"Open the Bank Vaults More" Financial Authorities Wield Carrots and Sticks

Daily Inspections at Commercial Bank Support Sites for the Time Being
Expansion of Support Capacity through LCR and Other Regulatory Easing
Banks "Concerns Rise Due to Increased Non-Performing Risk"

Korea Federation of Banks

[Asia Economy Reporter Kim Hyo-jin] Financial authorities have taken both carrot and stick measures toward banks to strengthen financial support for small business owners affected by the novel coronavirus infection (COVID-19). They have significantly reinforced the COVID loan on-site inspection team personnel to conduct daily visits to bank branches under a 'constant surveillance system,' while also easing temporary regulations such as the Korean won Liquidity Coverage Ratio (LCR) to relieve banks' liquidity management pressures.

The intention is to closely monitor the field while institutionally expanding support capacity so that banks can open their 'storerooms' more timely and extensively. However, some voices express concerns that as loans increase, the risk of defaults inevitably rises, potentially increasing the burden on both banks and borrowers.

According to financial authorities and the financial sector on the 13th, the Financial Supervisory Service (FSS), in coordination with the Financial Services Commission (FSC), began daily on-site inspections related to COVID-19 damage support on the 7th. The FSS plans to flexibly deploy dozens of personnel from the Financial Consumer Protection Department and regional inspection offices. An FSS official stated, "There is no set deadline for the daily inspection activities." The FSC plans to complete the formation of an emergency financial support team of about 15 members this week, led by the Director of the Financial Policy Bureau and including dispatched personnel from related agencies, to coordinate on-site inspections and various support policies.

The financial authorities intend to focus on verifying whether the ultra-low interest rate (1.5%) secondary interest subsidy loans from 14 commercial banks are being smoothly executed. An FSC official said, "We will also check whether the unification of credit ratings applied at the time of lending is properly implemented."

Additionally, the financial authorities will announce regulatory easing measures this week that temporarily suspend regulations such as the foreign currency LCR, consolidated LCR, and loan-to-deposit ratio, which have contributed to liquidity burdens in the financial sector. Due to increased burdens on the financial sector from contributions to the Bond Market Stabilization Fund and Securities Market Stabilization Fund, the measures will also include postponing the implementation of the large exposure limit regulation, one of the capital adequacy regulations.

The banking sector expresses willingness to provide maximum support in line with the government's and financial authorities' intentions but also shows growing anxiety about default risks. A representative from Bank A expressed concern, saying, "If a long-term downturn in the real economy and finance materializes, both banks and borrowers may find it difficult to cope." A representative from Bank B lamented, "If it were possible to operate credit solely based on external credit rating agencies' grades, why would banks have invested heavily in developing their own credit evaluation models?"

According to the Korea Federation of Banks, the banking sector has provided approximately 21 trillion won in financial support to small and medium-sized enterprises and small business owners affected by COVID-19 from February 7 to June 9. This includes 10.9 trillion won in new loans and 10.25 trillion won in loan maturity extensions and interest payment deferrals. The secondary interest subsidy loans from commercial banks amounted to about 400 billion won from June 1 to 9, with applications totaling 1.14 trillion won received at the counters.

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