Easing of Bank RW Regulations: Impact on Stocks, Funds, and Bonds

Banks Gain KRW 31 Trillion in Investment Capacity...
Likely to Increase Equity and Fund Holdings
Mortgage Lending to Decrease, Corporate Loans to Rise
in Line with Government Policy
Rising Demand from Banks for AAA to AA-Rated Corporate Bonds<

Recently, the government announced its "Direction for Promoting a Major Shift Toward Productive Finance." The core objective is to alleviate the concentration of funds in real estate and strengthen the role of financial institutions to ensure that capital flows to businesses in need. As a detailed measure, the government also unveiled the "Rationalization Plan for Bank and Insurance Capital Regulations for Productive Finance."

According to iM Securities' report titled "Productive Finance Transformation: Impact on Bank Credit," this plan is expected to increase banks' investment capacity by approximately 31 trillion won. The report also projects that the concentration of mortgage loans will be mitigated, corporate loans will increase to a limited extent, demand from banks for AAA to AA-rated corporate bonds will rise, and purchases of bonds with a risk weight of zero will also grow.

Direction of Bank Sector's Shift Toward Productive Finance

This plan can be summarized in three main points. First, the minimum risk weight (RW) for mortgage loans will be raised. In the banking sector, institutions choose between the standardized approach and the internal ratings-based approach for different asset exposures. For mortgage loans, most banks use the internal ratings-based approach. Accordingly, the minimum risk weight under the internal ratings-based approach will be raised from 15% to 20%. However, to prevent a sudden increase in capital burden for banks, this will apply only to newly issued mortgage loans. Raising the minimum RW for mortgages will lower the BIS capital adequacy ratio, which is a key indicator of bank soundness, thereby prompting banks to restrain mortgage lending.

Second, the RW for banks' equity holdings will be improved. Under current domestic regulations, a 400% RW is generally applied to equities, with a 250% rate only for listed shares or unlisted shares of companies with long-term business relationships (principle: 400%, exception: 250%). Going forward, in line with BIS standards, a 250% RW will generally apply, with a 400% RW only for venture shares held for less than three years for short-term trading purposes or those exposed to price volatility (principle: 250%, exception: 400%).

Third, the RW for fund investments will also be improved. As the RW for equities is improved, the RW for funds will automatically improve as well. The requirements for policy-support funds will be clarified, and guidelines will be provided. This paves the way for banks to actively participate in the activation of policy funds such as the National Growth Fund, which is being established to strengthen advanced industrial capabilities.

Credit Impact of Regulatory Changes

Three major changes are expected in the credit market as a result of these regulatory adjustments. First, as the concentration of mortgage loans in the banking sector is alleviated, corporate loans are expected to increase to a limited extent. The government has indicated its intention to induce banks to reduce mortgage lending by raising the minimum RW for mortgages. A reduction in mortgage lending directly leads to an increase in corporate loans. Lee Seungjae, an analyst at iM Securities, explained, "Since RWs are calculated differently for large corporations and small and medium-sized enterprises, selective lending is expected under the current focus on capital soundness. Also, because the minimum RW for mortgages is lower at 20% than the current average RW for corporate loans, which is known to be about 43%, this will not result in a sharp increase in corporate loans."

Second, demand from banks for AAA to AA-rated corporate bonds is expected to rise. With this RW regulatory change, domestic banks' total capital adequacy ratios will improve by an average of about 0.24 percentage points. This will reduce risk-weighted assets by about 31.6 trillion won, thereby increasing investment capacity by the same amount. Analyst Lee Seungjae predicted, "Banks' asset portfolios are expected to become more diversified, and demand from banks for high-quality corporate bonds rated AAA to AA will improve as a result."

Third, banks are expected to continue including assets with a risk weight of zero in their portfolios to maintain capital adequacy ratios. The minimum RWA under the Basel III standardized approach will be gradually raised from the current 60% to 65% in 2026, 70% in 2027, and 72.5% in 2028. As risk-weighted assets expand, banks facing increased capital burdens are expected to increase their purchases of government-guaranteed bonds and policy bank bonds, both of which have a risk weight of zero, to maintain capital soundness.

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