Money Ready for Restructuring
On June 8, the South Korean government made public its plan for government-run bank recapitalization to be prepared for the restructuring of certain sectors. The core part of the plan consists of an 11 trillion won recapitalization fund based on indirect investment by the Bank of Korea and the Industrial Bank of Korea (IBK) and the government’s direct investment worth at least one trillion won.
Put into operation on July 1, the recapitalization fund is slated to go to the Korea Development Bank (KDB) and the Export-Import Bank of Korea (EIBK). Ten-elevenths of the fund, which is based on the central bank’s secured loans, is to be spent for recapitalization purposes while the rest based on the government’s subordinated loans functions as the seed money of the recapitalization fund.
The government is planning to make an in-kind investment in the EIBK, too. According to the government, at least one trillion won is required in 2016 alone for the EIBK to meet a BIS capital adequacy ratio of 10.5%.
It is said that the government’s plan for the direct and indirect investments worth two trillion won is to avoid controversies regarding the note issuing authority of the Bank of Korea. The central bank’s employment of the authority for supporting the government-run banks has been criticized by many although it takes the form of indirect loans.
In the meantime, the remaining possibility of the central bank’s direct investment in the government-run banks is predicted to become a cause of controversy. The plan stipulates that the Bank of Korea can make a direct investment in the EIBK in a case where market instability turns into financial systemic risks during the course of the industrial restructuring. In this regard, the central bank said that the clause is nothing more than a declaratory one to show that the Bank of Korea is acting as the lender of last resort regardless of assistance in the restructuring.