Bank BIS Ratio Rule; Easing or Status Quo?
By Kim Jae-kyoung
Staff Reporter
The easing of the bank capital ratio rule debate is heating up here after President Lee Myung-bak Monday proposed loosening capital ratio rules for local banks to prevent them from curtailing loans.
Some analysts cautiously said that at a time when the global economy stays in recession, easing bank capital ratio rules is one option the government can consider.
``I think the rule relaxation is a fair idea to help the economy ride out the economic storm. But the idea is valid only when other nations agree on the issue,'' a local bank CFO told The Korea Times, asking not to be named.
David Mann, head of Korea Research at Standard Chartered Bank, echoed the view, saying, ``We would expect supportive policies from the government to reinforce confidence in the economy and the soundness of the banking sector.''
``Short-term priorities during the global crisis could mean some easing on this type of regulation is justified temporarily especially if it helps the economy recover more quickly and avoid worse case scenarios,'' he added.
The Bank for International Settlements (BIS) capital adequacy ratio, BIS ratio for short, is a bank's solvency ratio, measuring its financial health. If a bank does not meet this requirement, it will not likely survive. The benchmark ratio is eight percent. While financial regulators require banks to keep more than an eight percent capital ratio, they recommend that lenders keep a ratio of 10 percent or above.
Other bankers and analysts, however, countered that relaxation in bank capital ratio rules may hurt banks' financial soundness in the long run.
``Now is the time to tighten our lending standards and beef up our capital base in a preliminary step to brace for insolvency in the corporate sector,'' another bank executive said.
``It is nonsense for local lenders to ease such rules while governments in other countries are injecting capital into banking sectors to shore up their capital base,'' he added. ``
Kim Sang-jo, an economics professor at Hanyang University and executive director of the Solidarity for Economic Reform, labeled Lee's idea as ``short-sighted,'' saying, ``If such rules are eased, it will hurt banks' financial soundness in the end.''
``The collapse of U.S. investment banks are a good example illustrating how bank rules relaxation leads to insolvency in the entire financial sector,'' he added.
On his flight from Peru Monday after attending the APEC summit, Lee said that rules such as BIS capital adequacy ratios and accounting standards are restricting banks' lending, calling for relaxation of the BIS capital adequacy ratio, currently set at eight percent.
``I think we have to review and improve rules such as bank capital ratios and accounting standards that force financial firms to scale back lending through the Financial Stability Forum (FSF) activities,'' he said. ``Under current rules, banks have no choice but to cut lending,'' he added.
His comments came as Korean banks have been reluctant to extend loans to businesses and households to protect their capital base, which has been weakening significantly amid rising household debts, a wobbling property market and poor earnings.
In the three months to September, Kookmin Bank saw its capital ratio dip to 9.76 percent from 12.45 percent three months ago, the first time that its ratio fell below 10 percent since 2002. The comparable ratio for Shinbank Bank fell to 11.9 percent in the third quarter from 12.5 percent a quarter earlier.
Korea Exchange Bank, owned by U.S. private equity fund Lone Star, saw its ratio slip to 10.64 percent from 11.56 percent. Woori Bank's capital adequacy ratio stood at 10.5 percent in September.