Domestic Banks' 'Core Soundness Indicator' Capital Ratio Rises 1.46%p in Q3

Source: Financial Supervisory Service

[Asia Economy Reporter Kangwook Cho] Despite the prolonged COVID-19 pandemic, the core soundness indicator of domestic banks, the capital ratio for the third quarter, rose by more than 1 percentage point. This is analyzed to be due to the implementation of regulatory flexibility measures, such as advancing the application of the Basel III final rules to strengthen banks' funding capacity.

According to the Financial Supervisory Service on the 8th, as of the end of September, the total capital ratio of domestic banks based on the Bank for International Settlements (BIS) standards was 16.02%, up 1.46 percentage points from the end of the previous quarter.

The increase in total capital (KRW 9.0 trillion, up 3.6%) was due to capital expansion through net income and capital increases, and especially the introduction of the Basel III final rules led to a decrease in risk-weighted assets by KRW 99.2 trillion (down 5.8%).

Earlier, financial authorities implemented regulatory flexibility measures starting from the second quarter of this year, advancing the originally scheduled 2022 implementation of the "Basel III final rules" by more than a year and a half to strengthen banks' funding capacity for the real economy, including small and medium-sized enterprises struggling due to COVID-19.

The total capital ratio slightly declined from 15.4% at the end of September last year to 15.25% at the end of last year, and further dropped by 0.54 percentage points to 14.72% at the end of the first quarter this year due to the impact of COVID-19. It also fell by 0.19 percentage points to 14.53% at the end of the second quarter, before turning to an upward trend after one year.

The Tier 1 capital ratio (16.02%) and common equity tier 1 capital ratio (13.40%) also rose by 1.33 percentage points and 1.30 percentage points respectively from the end of the previous quarter. The simple Tier 1 capital ratio, which only considers the quantitative characteristics of risk, increased by 0.19 percentage points to 6.50%, as the growth rate of Tier 1 capital (+4.1%) exceeded the growth rate of total risk exposure (+0.9%).

As of the end of September, all banks exceeded regulatory ratios including buffer capital (capital conservation buffer and D-SIB additional capital).

Major banks, including large banks (D-SIB) such as Shinhan, Woori, Hana, Kookmin, and Nonghyup, showed stable total capital ratios ranging from 15% to 18%. This is analyzed to be due to the adoption of the Basel III final rules by many banks in the third quarter, which significantly reduced the scale of risk-weighted assets, thereby increasing capital ratios.

The total capital ratio of bank holding companies was 14.72%, up 1.02 percentage points from the end of the previous quarter. The Tier 1 capital ratio (13.30%) and common equity tier 1 capital ratio (12.09%) of holding companies also rose by 1.02 percentage points and 0.90 percentage points respectively.

As of the end of September, all bank holding companies exceeded regulatory ratios including buffer capital (capital conservation buffer and D-SIB additional capital) by 2 to 4 percentage points.

An official from the Financial Supervisory Service explained, "As of the end of September, the capital ratios of domestic banks and bank holding companies significantly exceeded regulatory ratios and are stably generating net income," adding, "This is partly due to regulatory flexibility measures such as the application of the Basel III final rules*."

He continued, "Since uncertainties caused by COVID-19 persist, we plan to guide banks and bank holding companies to secure sufficient loss absorption capacity and maintain funding functions through capital expansion and increased internal reserves."

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