Preventing Major Bank Losses... Formal Introduction of 'Large Exposure Regulation'

Financial Authorities Announce Regulatory Changes Including Bank Supervision Rules
Effective January 1 Next Year

The financial authorities will officially introduce the 'Large Exposure Limit Regulation,' which manages large exposures (risk exposures) to be within 25% of the basic capital to prevent banks from incurring significant losses due to counterparty defaults.

On the 9th, officials were busy moving in the corridor of the Financial Services Commission at the Government Seoul Office in Jongno-gu, Seoul, where the financial authorities decided to include mortgage loans (Judaemae) in the 'debt refinancing' infrastructure scheduled to be launched in May by the end of the year. The financial authorities explained that they aim to reduce the interest burden on mortgage loans by establishing a debt refinancing platform that allows users to compare financial sector loan interest rates at a glance and switch loans easily. Photo by Dongju Yoon doso7@

On the 5th, the Financial Services Commission and the Financial Supervisory Service announced that they will notify changes to regulations, including the Banking Act Enforcement Regulations, Banking Act Enforcement Rules, Financial Holding Company Supervision Regulations, and Financial Holding Company Supervision Rules, by the 15th to include this content. The amendment is expected to be implemented from January 1 next year after review by the Regulatory Reform Committee and approval by the Financial Services Commission following the notification of regulatory changes.

The Basel standard large exposure limit regulation is a framework established in 2014 by the Basel Committee on Banking Supervision (BCBS) to supplement the limitations of existing capital regulations during financial crises. It aims to prevent large losses to banks in the event of a default by a counterparty with concentrated exposure.

The Basel Committee recommended implementing this regulation by January 2019, but the financial authorities have been enforcing it in the form of administrative guidance since March 2019. Formal institutionalization has been continuously postponed due to the COVID-19 situation. Accordingly, the authorities prepared this amendment based on the Basel standards and the current administrative guidance, the 'Basel Standard Large Exposure Limit Management Criteria.'

This amendment is similar to the current credit extension limit system in that banks and bank holding companies are required to manage exposure per counterparty within 25% of BIS basic capital to prevent large losses from counterparty defaults.

However, the amendment differs in that it considers not only control relationships but also economic dependence relationships regarding counterparties. Control relationships refer to relationships where control is exercised by holding more than 50% of voting rights or having the authority to appoint or dismiss directors, while economic dependence relationships refer to relationships where the insolvency or risk of insolvency of one company can spread to another company.

Furthermore, regarding the scope of exposure, it includes credit extensions such as loans and financial support, financial products such as stocks and bonds, and guarantee amounts provided by guarantors. The authorities explain that this allows integrated risk management of exposures per counterparty for banks and bank holding companies, which is more comprehensive than the current credit extension limit system under existing law.

Considering domestic particularities, the authorities have established somewhat relaxed standards compared to the Basel standards, such as exempting guarantee exposures by guarantee institutions on personal loans closely related to housing-related loans and the stability of ordinary citizens from regulation. Additionally, a two-year grace period has been granted to Korea Development Bank to prevent a sudden contraction of funding for restructuring companies, and export credit agencies such as the Export-Import Bank of Korea, foreign bank branches, and internet-only banks that do not handle large corporate financing are excluded from the scope.

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