BOK refuses to invest in state banks

Bank of Korea Governor Lee Ju-yeol

Gov. Lee against recapitalization of KDB, Eximbank

By Yoon Ja-young

Bank of Korea (BOK) Governor Lee Ju-yeol rejected Thursday the government call for the central bank to print more money to recapitalize state-run banks.

Lee suggested that the BOK provide them with collateralized loans instead to fund restructuring of troubled shippers and shipbuilders.

At the Asian Development Bank (ADB) annual meeting held in Frankfurt, Germany, Lee told reporters that it was against the principles of the central bank to directly invest in the Korea Development Bank (KDB) and the Korea Export-Import Bank (Eximbank).

“The basic responsibility of the central bank is to minimize losses,” he said. “There should be guarantees that the BOK can recoup all of its money when it helps recapitalize other banks. It shouldn’t be in the form of a direct investment.”

His remarks mean that the central bank and the government remain divided on how to support the banks rescheduling of the debts of ailing shippers and shipbuilders.

The government and the BOK have been discussing ways to strengthen the lending capability of the KDB and Eximbank, and created a task force, Wednesday.

With the state banks lacking funds to inject into the troubled companies, the government has been pressuring the central bank to use its exclusive right to print money to fund them.

As it is the second largest shareholder in the Eximbank, the BOK can inject capital there. To invest in KDB, however, a relevant law must be revised.

The government and Cheong Wa Dae have been suggesting that they would push for the revision of this if the central bank’s investment in the state-run bank is needed.

While explaining that the government measure is against the principles of the central bank, the governor cited the U.S. Fed as an example. Lee pointed out that the Fed provided loans to businesses such as AIG instead of investing in the ailing companies.

“It was due to the basic principles of the central bank that it should minimize losses. In the case of the AIG loans, AIG had to put up all of its assets as collateral,” he said. “If the U.S. Fed had sustained losses by supporting businesses, would the decision have been justified?” he asked.

The governor suggested that the BOK can provide loans to the state-run banks based on collateral, as was the case with the bank recapitalization fund that was set up in December 2009 to ease liquidity problems at banks with a low capital adequacy ratio.

The banks borrowed money from the central bank to set up the fund, offering bonds as collateral.

He said that measure met the principles of the central bank.

“We have consistently said that the central bank is willing to play any role it can during restructuring.”

The governor added that his remarks should not be interpreted as a confrontation with the government.

“The government should play the main role in restructuring, and there should be reasons that are convincing enough if there are plans to make the central bank print money for it,” he stressed.

Lee said he agrees with Minister of Strategy and Finance Yoo Il-ho who pledged to talk with the National Assembly and acquire public consensus on the mobilization of the BOK’s money-printing power.

“The BOK does not have the power to distribute national resources at a loss. The money-printing power can be mobilized as long as sufficient collateral is secured,” Lee said.