Korea Development Bank has gained time to sell its equity in HMM (formerly Hyundai Merchant Marine). As HMM's stock price rises and its size increases, the sale becomes challenging, prompting Korea Development Bank to request the financial authorities to exclude HMM equity when calculating the Basel III BIS capital ratio for soundness management.
As HMM's stock price rises, the BIS ratio of Korea Development Bank declines, and if the BIS ratio falls, the cost of borrowing increases, shrinking the capacity for policy financing. For this reason, the financial authorities have decided to allow an exception for three years.
According to the financial industry on the 1st, the Financial Supervisory Service issued an opinion letter regarding Korea Development Bank's request for an exception in calculating the BIS ratio the previous day. The opinion letter is a document in which the financial authorities promise not to impose sanctions after a legal interpretation.
The opinion letter states that even if the value of HMM's equity exceeds 15% of Korea Development Bank's capital, no risk weight will be applied to the excess amount. The Financial Supervisory Service said, "Acquisition of HMM shares by Korea Development Bank occurred under a government decision due to its nature as a policy bank, and it cannot independently dispose of them." It further noted, "Applying a risk weight to Korea Development Bank's investment in HMM beyond 15% due to an unintentional event (stock price increase) is excessive, and considering the time needed for the future equity sale process, we will grant a temporary exception for three years."
Korea Development Bank is the largest shareholder, holding a 36.02% (369.19 million shares) stake in HMM. According to BIS regulations, if a bank holds more than 15% equity in a specific corporation relative to its capital, a risk weight of 1,250% is applied to the equity above 15%. As of 11 a.m. on this day, HMM's stock price was 23,200 won, and based on this calculation, the total value of HMM equity is 8.5652 trillion won. This accounts for 17.9% of Korea Development Bank's total capital (47.7045 trillion won) as of the end of the first quarter, exceeding the 15% threshold.
The BIS ratio is the ratio of risk-weighted assets to equity, and as risk weights increase, the size of risk-weighted assets grows, lowering the BIS ratio. Kang Seok-hoon, the former chairman of Korea Development Bank, said last April, "If HMM's stock price exceeds 25,000 won, the current BIS ratio in the mid-to-late 13% range becomes risky," and added, "The BIS ratio must not fall below 13%." The financial authorities recommend maintaining the BIS ratio above 13%.
If the BIS ratio falls below 13%, Korea Development Bank must focus on soundness management, making it difficult to increase corporate loans. There are analyses indicating that for every 0.01 percentage point drop in the BIS ratio, lending capacity decreases by approximately 250 billion won. If Korea Development Bank's BIS ratio drops to 13%, the capacity for funding supply could shrink by over 2 trillion won.
A financial authorities official noted, "Concerns are growing that Korea Development Bank's BIS ratio could significantly decrease due to HMM's rising stock price, leading to immediate action. We concluded that recognizing an exception is necessary for smooth policy financing by Korea Development Bank." An official from Korea Development Bank stated, "Our position on the sale of HMM has not changed," and that they will decide after sufficient consultation with relevant agencies.
With soundness management now relieved, Korea Development Bank is expected to accelerate its policy financing. Korea Development Bank plans to establish a 50 trillion won advanced strategic industry fund to support industries such as semiconductors, bio, and artificial intelligence (AI).