"Raising Provision Standards for Secondary Financial Institutions, Establishment of Bank Special Loan Loss Reserve Demand Rights"

Financial Services Commission Holds 4th Financial Risk Response Task Force Meeting

[Asia Economy Reporter Sim Nayoung] The Financial Services Commission (FSC) has decided to raise the provisioning standards for high-risk multiple debtors in the secondary financial sector. Accordingly, it will regulate the credit limits of specialized credit finance companies (specialized credit finance companies) in the construction and real estate industries. A system will also be established that allows financial authorities to require additional reserves when the banks' loan loss provisions and reserves are deemed insufficient.

On the 31st, Kim Soyoung, Vice Chairman of the FSC, held the 4th Financial Risk Response Task Force (TF) meeting to discuss measures to enhance the financial sector's loss absorption capacity. Vice Chairman Kim stated, "We will review the level of loan loss provisions to ensure that banks and the secondary financial sector have sufficient loss absorption capacity," adding, "We will raise the loan loss provision rates for the secondary financial sector and establish a special loan loss reserve requirement for banks."

The FSC plans to raise the provisioning standards for high-risk multiple debtors in the secondary financial sector, including savings banks, mutual finance, and specialized credit finance companies. For example, savings banks will increase the loan loss provision rate to 130% for multiple debtors who have borrowed from 5 to 6 financial institutions, and to 150% for those who have borrowed from 7 or more financial institutions.

Currently, credit limits on construction and real estate loans applied to savings banks and mutual finance will be expanded to specialized credit finance companies. The real estate project financing (PF) loan claims and debt guarantees of specialized credit finance companies will be limited to within 30% of their credit assets.

The special loan loss reserve requirement is a system whereby financial authorities can require banks to make additional reserves if loan loss provisions and reserves are deemed insufficient compared to expected losses.

A system to review the adequacy of the loan loss provision models used to measure expected losses will also be established. Banks will self-assess their loan loss provision models at the end of each year and submit the results to the Financial Supervisory Service (FSS), which will review the results for each bank and request improvements if deficiencies are found.

The FSC also conducted stakeholder consultations to reactivate measures such as the resumption of purchases by the 'Bond Market Stabilization Fund,' which was established in response to bond market instability in 2020 due to COVID-19. Additionally, it plans to integrate the purchase limits of corporate bond and commercial paper (CP) purchase programs and add purchases worth 6 trillion won. The FSC will also consider extending the program operation period and expanding the purchase scale in the future.

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