Government, central bank divided over bank recapitalization

Various scenarios have emerged as to how the government and the central bank will recapitalize policy banks for the restructuring of shipping and shipbuilding companies.

However, the Finance Ministry, the Bank of Korea and the Financial Services Commission have not yet devised their unified action plan, although they have confirmed their differences over the issue.

Despite the goal of reaching a compromise in bank recapitalization by next month, the central bank’s stance remains unchanged. It suggests that authorities should consider injecting capital into the state-run Korea Development Bank and the Export-Import Bank of Korea through a fund, as they did for commercial banks in the aftermath of the global financial crisis of 2008.

After the central bank’s monetary policy committee decided to maintain its benchmark interest rate at 1.5 percent last Friday, BOK gov. Lee Ju-yeol told reporters, “Bank recapitalization through a fund will be considered as one of options, to my understanding, even though no decisions have been made yet.”

He added that it may take a while to decide on how much will be needed for the fund as related parties will need to evaluate the policy banks’ finances and soundness even if they choose that recapitalization option.

Lee’s remarks come after the BOK governor said on the sidelines of the Asian Development Bank meeting in Germany early this month that it would be more appropriate to support the policy banks via a fund using their bonds as collateral rather than through direct capital injections.

This method would be more reasonable for the central bank as it could help it minimize losses and restrict it from extending its money-printing authority under the law.

The BOK’s current position does not completely align with that of the government, which seeks to manage corporate restructuring less with taxpayer money and more with a Korean version of quantitative easing – printing money and investing in bonds of the KDB and the Eximbank.

It remains to be seen how the government and the central bank will reconcile their differences and weigh the options this week when officials meet to discuss about restructuring measures for the second time. However, they still face political obstacles.

Investing in bonds of the policy banks such as the KDB will require a legal revision, while issuing state bonds by the government will increase the country’s debt burden, which will ultimately fall on taxpayers’ shoulders. Meanwhile, printing money to recapitalize those banks and an increase in money supply will spur inflation.

In their first meeting, the country’s fiscal and monetary policymakers said that they are in full agreement that Korea should comprehensively review its policy options and manage restructuring appropriately through a policy mix.

The KDB recently said that it will hand over its 7.86 percent stake in KAI worth about 500 billion won ($426 million) to boost the capital base of Eximbank Korea, whose BIS adequacy ratio has been falling on growing exposure to the bad debts of shipping and shipbuilding companies.

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