Ministry, BOK agree to increase capital base of policy banks

The Finance Ministry and the Bank of Korea have agreed to increase the capital base of policy banks through a mix of fiscal and monetary policies to ensure that corporate restructuring is carried out as planned, according to ministry officials Wednesday.

In their first task force meeting presided over by Vice Finance Minister Choi Sang-mok with officials from the central bank, the Financial Services Commission, the state-run Korea Development Bank and the Export-Import Bank of Korea, the Finance Ministry said that they saw eye to eye on the need to come up with funds to finance restructuring costs.

Although the task force did not disclose details on ways to raise capital and inject funds into the policy banks, the Finance Ministry said that fiscal and monetary authorities will together secure necessary “ammunitions” for a common goal.

The goal is to maintain market stability and prevent insecurity through contingency plans during the restructuring process.

“The country’s fiscal and monetary policymakers are in full agreement that we should comprehensively review our policy options and manage restructuring appropriately through a policy mix,” the Finance Ministry said in a statement.

“The government and the central bank do not disagree over the fact that we will have to fulfill our roles to rapidly and successfully carry out restructuring,” it added.

As recapitalization of the policy banks will involve taxpayer money, the government will abide by a principle to ensure people will not feel burdened as much as possible, and it will strongly ask those facing restructuring to take responsibility with the policy banks and draw self-rescue plans, the Finance Ministry said in a joint statement with the BOK and the FSC.

FSC chairman Yim Jong-yong said in a meeting with business editors of news organizations on Wednesday that KDB and Korea Eximbank must come up with their own plans on how they will deal with the costs associated with restructuring as they too have to take responsibility over the matter.

“KDB and Korea Eximbank executives will have to be held accountable after the auditors complete their assessments of the two policy banks,” Yim said.

“Daewoo Shipbuilding’s owner is KDB, and the bank must take responsibility as it appointed the executives who ran the company (into financial distress).”

The FSC chairman reiterated that there is no other option for Hyundai Merchant Marine but file for bankruptcy should it fail to negotiate with ship owners in reducing charter fees by mid-May.

He said that the FSC was thankful for the BOK agreeing to support the government’s restructuring efforts, noting that central banks have historically shown to lead in providing relief when in crises.

The authorities will continue to engage in talks and come up with the plan for banks’ recapitalization by the end of the first half of this year, the Finance Ministry, regulators and the central bank added.

Korea is expected to raise over 5 trillion won ($4 billion) to 10 trillion won to increase capital buffers of the policy banks, observers said.

Finance Minister Yoo Il-ho mentioned during his trip to Germany for the annual meeting of the Asian Development Bank that he will have to see if that figure would be suitable for restructuring, after the opposition parties suggested raising corporate taxes to raise funds for restructuring.

It remains to be seen as to how the authorities will finance restructuring costs through the policy banks, but they are expected to take a fast-track approach that does not require the National Assembly’s approval.

Various options have been discussed between the government and the political parties including enabling the central bank to invest in bonds of KDB and Korea Eximbank.

The state-run policy banks will need to set aside at least 9 trillion won as provisions for bad loans held by shipping and shipbuilding companies including Daewoo Shipbuilding and Marine Engineering, Hanjin Heavy Industries and, Hyundai Merchant Marine, analysts said. Commercial banks exposed to bad loans will need to be prepared with provisions of 2.5 trillion won.

By Park Hyong-ki (hkp@heraldcorp.com)