`State-owned Banks to Invest in Commercial Counterparts`

The ruling Grand National Party plans to help Woori Bank improve its capital adequacy ratio and provide more loans to companies by urging state-owned banks to invest in Woori as well as other commercial banks.

In an interview with The Dong-A Ilbo yesterday, the party’s chief policymaker Yim Tae-hee said, “We’re planning measures under which the Export-Import Bank of Korea and Korea Development Bank invest in commercial banks to help them provide more loans to companies. The plan under consideration seeks to improve the financial conditions of state-owned banks and encourage them to invest in commercial banks.”

“We’ll raise the BIS capital adequacy ratio of Woori Bank, which has already received an injection of public funds, to 13-14 percent. Later, we’ll encourage other banks to take part in the program.”

Despite the efforts of the government and the Bank of Korea to inject money into the market, commercial banks are hesitant to provide loans to companies due to fears over their capital adequacy ratios. The plan is part of the government’s efforts to support small and medium-size companies through state-owned banks.

Investment in commercial banks by state-owned banks means the government is planning to partially nationalize commercial banks. Yim mentioned the precedent of the British government’s nationalization of some commercial banks including Barclays Bank.

“In 2000, the Export-Import Bank of Korea invested 400 billion won (275 million U.S. dollars) into Korea Exchange Bank to help Germany’s Commerzbank purchase the latter,” he said. “We know there are some negative views on the policy, but it’s high time for the government to come to a definite decision.”

To help state-owned banks invest in commercial banks, the government will invest 1.5 trillion won (one billion dollars) into the Korea Development Bank and 650 billion won (450 million dollars) into the Export-Import Bank of Korea as planned. If necessary, the government will invest more next year, Yim added.

The domestic financial industry is negative over the plan, however. One industry source said, “Under law, a bank cannot make an investment in more than 10 percent of other financial holding companies. Shareholders will also oppose the plan.”

koh@donga.com sanjuck@donga.com