South Korean regulator to police loan-deposit ratios

Lenders are barred from lending more than the amount they receive to manage their liquidity risks.

In its report to President Lee Myung-bak, the Financial Services Commission pushes for the measures in 2010 together with others, as it intends to fortify the stability of local financial markets and to improve their competitiveness.

Likewise, banks with won-denominated loans exceeding 2 trillion won ($1.7 billion), including Korean branches of foreign banks, will be required to lower their loan-to-deposit ratio below 100 percent by the end of 2013, according to the report.

Excluded from the rule are state policy banks Industrial Bank of Korea, Korea Development Bank and the Export-Import Bank of Korea.

"The loan-deposit ratio rule would help local banks manage their liquidity risk, while preventing excessive competition for asset growth," FSC Vice Chairman Kwon Hyouk-se told a press conference, in a report in Korea Herald.

"Since drastic implementation of the measure could have side effects such as curbing new loan issuances, we plan to grant the banks a four-year grace period," he said.