Financial Services Commission to Postpone Bank Integrated LCR Regulation by 3 Months, Then Gradually Normalize

[Asia Economy Reporter Song Hwajeong] As the maturity extension and repayment deferral measures for loans to small and medium-sized enterprises (SMEs) and small business owners have been extended by six months, the financial regulation relaxation measures, which were set to end at the end of this month, will also be granted a three-month grace period. Among these, the integrated Liquidity Coverage Ratio (LCR) regulation for banks, which is expected to cause market shocks, will be gradually normalized after a three-month grace period.

On the 30th, the Financial Services Commission (FSC) held a regular meeting to discuss the progress and future plans for the financial regulation relaxation measures. They reviewed the status of 25 measures that had been relaxed so far and examined the future handling plans for seven measures whose relaxation periods end in March.

The FSC decided to grant a common three-month grace period considering the extension of maturity extension and repayment deferral, but for regulations expected to cause market shocks, gradual normalization will be pursued. Other regulations that do not pose difficulties for financial institutions to comply with will be normalized immediately after the three-month grace period.

First, regarding the integrated LCR for banks, since immediate normalization could cause shocks to the banking sector and bond markets, the FSC decided to maintain a three-month grace period until June and then gradually raise the regulatory ratio quarterly. As of the end of last year, the average LCR for banks was 105.1%, with four banks complying with the relaxed regulatory ratio of 85%. The integrated LCR regulatory ratio for banks will be maintained at 85% until June, then increased by 5 percentage points to 90% from July to September, 92.5% from October to the end of the year, 95% in the first quarter of next year, 97.5% in the second quarter, and finally raised to 100% from July onward.

Other six relaxation measures, including the foreign currency LCR for banks, loan-to-deposit ratio, and liquidity ratios for the secondary financial sector, will be terminated immediately after the common three-month grace period as there is no market burden regarding their normalization.

Regarding the Industrial Bank of Korea’s (IBK) grace period for the application of the net stable funding ratio, which ends in June, the FSC plans to review the possibility of further extension later, considering IBK’s COVID-19 related fund supply status.

Since April 2020, the FSC and the Financial Supervisory Service have been implementing financial regulation relaxation measures in response to COVID-19. The 25 relaxation measures, including capital regulations, liquidity regulations, and business regulations by financial sector, have directly and indirectly contributed to providing financial institutions with the capacity to actively extend loan maturities and defer repayments for SMEs and small business owners affected by COVID-19, thereby expanding the flow of funds to support the real economy, such as corporate loans.

An FSC official stated, "Considering the increase in loan volumes and preparations for potential non-performing loans amid the two-year continuation of the relaxation measures, we judged that it is time to gradually start normalizing regulations. We also took into account that internationally, base interest rate hikes, additional regulatory capital accumulation, and regulatory normalization are underway." The official added, "Along with the phased normalization of the relaxation measures, we plan to thoroughly monitor related trends to ensure that financial companies maintain soundness without neglect."

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