Cash Capital Injections for MASGA Support at KDB and Eximbank... Additional In-Kind Contributions Likely
Government Accelerates Capital Expansion for State-Run Banks
The government is accelerating state-run bank investments to support the Korea-US shipbuilding cooperation initiative, the MASGA Project. Following the decision to allocate 130 billion won and 700 billion won in cash investments to Korea Development Bank and Export-Import Bank of Korea, respectively, in next year's budget, the government is also actively considering injecting non-cash assets. As follow-up negotiations with the United States are still underway, the government aims to provide substantial financial backing to strengthen its negotiating position.
According to relevant ministries on September 9, the Ministry of Economy and Finance is actively considering making non-cash investments in Korea Development Bank and Export-Import Bank of Korea early next year to support the MASGA Project. A government official explained, "Given the large scale of the US investment fund, it may be difficult for the existing state-run banks to handle it with their current capacity." While cash investments require parliamentary budget approval, non-cash investments can proceed with only Cabinet approval, so both types of capital injections are likely to occur around the same time after the budget review is completed.
Cash investments involve the government directly injecting cash into the capital of state-run banks, whereas non-cash investments increase capital by providing state-owned assets such as shares in public enterprises or real estate instead of cash. From the perspective of the recipient banks, cash investments are preferred over non-cash ones, as the same amount of cash allows for greater lending capacity.
When receiving a cash capital increase, only the numerator (capital) in the Bank for International Settlements (BIS) capital adequacy ratio rises, resulting in a significant improvement in the ratio and a substantial expansion of lending capacity. In contrast, if banks receive non-cash assets such as shares in Korea Land and Housing Corporation or Korea Electric Power Corporation, both the numerator and the denominator (risk-weighted assets) increase, so the improvement in the BIS ratio is relatively limited. For this reason, there has often been debate in the past over whether the government should inject cash or non-cash assets into state-run banks. Considering fiscal conditions, the government has often opted for a mix of cash and non-cash investments or supported banks mainly through non-cash investments, rather than relying solely on large-scale cash injections.
Large-scale cash injections such as this are not unprecedented. During the restructuring of the shipbuilding and shipping industries in 2016, the government ultimately injected 400 billion won in cash into Korea Development Bank and 1 trillion won into Export-Import Bank of Korea. In 2022, the government also invested 600 billion won in Korea Development Bank to help create a New Deal Fund, which combined with private capital to reach a total fund size of 4 trillion won.
However, these previous injections were made using a "pass-through investment" method, in which the government required the injected cash to be placed directly into specific funds. The Ministry of Economy and Finance explained that this time, the support is not structured as a pass-through investment, since the government is not mandating that the injected funds be used to establish a fund. With negotiations with the US ongoing, the main purpose is to increase capital and provide a financial safety net. A senior government official stated, "The cash investment was included as a way to maximize flexibility in the negotiation process before the president entered into talks with the US." The Ministry of Economy and Finance also noted that there have been special account projects in the past where cash investments were made to encourage investment in high-risk regions.
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Although the scale of investment in the US is expected to reach approximately 350 billion dollars (about 486 trillion won), projections suggest that the government's actual total capital injection will be in the range of 5 trillion to 10 trillion won. This is because the fund currently under discussion between Korea and the US is likely to focus on policy financial institutions such as Korea Development Bank, Export-Import Bank of Korea, and Korea Trade Insurance Corporation taking the lead in providing loans or guarantees to support private companies' investments in the US, rather than making direct investments in projects. The fund structure is likely to involve the US government proposing local investment projects, with companies selectively participating after conducting feasibility studies.
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