UPDATE 1-S.Korea to ease banks capital rules for SME lending

(Adds statement from Financial Services Commission)

SEOUL, Nov 5 (Reuters) - South Korea will push back full adoption of tighter capital rules for banks by a year to 2010, to help give banks room to lend to smaller firms in the fall-out from the global financial crisis, a regulator said on Wednesday.

The country partly introduced the Basel II capital adequacy ratio for banks at the start of 2008 in order to better account for risky assets and to comply with international standards.

"Now the financial crisis is putting downward pressure on banks' BIS ratio, mandatory adoption of Basel II will have a negative impact such as reduced credit lines to small- and medium-sized enterprises (SMEs)," the Financial Supervisory Service (FSS) said.

BIS stands for the Bank for International Settlements.

The delay will ease pressure on banks' capital ratios and stop banks from curtailing lending to SMEs, FSS said in a statement.

The announcement follows a series of recent liquidity support measures unveiled by governments and central banks around the world to shield their economies from the global credit squeeze.

Last week, South Korea loosened won KRW= liquidity requirements on banks to help bring down their funding costs, after the Bank of Korea delivered its biggest-ever rate cut.

South Korea has also announced plans to provide $30 billion liquidity to domestic lenders and exporters and offer government guarantees on banks' foreign exchange deals.

The European Union, Japan, Hong Kong and Canada adopted the Basel II rule in 2007, followed by Singapore, Australia and New Zealand last year.

Separately, Financial Services Commission (FSC) Chairman Jun Kwang-woo said that government liquidity-boosts would help banks absorb risks from lending to companies such as SMEs.

"Preventing profit-making companies from going bankrupt and the real economy from contracting will be the most effective way to stabilise our financial system," he told a meeting with heads of seven major domestic banks, another FSC statement said.

FSS Governor Kim Jong-chang also told the meeting that it would hold chief executives of banks accountable for any unfair business practices and performances with regards to SME support.

FSS supervises financial institutions and is under the control of the FSC which sets and implements financial policies.

Last Thursday, KB Financial Group (105560.KS), which runs South Korea's top retail bank Kookmin, reported a fall in its BIS capital ratio to below 10 percent for the July-September quarter as its bad loan charges climbed to a two-year high.

Commercial banks in South Korea are required to keep more than 8 percent capital ratio in reserve, and major domestic lenders have retained 11-13 percent ratios.

(Reporting by Kim Yeon-hee; Editing by Keiron Henderson)