Clarification on Press Release of
BIS Ratios of 12 Undercapitalized Banks


The release of BIS ratios and information pertaining to precautionary loans and below (as of March, 1998) on July 1, 1998 represents a mere segment of accounting firms' projection of BIS ratio and precautionary loans and below out to June, 2000, which was done as a part of the evaluation of rehabilitation plans submitted by the 12 undercapitalized banks.

Taking into account the fact that prevailing BSA (Bank Supervisory Authority) asset classification standards as well as accounting standards will be strengthened to match that of international standards, accounting firms applied in its estimation the revised standards which represent significantly stricter standards. The released information, therefore, does not represent an official estimation based on prevailing standards nor is it in any way an official announcement issued by the supervisory authorities.

As amendment of existing standards is in the works, which also happens to be a condition mandated to be met by January, 1999 under agreement with the IMF, it makes sense to apply amended standards and to judge whether or not banks will be able to meet BIS standards (8%) by the end of June, 2000 even under stricter standards.

These BIS ratios are meaningful in that they serve as a yardstick that measures, with the use of international standards, the potential soundness of banks going 2 years forward and for these reasons they were utilized in the Bank Appraisal Committee's evaluation of the feasibility of rehabilitation plan's mid-to-long term strategies.

Along these lines it is important to regard the recent release of BIS ratios and statistics on precautionary loans and below as of March, 1998 as a mid-point estimation, which only represents a part of a larger scheme to evaluate the feasibility of achieving the BIS ratio 8% target by June, 2000, based on rehabilitation plans submitted by respective banks.

One of the reasons BIS ratios at March, 1998 were low is that valuation of securities holdings in bank accounts as well as trust accounts of banks was based on market price rather than book value as was done in the past and that as a result of discounting of securities under a high interest rate scenario, which reflected interest rates of around 20% around the end of 1997, an increased level of loss provisioning on securities was required. However, since interest rates have come down to near normal levels recently, it can be said that securities are undervalued as a result of using higher than normal interest rates when discounting. Special consideration was given in this regard when evaluating feasibility of BIS ratio targets by the end of June, 2000.

Another point worth mentioning is that precautionary loans and below are often referred to as non-performing loans in the press. This is not an accurate statement. Precautionary loans and below refer to classified loans, which include precautionary loans as well as non-performing loans (comprised of substandard, doubtful and estimated loss loans). Therefore, precautionary loans and below (i.e. classified loans) cover a wider range which include precautionary loans in addition to NPL (non-performing loans).



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Structural Reform Planning Unit Financial Supervisory Commission Seoul, Korea