'Startled by SVB' Financial Authorities Consider Introducing 'Countercyclical Buffer Capital' to Banks

Stress Buffer Capital System Also Being Considered for Introduction

Financial authorities are actively considering imposing a 'Countercyclical Capital Buffer (CCyB)' within this year. Additionally, they plan to introduce a 'Stress Capital Buffer' system that differentially imposes additional capital accumulation obligations based on each bank's stress test results. The aim is to have banks accumulate extra capital so they can maintain soundness even during economic crisis phases.

On the 16th, the Financial Services Commission announced the "Direction for Enhancing Soundness Systems to Improve Banks' Loss Absorption Capacity," based on the results of the 3rd Working-Level Meeting of the Banking Sector Management, Business Practices, and System Improvement Task Force (TF) held on the 15th.

The authorities' move to revise capital adequacy and provisioning systems comes as the soundness of domestic banks deteriorated due to last year's interest rate and exchange rate increases, heightening the need for proactive risk management. Kim So-young, Vice Chairman of the Financial Services Commission, stated, "Given the increased volatility and uncertainty concerns in financial markets following recent incidents such as the Silicon Valley Bank crisis in the U.S., enhancing the soundness of the financial sector is crucial at this time," adding, "We will actively pursue improvements in capital adequacy and loan loss provisioning systems to strengthen banks' loss absorption capacity."

As of the end of September last year, the common equity tier 1 capital ratio of domestic banks stood at 12.26%, exceeding the regulatory ratio (7.0~8.0%), but it showed a declining trend compared to the end of 2021 (12.99%) due to bond valuation losses and other factors. This level is relatively low compared to major countries such as the U.S. (12.37%) and the U.K. (15.65%).

Delinquency rates, which had decreased during the COVID-19 pandemic, have recently been gradually rising, especially in the household sector, due to factors such as increased loan interest rates. An official from the authorities added, "Considering the possibility of statistical distortions caused by COVID-19 support measures, the actual delinquency rate is expected to be higher."

Accordingly, the authorities have decided to actively consider imposing the countercyclical capital buffer within this year as a measure to enhance the capital adequacy of domestic banks. The countercyclical capital buffer requires banks to accumulate additional capital (0~2.5%) during credit expansion periods and allows the relaxation and use of this obligation when credit contraction occurs.

Since there is a possibility that the surge in loans during the COVID-19 response may become non-performing in the future, the authorities are reviewing the imposition of additional capital accumulation obligations in the second to third quarters. Korea also introduced the countercyclical capital buffer system in 2016 as part of Basel I and II capital regulations, but the current accumulation level remains at 0%.

Furthermore, referencing cases from major overseas countries, the authorities plan to operate a 'neutral countercyclical capital buffer' system continuously, which maintains a capital buffer at all times to prepare for unexpected external shocks, even when no signals warranting additional capital accumulation have occurred.

In addition, the authorities are promoting the introduction of a 'Stress Capital Buffer' system. Under the current system, there is no legal basis to impose direct supervisory measures such as requiring additional capital accumulation for individual banks even if stress test results are inadequate. Therefore, referring to overseas cases, they plan to impose additional capital accumulation obligations based on each bank's test results.

In the U.S., the Federal Reserve conducts stress tests on large banks and imposes differentiated additional capital accumulation obligations based on the results. Last year, more than 30 banks were required to accumulate additional capital ranging from 2.5% to 9.0%. The authorities also plan to strengthen verification and post-management to enhance the reliability of bank stress tests concurrently.

The provisioning system will also be revised. The authorities are promoting the establishment of a 'Special Loan Loss Provision Accumulation Request Right,' which requires banks to accumulate additional loan loss reserves if their provisions and reserves are deemed insufficient relative to expected losses. They are also working on building a 'Expected Loss Forecast Model Inspection System' to periodically review banks' expected loss forecasting models for provisioning. The authorities announced changes to the banking supervision regulations including these measures at the end of January.

A Financial Services Commission official said, "Regarding measures to enhance capital adequacy, we will specify detailed improvement plans in the first half of the year and begin system improvements from the second half," adding, "The provisioning system, for which regulatory amendments are currently underway, will also be implemented within the first half of the year."

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