New Fund Seeks to Quell Financial Soundness Worries

A financial stabilization fund will help financial institutions including commercial and mutual savings banks and insurers amid worries over aggravating financial soundness.

The government will also spend 40 trillion won (27 billion U.S. dollars) to purchase bad debts of financial institutions and assets of companies subject to restructuring.

Financial Services Commission Chairman Chin Dong-soo said yesterday, “We will submit revised bills on financial industry restructuring and the establishment of Korea Asset Management Corp. to the National Assembly at the extra parliamentary session in April, to prevent the surging number of bankruptcies among companies and households from causing financial institutions to go belly up.”

The commission will separate the policymaking function of Korea Development Bank and create the financial stabilization fund under the newly established Korea Policy Finance Corp. to support all types of financial institutions capable of normal management, including banks whose capital adequacy ratio exceeds eight percent.

The fund will be financed via issuance of government bonds by Korea Policy Finance Corp. The amount has yet to be determined.

The commission said the fund, along with one on capital expansion worth 20 trillion won (13.5 billion dollars), will give financial institutions easy access to capital, thus preventing the spread of financial institutions’ insolvency.

Preemptively dealing with looming problems is hard now since only financial institutions whose capital adequacy ratio falls below eight percent can receive public funds.

Also, the commission will create a restructuring fund worth 40 trillion won (27 billion dollars) under the asset management company for buying bad debts of financial institutions by 2014.

The Korean government’s experience of spending 21.6 trillion won (14.5 billion dollars) to buy the non-performing loans of financial institutions in the wake of the former currency crisis can be a gauge of the amount of bad loans incurred by the global financial crisis.

The restructuring fund will be also financed by government bonds. The government will determine the fund’s amount and time of implementation depending on market conditions.

legman@donga.com