Korea announces second phase of bank restructuring

The Korean government has released its blueprint for the second phase of its banking sector reforms announced by the Financial Supervisory Commission (FSC) on Wednesday.The plans are as follows:

1. Nonviable banks to be merged under a government-led financial holding company:

• Five domestic banks deemed nonviable by the Financial Supervisory Commission will be merged under a government-led financial holding company. The five banks are Hanvit, Peace, Kwangju, Cheju and Kyongnam Bank.
• Other healthy banks not subject to the government's fund injections can also join the financial holding company, should they wish to do so.
• The government plans to launch the holding company by the first quarter of next year and the merged banks will undergo necessary reorganizations to gain competitiveness. The process will be completed by the first half of next year and the financial holding firm will begin operating from next October.

2.More healthy banks to merge:

• Healthy banks are also expected to form multiple mergers next year, to boost their asset size and gain competitiveness on the global market.
• Talks for a merger are already underway between Hana and KorAm, a move that would boost their total assets to 82.7 trillion won. The two banks together would form the nation's second largest bank and the 128th largest in the world.
• Other sound banks are also said to be involved in merger talks, but the details have yet to be revealed by those involved.

3.Seoul Bank to be sold to overseas buyer:

• Seoul Bank, now undergoing massive restructuring through the consultation of Deutsche Bank, is expected to complete its structural reforms by the end of next June. As soon as its operations normalize, the government plans to sell the bank overseas. However, if the plan fails, the government may also place Seoul Bank under the financial holding firm.

4.Additional public funds to be injected into nonviable banks:

• The government will inject additional public funds into nonviable banks to increase their capital adequacy ratio set by the Bank for International Settlements (BIS) to the 10 percent level.
• The exact amount required will be estimated by the Korea Deposit Insurance Corporation (KDIC), but it is estimated that the five banks to be merged under one holding firm and Seoul Bank require roughly 7 trillion won in public funds.
• The government will provide the funds to the banks in two stages after signing a memorandum of understanding (MOU) on the injection with each bank.
• The MOUs will require the banks to follow up on the government's reform plans and undertake aggressive self-rescue efforts. Punitive actions will be taken against the banks if they fail to meet the requirements stipulated in the MOUs.
• The MOUs will also include target amounts for return on asset (ROA), return on common equity (ROE) and productivity per person which the banks will be required to meet. The target goals will be set by the KDIC, and if the banks fail to attain the target figures, they will have to freeze wages and undertake self-rescue efforts.
• The banks will also be required to reduce their capital according to the amount of their impaired capital as a pre-condition to public fund injections.

(YONHAP)