hankyoreh

Controversy is erupting on the matter of when a bank’s equity capital ratio should be measured. The ratio determines how much money a bank is allowed to invest in subsidiaries, and would play a big part in Kookmin’s ability to acquire Korea Exchange Bank.

The debate comes amid the review process for Kookmin Bank to acquire Korea Exchange Bank from its major shareholder, U.S.-based fund Lone Star. Experts criticized the financial regulators for making a rough estimate on figures in the middle of negotiations over a deal potentially worth 7 trillion won (US$7 billion).

The Financial Supervisory Service is arguing that the measurement of a bank’s equity capital ratio should be performed on the date a bank decides to acquire a company, whereas Kookmin Bank says the ratio should be measured from the date when a bank buys its initial stake in the company to begin the acquisition process. Currently, finance firms are barred from investing more than 30 percent of their total capital in subsidiaries.

According to a regulatory filing by Kookmin Bank on October 2, the bank’s equity capital was 15.68 trillion won as of the end of 2005, which would allow the bank to invest 4.7 trillion won in its affiliates. But because Kookmin Bank has already invested a total of 385.4 billion won in its 11 affiliates, the bank would be allowed 4.3 trillion won to invest in sealing the deal it has inked with Lone Star.

The figure of 4.3 trillion won has also been called into question, as Kookmin agreed to purchase stakes of Korea Exchange Bank for 15,200 won per share, which would mean a 70.87 percent stake would cost 6.9 trillion won in total. With shares at the agreed-upon price, for Kookmin to buy even a 50-percent stake - the amount required to become a major shareholder - the bank would need to invest 4.9 trillion won, 582.1 billion won more than the currently agreed sale price.

Rep. Sim Sang Jeong of the minority Democratic Labor Party has raised the matter, saying that the date of setting a bank’s equity capital ratio should be counted from the end of the fiscal year a bank acquires a stake in a company, citing the terminology ‘recent fiscal year’ in official banking regulations.

"In that case, it is legally impossible for Kookmin Bank to acquire more than a 50-percent stake in Korea Exchange Bank," the lawmaker said.

What is fueling the controversy is that there is no clear definition of how to determine a date for measuring a bank’s equity capital ratio when the bank invests in a unit. A Financial Supervisory Service official said, "Because there are no clear terms set forth, we will have to make the decision on our own. The date may be counted from a date when Kookmin Bank approved the acquisition of Korea Exchange Bank." In which case Kookmin Bank would meet the investment ceiling in acquiring Korea First. In March, Kookmin Bank had already raised 1.9 trillion won through the sale of bonds. During the first half of this year, Kookmin Bank additionally boosted its equity capital by more than 3 trillion won via business returns.

Kookmin Bank says that the investment ceiling should be counted from a date when it purchased the Korea Exchange Bank stake. In this case, Kookmin Bank may successfully acquire the 70.87 percent stake in Korea Exchage Bank.

Hongik University economics professor Jeon Seong-in said, "The problem is that financial regulators failed to set a date for calculating a bank’s equity capital ratio in the first place," and now they will merely make the decision retroactively and of their own accord, he said.