Financial Firms' LCR and Loan-to-Deposit Ratio Regulation Eased: "Maximum Supply Capacity Expanded by 394 Trillion"

Temporary Relaxation of Bank, Insurance, and Securities Regulations to Support Real Economy Amid COVID-19 Crisis
Financial Institutions' Total Funding Capacity Estimated to Increase from 206 Trillion to 394 Trillion Won

[Asia Economy Reporter Jo Gang-wook] Regulations on financial companies such as banks, insurance companies, and securities firms will be temporarily eased to support the real economy struggling due to the novel coronavirus infection (COVID-19). For banks, this includes the Liquidity Coverage Ratio (LCR) and the loan-to-deposit ratio (loans relative to deposits), and for securities firms, the Net Capital Ratio (NCR) for business operations. Financial authorities expect that through these measures, the funding supply capacity of the financial sector could increase by up to approximately 394 trillion won.

The Financial Services Commission and the Financial Supervisory Service announced on the 19th a 'Financial Regulation Flexibility Plan' that includes lowering the LCR regulation for banks from the current 100% to 85% until September.

The LCR is the ratio of high-quality liquid assets to the expected net cash outflows over the next 30 days. The financial authorities decided to lower the combined LCR, which includes both Korean won and foreign currency, from 100% or more to 85% or more. Additionally, the foreign currency LCR regulation, which was to be lowered from 80% to 70% by the end of May, has been extended until the end of September.

The loan-to-deposit ratio, which banks must maintain at 100%, will also be temporarily relaxed. Accordingly, until June next year, banks will not face sanctions such as demands for management improvement plans even if they violate the ratio within a 5 percentage point range.

When calculating the loan-to-deposit ratio, loans to individual business owners handled this year will have their weighting lowered from 100% to 85%. However, the weighting for new loans related to residential rental and sales businesses among individual business owner and corporate loans has been raised to the same level as household loans (115%). Savings banks (up to 110%) and mutual finance cooperatives (up to 80?100%) will also not face disadvantages if they violate the ratio within 10 percentage points until June next year.

The credit extension limit between subsidiaries of holding companies will be increased. Under the current Financial Holding Company Act, the credit extension limit between subsidiaries of a holding company is generally restricted to 10% of their own capital. However, due to the credit crunch caused by COVID-19, the need to expand credit extension among subsidiaries within holding companies has been raised. Therefore, the credit extension limit and total for a subsidiary's credit to other subsidiaries will be increased by 10 percentage points each?from 10% to 20% and from 20% to 30%, respectively. As a result, financial authorities expect that the five major banks will have the capacity to supply an additional 12.9 trillion won in credit to their affiliates.

The capital accumulation burden due to contributions to the Securities Market Stabilization Fund (SMSF) will also be reduced. For banks, the risk weight applied to holdings of listed stocks will be lowered from the current 300% to 100%. Financial authorities explained that considering the SMSF’s purpose as 'supporting a specific economic sector' to stabilize the stock market, a risk weight one-third that of general stock holdings is applied. For insurance and securities companies, the risk value applied to SMSF contributions will be adjusted downward compared to general Exchange-Traded Fund (ETF) investments. For insurance, it will be lowered from the existing 8?12% to 6%, and for securities, from 9?12% to 4.5?6%.

The NCR regulation on corporate loan bonds held by securities firms will also be eased. Accordingly, until the end of September, the risk value calculation standards for newly acquired corporate loan bonds will be temporarily relaxed for maturities up to two years.

The implementation timing of the large exposure limit regulation (for loans, guarantees, and other risk exposures) for banks will be postponed until after next year. The large exposure limit regulation manages exposure to each counterparty within 25% of the Bank for International Settlements (BIS) Tier 1 capital. The Basel Committee recommended implementing the large exposure limit regulation from last year to mitigate concentration risk from large loans. In Korea, it has been implemented as administrative guidance since March last year, and the timing for formal regulation is under review.

The credit risk calculation method reform, part of the originally planned 'Basel III final rules' to be introduced in 2022, will be implemented early starting this quarter. Financial authorities expect that this will raise the average BIS ratio of domestic banks by 0.8 percentage points and increase supply capacity by 259 trillion won.

Additionally, financial companies do not need to set aside additional provisions for loans with maturity extensions or repayment deferrals due to the COVID-19 situation, and unpaid interest can be recognized as interest income in accounting. The plan also includes allowing insurance companies to contribute to the bond market stabilization fund and SMSF through repurchase agreement (RP) sales, expanding the leverage limit (total assets relative to equity capital) for card companies from 6 times to 8 times, permitting insurance planners to apply telemarketing (TM) procedures when recruiting through face-to-face channels, temporarily easing liquidity ratio requirements for specialized credit finance companies and savings banks, and temporarily deferring the mandatory loan ratio application within savings banks’ business areas.

Financial authorities estimate that the total funding supply capacity of financial companies will increase from 206 trillion won to 394 trillion won due to these measures. By sector, this includes 71.6 trillion to 259 trillion won for banks, 8.6 trillion won for securities firms, 54.4 trillion won for card companies, 6.6 trillion won for savings banks, and 65.1 trillion won for mutual finance cooperatives.

Financial authorities will immediately implement items that can be carried out without legal amendments, such as non-action opinions and legal interpretations, and will expedite legal revisions for items requiring regulatory changes. They will also review the necessity of extending or supplementing time-limited measures such as LCR and loan-to-deposit ratios before their expiration and provide stakeholders with sufficient time to adapt.

The financial authorities stated, "We will thoroughly monitor related trends to ensure that the financial companies’ soundness management is not neglected due to this regulatory flexibility and will take necessary measures such as strengthening supervision promptly if any abnormal signs occur."

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