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The government injected W4 trillion (US$1=W1,381) into Woori, Kookmin, Hana, Kwangju, Kyongnam, National Agricultural Cooperative Federation and National Federation of Fisheries Cooperatives banks. The injections of public funds were carried out via the purchase of hybrid bonds and subordinated debt issued by the banks. The government purchased those bonds through a bank recapitalization fund created with money supplied by the Bank of Korea and other sources. The government plans to recapitalize banks twice more during the first half of this year.
The latest capital injection is part of government efforts to offset a possible surge in insolvent loans extended by those banks due to corporate restructuring as the economic slump continues. It is different from the emergency rescue funds that were pumped into insolvent banks to save them during the Asian financial crisis. Most Korean banks are weathering the global economic crisis, but the government has gone ahead and given them a ¡°vaccine¡± injection. That is why the government said it would not hold those banks responsible for receiving public money.
But Woori Bank is the exception. That bank has already received two separate injections of taxpayers¡¯ money. Woori Bank received W7.9 trillion in public money -- W3.3 trillion in 1998 when it was Hanvit Bank and W4.6 trillion in 2001 when it changed its name to the present one. For the other commercial banks, this is their first public fund injection. It is difficult to find another bank in the world that has received three separate injections of public funds, as in Woori's case.
Woori Bank posted a W665 billion net loss during the fourth quarter of last year. With a BIS capital adequacy ratio of 7.7 percent, it is the only commercial bank unable to meet the 9 percent ratio required by the government. That is why Woori Bank received the largest amount of public funds this time -- W1.3 trillion.
Until now, Woori Bank has been the most reckless in expanding the amount of its loans and has been growing in size. In early 2006, the head of the bank presented branch managers with a baton containing a dagger, calling on them to engage in aggressive sales tactics. As a result, Woori Bank¡¯s total assets swelled from W140 trillion at the end of 2005 to W186 trillion at the end of 2006 and to W219 trillion at the end of 2007. And over that period, the size of loans Woori Bank extended were more than twice the average at other Korean banks, with a large portion of risky loans. Last year, Woori Bank posted W400 billion losses in appraised assets after it invested too heavily in derivatives products, such as collateralized debt obligations (CDO) and credit default swaps (CDS).
Taxpayers¡¯ money must not be passed out blindly. It may be difficult to make the ousted management of Woori Bank face legal responsibilities. The government should at least compile a white paper to justify why Woori Bank required three separate public fund injections totaling W9.2 trillion. That is how we can prevent another mistake like Woori Bank, and also ensure that the people responsible for this mess cannot work in Korea¡¯s financial industry again.
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