Preparing for Loan Defaults... Financial Authorities Tell Banks to "Enhance Loss Absorption Capacity"

'Banking Sector Management and Business Practice Improvement Measures' Task Force (TF)
Corporate Insolvency and Delinquency Rate Rise... Banks Must Prepare for Impact
Imposition of Countercyclical Capital Buffer, Accumulation of Special Loan Loss Reserves

Financial authorities have imposed countercyclical capital buffers on banks to enhance their loss-absorbing capacity in preparation for an economic downturn, and have also taken measures to increase provisions.

The Financial Authorities' Task Force (TF) on 'Improvement Measures for Banking Sector Management and Business Practices' announced on the 5th that it has prepared a plan to enable banks to maintain sufficient loss-absorbing capacity through banking sector profits for risk management purposes.

Kim So-young, Vice Chairman of the Financial Services Commission, stated, "Corporate loans are increasing, capital ratios are declining due to expanded dividends and bond losses, and delinquency rates are rising," adding, "Accordingly, a 1 percentage point countercyclical capital buffer has been imposed this year." The countercyclical capital buffer system requires banks to accumulate additional capital within a range of 0 to 2.5% of risk-weighted assets. Although introduced in 2016, it has not been imposed until now.

If banks are judged to have insufficient loan loss provisions and reserves compared to expected future losses, financial authorities may require them to set aside special loan loss reserves. While the banking sector's loss-absorbing capacity remains sound, the authorities believe that additional soundness measures are necessary due to increasing uncertainty. Although provision accumulation continues to rise, the delinquency rate is also increasing, which must be taken into account.

As of March, the banking sector's loan loss provisions amounted to 24 trillion won, with a provision coverage ratio of 229.9%. Compared to the end of 2018, just before the COVID-19 outbreak (19.1 trillion won, 104.1%), the amount increased by 4.9 trillion won and the coverage ratio rose by 125.8 percentage points.

Meanwhile, the banking sector's delinquency rate was 0.37% as of April. During the COVID-19 period, loan maturity extensions and repayment deferrals were implemented mainly for self-employed individuals, causing the delinquency rate to fall to 0.21% by the end of 2021. However, as loan interest rates sharply increased in the second half of last year, the delinquency rate also rose accordingly.

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