Regulator may lower loan-to-deposit ratio to 90%

By Kang Seung-woo

The nation’s financial regulator is considering requiring banks to downscale their loan-to-deposit ratio to 90 percent as part of efforts to defuse the problem of snowballing household debt, a senior official said Thursday.

The ratio, a measurement of a bank’s financial health, represents the percentage of a lender’s loans against the amount of its deposits. The higher the ratio, the more the bank depends on borrowed funds. Thus, the increased ratio will likely, as its immediate effect, result in the strengthening of banks’ financial situations.

“The government is considering lowering the ratio on a gradual basis,” said the official at the Financial Services Commission (FSC).

The FSC plans to form a task force with the Financial Supervisory Service (FSS) and the Korea Federation of Banks in the near future.

The move came one day after the government unveiled its comprehensive plans to rein in household debt, which topped 800 trillion won in the first quarter of the year.

The regulator will press banks to lower their loan-to-deposit ratios to 90 percent by June 2012, from the original deadline of the end of 2013.

Putting the diminished ratio in place, the FSS plans to further tackle household debt.

Domestic banks’ loan-to-deposit ratio once hovered above 100 percent, which was blamed as a major vulnerability to a liquidity squeeze at the height of the global financial crisis.

At the end of March, the country’s 13 commercial lenders saw their average loan-to-deposit ratio at 97.1 percent.

“The government would review whether to further lower the ratio after watching the growth pace of household debt,” the official said, adding that if the ratio is cut by 10 percentage points, banks’ overall loans shrink by 100 trillion won.

Worsening household debt has put the Korean economy under strain, as debt has expanded faster than income growth.

According to the Bank of Korea (BOK), accumulating debt has been outpacing the growth of the gross national disposable income in the past 10 years, as the debt has averaged an annual 10 percent increase, compared with an income rise of 5 percent.

As a result, the number of applicants for its individual debt-restructuring program surpassed 1 million as of June 15, according to the Credit Counseling and Recovery Service.