Regulators say the overhaul on capital regulations for the banking and insurance sectors could free up 98.7 trillion won in funding capacity to aid firms hit by Middle East turmoil
Korean government plays a ‘policy supplementary budget’ gambit. (Photo: BusinessKorea DB)
Financial authorities will overhaul capital regulations for the banking and insurance sectors to secure up to 98.7 trillion won (approximately $66.9 billion) in additional funding capacity. The plan is to support companies affected by the Middle East crisis while redirecting the flow of funds from real estate and household loans to advanced and future industries.
The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) held the ‘5th Meeting on the Great Transformation to Productive Finance’ on April 16, chaired by FSC Chairman Lee Eok-won, and announced measures to rationalize capital regulations for the banking and insurance sectors.
In his opening remarks, Chairman Lee emphasized, “We will accelerate the great transformation to productive finance to not only overcome the crisis stemming from the Middle East but also to boldly respond to the post-war industrial restructuring and foster strategic industries.” He added, “As this measure is a kind of ‘policy supplementary budget measure,’ it must serve as the priming water for overcoming the crisis and achieving an economic rebound.”
He continued, “The great transformation to productive finance is no longer a choice but a path we must take,” and said, “I hope the financial sector will also play an active role with the sense of urgency that ‘if you don’t change, you will be left behind.’”
In the banking sector, up to 74.5 trillion won in additional funding capacity will be secured through three measures: △rationalizing the recognition of operational risk losses, △expanding the structural foreign exchange position, and △improving internal credit rating models.
First, large-scale loss events with a low probability of recurrence will be excluded from the calculation of operational risk through a review, provided they have been recognized as operational risk for over three years and conditions such as establishing recurrence prevention measures, completing sufficient compensation, and resolving remaining legal risks are met. It is estimated that the Common Equity Tier 1 (CET1) ratio for the five major financial holding companies will rise by up to 26 bp. The FSS will begin accepting applications for approval from the end of this month.
Operational risk refers to the risk of loss arising from a bank’s internal systems and occurs when compensation or penalties are incurred due to lawsuits or disputes following financial incidents.
However, as this measure is almost unprecedented, the review criteria will be strictly applied. Shin Jang-soo, Director of the Banking Division at the FSC, emphasized, “There are almost no global precedents,” and that “approvals for loss exclusion should not occur frequently and require a strict review.” Regarding the Hong Kong ELS situation, he drew a line, stating, “It is not currently eligible as the three-year loss recognition period has not passed.”
The scope of approval for structural foreign exchange positions will also be expanded to include long-term overseas equity investments and retained earnings of overseas branches. The CET1 ratio for each holding company is expected to rise by up to 12 bp, and this will be implemented immediately upon announcement. Director Shin explained, “Since the purpose of long-term equity investments makes them difficult to sell, we will apply the structural foreign exchange position with the entire equity investment as the limit.”
Regarding the improvement of banks’ internal credit rating models, the authorities plan to expedite the review process when banks redevelop models with diminished credit risk differentiation capabilities, thereby supporting the enhancement of banks’ foresight and the expansion of their capital buffers.
Regarding concerns about the effectiveness of whether the secured capacity will actually flow into productive sectors, he said, “Under the current household loan management structure, it will be very difficult to use it for household loans,” and that “it will inevitably flow mostly into corporate loans and productive sectors.”
In the insurance sector, up to 24.2 trillion won in additional funding capacity will be created by rationalizing risk weights.
For investments in policy programs such as the National Growth Fund, the risk weight will be lowered from the existing 49% to 20% or less. A special provision for policy programs will be newly established to reduce risk weights in proportion to the actual risk mitigation effects, such as the government’s first-loss absorption. The application of the ‘special provision for long-term holdings (20% risk weight)’ will be expanded to include unlisted stocks and funds. This special provision will also be permitted if a more than 10-year investment plan is established for a policy program.
The risk weight for qualified venture investments will also be reduced from 49% to 35%, the level for listed stocks. Additionally, special provisions related to infrastructure investment will be expanded. The scope of ‘qualified infrastructure,’ previously limited to traditional infrastructure like roads and ports, will be broadened to include non-traditional infrastructure such as renewable energy and AI-based facilities, to which a special 20% risk weight provision will be applied.
Credit risk amounts for loans and bonds will be reduced, and for infrastructure loans partially guaranteed by the government, the guaranteed portion will be classified as risk-free (0 risk weight). Conversely, to enhance regulatory equity and curb the flow of funds into real estate, the risk weight for mortgage loans in the 60-80% LTV range will be raised from 3.5% to 4.0%.
The financial authorities plan to institutionalize these measures by amending supervisory regulations and detailed enforcement rules by the first half of this year. Additional supplementary tasks, such as improving the matching adjustment system, are scheduled to be announced in the third quarter after gathering opinions. Furthermore, the authorities plan to continuously identify additional tasks for the insurance sector’s great transformation to productive finance.
The FSC explained, “While we have previously focused on soundness management for the introduction and stabilization of IFRS17, we will now promote a virtuous cycle of productive finance based on this established soundness. This is a process of rationalization rather than deregulation.”
Jung Suk-yee
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