financial capability,” he said.

Local household debt reached 876.3 trillion won ($825.1 billion) as of late June, creating a serious drag on Asia’s fourth-largest economy.

In regard to the so-called “Systemically Important Financial Institutions” (SIFIs), Wellink agreed to the possibility that a Korean bank could be included in that group in the long term.

The Financial Stability Board announced 29 banks to be listed as SIFIs earlier this month. Those banks have to set aside extra capital that totals as much as 1-2.5 percentage points to their risk-weighed assets.

“A big bank is not a problem, but how big it is in relation to its economy,” he said. 

(Yonhap News)