By Kim Tae-gyu
Staff Reporter

The Seoul government is thinking of regulating the amount domestic banks can loan in line with the global initiative of trying to control the capital adequacy and liquidity of lenders.

The Financial Services Commission (FSC) said Thursday that it is mulling over regulating the loan-deposit ratio; the size of a certain bank's loans divided by its deposits.

If the ratio, widely used to measure the capital adequacy and liquidity of commercial banks across the world, is 100 percent, it means that the bank borrows funds to lend, which are typically more costly than deposits. The higher the number, the more it depends on borrowed funds.

``Following the instructions from the G20 meeting, the Basel Committee is now considering ways of improving the liquidity of banks. It is expected to come up with measures next year,'' FSC Director Choi Hoon said.

``Because we will have to comply with the steps as directed by the Basel Committee and the G20, we are preparing our own. One of the options is to control the loan-deposit ratio,'' he said.

Financial policymakers of Asia's fourth-largest economy had maintained a range for appropriate loan-deposit ratios up to November 1998 but scrapped the system as a part of deregulation efforts that year.

Yet, the high loan-deposit ratio of Korean banks caused problems in the aftermath of the global financial crisis as foreign media put the country on a watch list regarding their financial stability due to the high rates.

As of the end of June, the loan-deposit ratio amounted to 98.9 percent for domestic lenders. When certificates of deposits are included in the calculation, the figure stood at 114.1 percent.

``Details have yet to be fixed. We will make a decision when we know the policies of the G20 and the Basel Committee,'' Choi said.

If the FSC opts to regulate the loan-deposit ratio, the main disputes are whether or not certificates of deposits would be included and how low the target ratio would be.

Plus, the FSC is currently agonizing over whether it will offer a one-off guideline for a specific time or it will allow banks to reach the target ratios step-by-step.

Market watchers point out that the introduction of the new regulation could cut down the banks' bottom lines.

``Should the FSC set the ratio at 100 percent, some banks will have to attract more deposits. Then, interest rates for deposits will go up, eventually undermining their profitability,'' a Seoul analyst said.

voc200@koreatimes.co.kr