$130 billion aid for Korean banks

The Financial Services Commission (FSC) said yesterday that the Korean government would provide guarantees for interbank loans and the external debt of national banks, as well as providing extra liquidity for domestic markets.

The FSC said: “As other major economies start providing guarantees to inter-bank loans, the Korean government will take similar measures to avoid placing domestic banks at a comparative disadvantage in terms of overseas funding and to allay fears in the financial market”.

Once it receives approval from the National Assembly, the government will provide three-year guarantees on up to $100 billion of debt issued by Korean banks between today and June 30, 2009. Over that period, $80 billion of Korean bank debt is set to mature, the FSC said.

Until the Assembly approves the plan, two state-owned banks, Korea Development Bank and Korea Eximbank, will provide the guarantees.

The government and the Bank of Korea have also promised to improve their banks' dollar liquidity by lending out an additional $30 billion from their foreign exchange reserves, and will provide Korean won liquidity by purchasing of government bonds, redeeming monetary stabilisation bonds early, and expanding repo facilities.

The government also promised an extra 1 trillion won investment in the majority state-owned Industrial Bank of Korea, which it said "is likely to translate into additional loans worth 12 trillion won available to small and mid-sized companies".

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