Bigger not necessarily better for banks

What is an excellent bank? Can an excellent bank be built in a month?

Jin Nyum, Minister of Finance & Economy, and Lee Keun-Young, head of the Financial Supervisory Commission, used to say that there are negotiations among banks to create a blue-chip bank and that it will be realized during October.

However, no one knows exactly what a blue-chip bank is and how such a bank can be built. Officials of the Financial Supervisory Commission or the Financial Supervisory Service just say "Well..." when they are asked about this. Some say that the blue-chip bank would rank among the world's top 50 banks in terms of assets with over 20% in BIS-based capital adequacy ratio and less than 3% in non-performing loans.

Their remarks lead to the conclusion that an excellent bank is equal to a large bank. As of the end of 1999, the world's 50th largest bank had US$210 billion in assets. For this reason, industry executives are showing their keen interest in those banks whose combined assets approach it after mergers.

As a result, possible mergers between Kookmin Bank (90.69 trillion won) and Korea Exchange Bank (52.12 trillion won); KorAm Bank (31 trillion won) and Hana Bank (50 trillion won); and Housing and Commercial Bank (63 trillion won), Hanvit Bank (80 trillion won) and some regional banks are spreading.

The problem is that massive assets don¡¯t mean that a bank is a healthy one. Hanvit Bank, which was born through a merger between Hanil Bank and Commercial Bank of Korea, has the second largest asset volume after Kookmin Bank. But nobody thinks of it is a healthy bank. Rather, KorAm Bank, whose assets total 31 trillion won, is evaluated as healthier than Hanvit Bank.

If the government pours taxpayers¡¯ money into Hanvit Bank, Cho Hung Bank and Korea Exchange Bank, their BIS-based capital adequacy ratios would exceed 10%, but their non-performing loans still exceed 10%.

Blue-chip banks are neither built in a short period of time nor can be created just by wishing for them. The government is heralding the birth of a blue-chip bank, but there must be a reason why foreign investors are selling off bank stocks.