The plan to have the Bank of Korea (BOK) come up with the funding for state banks in their efforts to finance corporate restructuring became closer to a reality after the government agreed to have the state-run Korea Credit Guarantee Fund guarantee payments of the loans the central bank would create for restructuring.

The Bank of Korea has been resisting to the idea of its funding state banks citing the BOK Act that strictly limits the central bank investment to government-guaranteed assets.

During Monday’s meeting of the Ministry of Strategy and Finance, Financial Services Commission, and the BOK to discuss ways to recapitalize state banks in charge of bailing out and rebuilding troubled companies, authorities agreed that the Korea Credit Guarantee Fund ensures guarantees to the funding the central bank injects into state banks in which it has stake.

On the question of how, the state-owned Industrial Bank of Korea (IBK) could create a special purpose vehicle financed on investment in securities from the finance ministry and loans from the BOK. Another option is to have IBK and another state entity Korea Asset Management Corp. jointly set up a special fund committed to aid corporate restructuring. Repayment on loans to the special-purpose vehicle from the BOK would be fully guaranteed by the Korea Credit Guarantee whose activity is not reflected in the fiscal balance sheet and therefore does not create deficit in public finance.

The special purpose company as previously created in 2009 following the global financial crisis will be recapitalized only when necessary. In 2009, the Bank of Korea pledged 10 trillion won ($8.44 billion) and Korea Development Bank 2 trillion won to fund banks if they run into troubles. But actual funding stopped at 4 trillion won.

Industry observers believe at least 5 trillion won would be needed to recapitalize Export-Import Bank of Korea to clean up its non-performing loans to troubled shipper and shipbuilders. The Bank of Korea will channel new funding upon demand. The special-purpose fund will buy contingent convertible (CoCo) bonds that can be converted into stocks if bonds cannot be repaid or other subordinated debt issued by state banks.

By Cho Si-young, Lee Sang-duk, and Kim Hyo-sung

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