Korean Banks Destined for Relapse
`BIS Ratio Heads for Single Digit'
By Kim Tae-gyu
Staff Reporter
In the worst-case scenario, some local banks would fall off the cliff amid the global financial crisis. Even in the best-case scenario, lenders would be pushed to the edge of the cliff, according to a private think-tank.
LG Economic Research Institute came up with three scenarios Sunday based on prediction of the ratios of the aggregate defaults to loans in the overall banking industry ― 2.5 percent, 5 percent and 7 percent.
``If the default ratio ends up rocketing six fold from the current 1.2 percent to 7 percent, our banks would have to shoulder 26 trillion won in losses,'' Lee Han-duk, a researcher at the LG institute, wrote in a report.
``Then the Bank for International Settlements (BIS) ratio would plunge to 7.2 percent on average. If this is the case, industry-wide restructuring is a must to hold up the whole system,'' he said.
A default ratio of 7 percent is often the case. During the Asian financial meltdown, the figure soared to up to 10 percent.
Lee said that should the default ratio only double to 2.5 percent, which is similar to that during the LG Card-originated mini crisis in 2003, the BIS ratio would fall below the important 10-percent mark.
``It is not a good sign for the BIS ratio dip to a single digit. If banks do not take drastic measures, they are destined for a serious situation,'' Lee said.
The BIS ratio is a barometer to measure a bank's solvency by comparing its risk-bearing capital and risk-weighted assets. A high number represents better status.
Although the BIS ratio has come under fire because of its counter-cyclical properties, it is widely accepted internationally. Usually, a ratio above 10 percent is believed to guarantee financial health.
The BIS ratios of local lenders has deteriorated this year, affected by ongoing financial distress, but banks maintained it at a double-digit at 10.6 percent as of the end of September.
Backlashes of Greed
As for why things have deteriorated so much, Lee picked up banks' unbridled practices of having lent as much as they could without worrying about financial soundness.
``Throughout the 1980s and 1990s, the growth rate of bank loans slightly outpaced that of gross domestic product (GDP). Back then, banks struck the balance,'' Lee said.
``But in the 2000s, the growth rate of loans stood at 16 percent in comparison to a mere 7 percent nominal GDP expansion. This explains why banks are in trouble,'' he said.
In particular, Lee pointed out that domestic banks took too much risk in order to outpace their rivals in the ill-fated competition to inflate revenues.
``After regulations became strict regarding mortgage loans in 2006, our banks turned their eyes to such risk-ridden areas as project financing,'' Lee said.
``As builders are in financial troubles, banks have to be wary of a huge amount of non-performing loans related to project financing, which amounts to approximately 50 trillion won,'' he said.
A project-financing scheme refers to a way to secure funds for a particular project such as a railway, nuclear power station, toll road or the construction of large infrastructure.
In Korea, the new financing format was largely used to build large apartments complexes _ banks provided money for building the apartments through non-recourse loans secured by cash flow from the project itself.
Hence, if the projects are in jeopardy, banks may fail to collect the loans, which is what is happening at the moment, with many builders struggling to survive.