Central bank calls for bank soundness

Bank of Korea Gov. Lee Ju-yeol urged Korean banks to pay attention to asset quality in their balance sheets and manage them well amid a gloomy market outlook.

In a meeting with bank executives on Thursday, the country’s top monetary policymaker said the ongoing restructuring of debt-laden shipping and shipbuilding companies as well as low interest rates are expected to weigh on banks’ profitability.

This calls for commercial banks to push efforts to maintain financial soundness.

“Concerns are growing over the possibility of local banks seeing profitability waning due to corporate restructuring and the prolonged low interest rates,” Lee said during the meeting.

“Banks must maintain the soundness of their assets and capital adequacy level in the face of possible instability in the financial market.”

Lee’s remarks come a day after the BOK chief called for a fiscal response to multiple challenges, such as the rapidly aging population and low productivity faced by Asia’s fourth-largest economy, stressing that its monetary easing is not enough to buffer the economy.

He added that as a small open economy, it must manage any potential risks with an effective mix of fiscal and monetary policies. The central bank cut rates twice last year. In June, it slashed its key base rate to a record low of 1.25 percent, following pledges to support the recapitalization of state-run policy banks via a fund.

Bank executives shared their views on the possibility of their profitability decreasing due to low interest rates and increased competition, adding that they will maintain the quality of their assets, capital adequacy and foreign currency holdings.

They also pointed out that certain measures such as cost cutting will have to be taken to further normalize their operations in the future.

Banks also noted that household debt growth is expected to slow in the second half of this year on tightened state regulations and banks’ increased loan management.

Regulators have taken measures against household debt growth by increasing the monitoring of indices such as loan qualification ratios of loan-to-value and debt-to-income. Korea has also introduced programs enabling consumers to take out long-term amortizing loans with fixed interest rates and pay down debt.

A number of factors have contributed to rising household debt over the years. For instance, loans taken by the baby-boom generation to launch small businesses after retirement.

By Park Hyong-ki (hkp@heraldcorp.com)