By Kim Tae-gyu
Staff Reporter
An entrepreneur in Seoul visited a bank to get fresh loans. He was ready to offer his factories and nearby land as collateral but the bank flatly refused to lend.
The reason: The bank was desperate to crank up its Bank for International Settlements (BIS) ratio to survive, as the government is constantly taking issue with it.
This shows why the BIS ratio, which measures the financial soundness of a bank by comparing its capital and risk-weighted assets, has come under fire of late. A bigger BIS ratio represents better status and 8 percent is regarded as the minimum.
Although the ratio is globally accepted as a barometer to gauge the solvency of banks, it is counter-cyclical ― it matters most during economic downturns, hence it makes banks limit loans in a recession when they are required to expand loans to cope with the slump.
``The Bank of Korea has provided more than 35 trillion won to banks since September when the global financial crisis went full throttle,'' said a Seoul analyst, who declined to be named.
``But the effect is not seen at all with the banks keeping the liquidity in their safes. They simply don't lend and one of the biggest reasons is to keep the BIS ratio high enough to survive,'' he said.
Bank loans to companies more than halved to 3.5 trillion won last month from 7.3 trillion won in October.
Chang Ha-joon, an economics professor at Cambridge University, concurs with the anonymous analyst.
``What banks do for their own interests, or to improve the BIS ratio, is against the interests of the whole society. This is a bad idea,'' Chang said in a recent telephone interview with The Korea Times.
``I am not sure what is the right BIS ratio. It might be 10 percent, 8 percent or some lower figure. The bottom line is that the standards should be in tune with the economic situation,'' he said.
Two Types of Capital Ratios
As of the end of September, domestic banks maintain an average BIS ratio of 10.6 percent, which is not so bad. But banks are wary, as the figure had been around 12 percent over the past few years.
Accordingly, they issued subordinate bonds or plan to do so this month worth 6.5 trillion won in order to jack up the BIS ratio through increasing their capital.
On top of the BIS ratio, banks have one more thing to worry about dubbed the Tier 1 capital ratio.
The BIS categorizes capital into two types ― Tier 1 and Tier 2. The former refers to the book value of a banks' own stocks and retained earnings. Included in the latter are subordinate debts and loan-loss reserves.
The BIS ratio is computed by comparing risk-weighted assets with all the capital including both Tier 1 and Tier 2. But the Tier 1 capital ratio compares assets with stocks and retained earnings.
Earlier last week, the Financial Supervisory Services set a guideline for the Tier 1 capital ratio of 9 percent, which translates into about a 13 percent BIS ratio.
Its logic: Banks need to augment basic assets through issuing new stocks, plowing back more profits or selling hybrid bonds to achieve a more stable financial status.
Even the country's major banks are expected to struggle to meet the standard with the sole exception of the frontrunner Koomin Bank.
Kookmin met the ratio at 9.17 percent as of September but runner-up player Woori stood at a mere 7.64 percent and No. 3 Shinhan was 8.5 percent.
``Everybody knows that the capital adequacy ratios have problems of counter-cyclical properties,'' said Song Min-kyu, an economist at the state-run Korea Development Institute.
``To grapple with the global financial crisis, the world is expected to come up with more eased standards. But for the time being, the current rule needs to be complied with because we cannot revise the global rule on our own. That is the difficult part,'' he said.
voc200@koreatimes.co.kr
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