Financial Services Commission to Ease Bank KRW LCR Regulations Next Week... "Regulatory Exemption or Ratio Relaxation"

Banks' Won LCR Falls 10%p Due to Chaean and Jeungan Fund Contributions and Loan Maturity Deferrals
Each 1%p LCR Regulatory Buffer Increase Boosts Individual Bank Lending Capacity by 500 Billion Won... Real Economy Funding Expected to Expand

[Asia Economy Reporter Kwon Haeyoung] The Financial Services Commission (FSC) is set to ease the Korean won liquidity coverage ratio (LCR) regulations as early as next week. This move comes as banks face increased capital burdens due to their expanded contributions and loans to bond stabilization and securities stabilization funds amid the impact of the novel coronavirus disease (COVID-19). For every 1% reduction in the LCR regulatory ratio, each bank’s lending capacity increases by 500 billion KRW, enabling banks to supply funds more smoothly to the market and businesses.

On the 31st, an FSC official stated, "We have decided to ease the Korean won LCR regulations in preparation for potential liquidity deterioration in banks," adding, "We are considering options such as temporarily suspending the LCR regulations or temporarily lowering the regulatory ratio itself." The official further explained, "Currently, regardless of whether the regulation is suspended, banks are not subject to penalties for failing to meet the ratio," and "Liquidity is not immediately drying up in the market, so we are carefully considering the announcement details and timing."

The FSC plans to announce the easing of LCR regulations as early as next week. The Financial Supervisory Service is currently conducting simulations on the necessity and impact of regulatory easing, including the decline in LCR due to individual banks’ increased contributions and loans. Previously, the Ministry of Economy and Finance decided to relax the foreign currency LCR regulatory ratio from the current 80% to 70% for three months until the end of May.

The LCR regulation is a soundness regulation that requires banks to hold sufficient high-quality liquid assets to respond to liquidity shortages. The LCR is calculated by dividing high-quality liquid assets such as cash, government bonds, and monetary stabilization bonds by the net cash outflows over the next 30 days, and banks must maintain this ratio at 100% or higher. It is reported that when banks make trillion-won-level contributions to the bond stabilization and securities stabilization funds to support companies facing financial difficulties due to COVID-19, the LCR falls to the 90% range, making it impossible to meet the regulatory ratio. The LCR regulation was introduced in 2015, although it did not exist during the 2008 global financial crisis when the bond stabilization fund was first established.

An executive from a commercial bank said, "Most banks find it difficult to maintain the LCR at 100% when contributing to the bond and securities stabilization funds," adding, "While the impact on the Bank for International Settlements (BIS) capital adequacy ratio is not significant, the burden from the LCR decline is substantial, making regulatory easing urgent."

Banks are advocating for lowering the LCR regulatory ratio to 90%. In the case of Bank A, if it contributes to the bond and securities stabilization funds according to government policy and grants a six-month grace period on principal and interest repayments for existing small business and SME borrowers, the LCR is expected to drop from the current 105% to 95%. Meanwhile, the BIS ratio only decreases by 5 basis points. Banks with a high proportion of household loans, such as KB Kookmin Bank, reportedly experience a larger decline in the Korean won LCR.

Another official from a commercial bank explained, "Every 1 percentage point increase in the LCR regulatory buffer increases lending capacity by 500 billion KRW," adding, "The government needs to lower the LCR regulatory ratio to at least 90% to provide some breathing room."

Some in the banking sector have also suggested that future equity stakes in the bond stabilization fund be recognized as high-quality liquid assets. Regarding this, an FSC official said, "Requesting that equity stakes in the bond stabilization fund be considered high-quality liquid assets involves changing general accounting principles arbitrarily, which is not possible," but added, "However, we will seek ways to reduce banks’ burdens through temporary suspension or easing of the LCR regulations."

This content was produced with the assistance of AI translation services.