• What countermeasures does the Korean government have to address the credit crunch caused by the money injected by the central bank coming back to the central bank through banks?

  • It has been frequently said that no matter how much money the government puts into the financial markets, it does not flow into the real economy quickly enough. This is mainly due to the increase in counter-party risks and economic uncertainty led by the global financial turmoil and the downward trend of growth. In response, the government is pursuing restructuring of insolvent businesses, such as the construction and shipbuilding companies, in order to eliminate economic uncertainty. In addition, it will continue to provide liquidity to recoverable companies selectively through policy banks and national guarantors. The recently created Bond Market Stabilization Fund is also expected to play a role in resolving credit crunch in the bond market. The government also plans to establish a 20 trillion won "Bank Capital Expansion Fund" to expand bank's credit supply capacity.

    12The government is increasing capital of policy banks (Korea Development Bank and Industrial Bank of Korea) by 2.4 trillion won, which will result in an expansion of corporate lending by 14 trillion won.

    Moreover, the government is making additional investment into national guarantors (Korea Credit Guarantee Fund and Kibo Technology Fund) worth 1.1 trillion won to increase public guarantee by 11.7 trillion won.

    < Reference > Details of the Bank Capital Expansion Fund

    1. Background
    The Fund is designed to strengthen banks' financial soundness and ability to absorb losses in the face of a prolonged economic slump and major restructuring, leading to a credit expansion in the real sector, including SMEs.

    2. Fund Scale and Funding Method
    A total of 20 trillion won will be raised by the BOK (about 10 trillion won in loans), institutional and individual investors (about 8 trillion won in investment) and KDB (about 2 trillion won in investment). 13

    < Overview of the Capital Expansion Fund >

    overview of the capital expansion fund

    3. Targets and Methods
    Banks have discretion to request funds, upon which the Fund will purchase preferred shares, hybrid securities, redeemable preferred shares, subordinated loans or others.

    If the 20 trillion won Fund is used to raise Tier 1 capital, the BIS ratio of commercial banks can improve by as much as 2.59 percent.

    13 When a bank applies for funds, the Capital Call method will be used to provide capital based on a pre-agreed ratio.

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