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[Op-Ed] BIS Capital Adequacy Ratio

Posted January. 10, 2009 06:59,   


Financial authorities say the government will not intervene even if a bank’s BIS capital adequacy ratio falls to the 10-percent range from 12 percent now. The financial sector expects the eased ratio will prompt banks to lend more money to companies after the Lunar New Year holidays. When the government ordered banks to raise the ratio to 12 percent in December last year, they suspended lending to meet the ratio. If the lower ratio can assist banks, which have never budged despite the president’s strong urge to extend loans to smaller companies, to funnel funds into companies, why couldn’t the government lower the ratio earlier?

When the government controlled the financial sector in the past, a bank facing bankruptcy got a government rescue with special loans from the Bank of Korea. In return for the rescue, the bank president who took rebates for lending was punished and non-viable companies were liquidated. After the financial crisis in the late 1990s, however, banks that failed to keep the BIS ratio were either liquidated or forcibly consolidated. Between 1997 and 2002, as many as 655 financial institutions disappeared. Bankers who know what fate they will face have no choice but to follow the government’s order to raise the ratio to 12 percent.

There is no the optimal BIS ratio applicable to every situation. In the 1980s, when a financial crisis rocked Latin America, just eight U.S. creditor banks with BIS ratios exceeding eight percent reportedly survived. Some say that the ratio standard was meant to prevent Japanese banks from buying up U.S. banks. When the Bank for International Settlements released capital adequacy ratios of banks around the world in 1988, those of Japan had a ratio of under five percent. In Korea, it is customary that banks with a BIS ratio lower than eight percent are subject to restructuring and those lower than 10 percent are under observation. The government lost its credibility by raising this indefinite standard to 12 percent and again dropping it to the 10-percent range.

While banks whose ratios are lower than 12 percent welcome the move, those having trouble raising it are complaining. Though they don’t expect the government to once again raise the standard to 12 percent soon, they are still reluctant to loan money to companies. The key is the restructuring drive that will start early this year full-scale. When the capital adequacy ratio further drops due to the growing number of companies going under and the ensuing drop in asset values, banks will restrict lending to maintain the ratio, creating a vicious circle. If restructuring ends quickly, surviving companies will benefit from expanded lending opportunities.

Editorial Writer Park Yeoung-kyun (parkyk@donga.com)