By Kim Jae-kyoung
Staff Reporter
The central bank has decided to supply more liquidity to struggling Korean banks by paying interest on required reserves and purchasing bonds issued by the Korea Housing Finance Corp. (KHFC).
The move, designed to make more credit available to local companies, came as local lenders are facing the double burden of worsening financial soundness and falling profitability.
The Bank of Korea (BOK) said Wednesday that it will supply up to 500 billion won to local banks by paying annual interest of 2.3 percent on their required reserves housed with the central bank in a bid to improve their capital ratio under the Bank for International Settlements (BIS).
It will be the first time since 1986 that the BOK has paid interest on the required reserves ― funds that banks must keep at the BOK to meet possible bank runs. Generally, no interest is given on these reserves, except in emergency cases.
Commercial banks are currently required to hold around seven percent of client deposits in non-interest-bearing accounts at the central bank.
The BOK also decided to include bonds issued by the KHFC in the target for its open market operations to enable the state-run corporation to buy more mortgage-backed securities (MBS) from local banks.
``Both measures were designed to help improve banks' financial soundness so that more credit is available to cash-strapped enterprises,'' BOK Deputy Governor Lee Ju-yeol said after an unscheduled monetary policy meeting.
``With the new measure, we expect banks to secure the capability of extending additional 6.3 trillion won in new loans, which we believe will help ease the liquidity shortage here,'' he added.
Battered by the economic downturn, local lenders performed poorly in the third quarter, suffering weakening capital bases.
Korean banks' capital adequacy ratios deteriorated in the third quarter amid rising household debt, a wobbling property market and poor earnings. The average BIS ratio for local lenders fell to 10.61 percent in September from 12.31 percent at the end of 2007.
The BIS ratio gives an indication of the solvency of a bank. While financial regulators require banks to keep more than an eight percent capital ratio, they recommend that they keep it above 10 percent or more.