South Korean banks plan to contribute Won8,000bn ($5.5bn) to a Won10,000bn bond fund designed to invest in corporate bonds and bank debt to ease the liquidity crunch in Asia’s fourth-largest economy.

State-run Korea Development Bank will pump Won2,000bn and Kookmin Bank, the country’s largest commercial lender, will inject Won1,000bn into the new fund that the government announced last month. Other banks – including Citi and Standard Chartered’s Korean unit – will contribute the remainder. Insurers and brokers will provide a further Won2,000bn.

The decision was made at a meeting of chief executives of local Korean banks. Top managers also agreed to refrain from issuing domestic bonds and extend debt maturity of construction companies for one year.

“They shared the view that banks had to make every effort to have money circulate in financial markets now that the economic slump and slow exports are hitting small and medium-sized companies,” the association of local banks said.

The government has said the fund will be used “at the minimum level to correct temporary market failures”.

The banks agreed to extend debt maturity for a year for 27 out of 30 builders asking for financial support. Construction companies in Korea are heavily indebted and there are an increasing number of unsold apartments in provincial areas.

The banks also called on the government to revive corporate lending while maintaining their financial soundness.

South Korean banks plan to raise Won7,000bn later this year by selling subordinated bonds in an effort to meet regulatory requirements to improve capital adequacy ratios in the banking sector, which have fallen to the lowest in more than seven years. The banks have said they will refrain from issuing local bonds including certificates of deposit, which could help reduce market interest rates.

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