Government Eases Bank and Insurance Capital Regulations Significantly... Secures 98.7 Trillion Won for 'Productive Finance'

FSC Holds 5th Productive Finance Transformation Meeting

Banks to Ease Loss Recognition Rules for Low-Recurrence Financial Incidents

Insurers to Lower Risk Coefficients for Policy Fund Investments

Lee Eogwon: "Policy Supplementary Budg

The government will ease capital regulations for the banking and insurance sectors to expand productive finance, thereby securing up to 98.7 trillion won in additional funding capacity. This measure is intended to support the provision of funds to the real economy and to assist companies affected by the Middle East crisis, as part of efforts to bolster 'productive finance'.

The Financial Services Commission and the Financial Supervisory Service announced on the 16th that they held the 5th 'Productive Finance Great Transformation' meeting, chaired by Financial Services Commission Chairman Lee Eogwon, and unveiled plans to rationalize capital regulations for banks and insurance companies.

Lee Eogwon, Chairman of the Financial Services Commission, stated, "With these capital regulation rationalization measures, the banking sector will secure an additional funding capacity of 74.5 trillion won, and the insurance sector 24.2 trillion won, bringing the total to as much as 98.7 trillion won. This is essentially a 'policy supplementary budget measure,' which is expected to serve as a catalyst for overcoming the current crisis and driving economic resurgence."

Financial authorities will first ease the way operational risk is calculated for banks. Until now, banks reflected 6 to 7 times the amount of fines imposed for financial incidents as operational risk, including these amounts in risk-weighted assets (RWA) for up to 10 years. However, if large-scale incidents with a low likelihood of recurrence meet certain criteria, the capital burden can be reduced. For banks, a financial incident is defined as one where the average annual loss exceeds 5%.

Specifically, if effective recurrence prevention measures such as internal control improvements, institutional enhancements, or business discontinuation are in place, and losses have been reflected for at least three years, such losses can be excluded from operational risk. As a result, the Common Equity Tier 1 (CET1) ratio for the five major bank holding companies is expected to rise by up to 26 basis points.

However, in the case of the Hong Kong H Index (Hang Seng China Enterprises Index, HSCEI) equity-linked securities (ELS) misselling fines, for which a conclusion may be reached as early as the end of this month, the relaxed capital regulation is unlikely to be applied immediately, as the requirement for recognizing the loss for more than three years will not be met.

In addition, the scope of structural foreign exchange positions will be expanded to include long-term overseas equity investments and retained earnings of overseas branches, which will be excluded from the calculation of 'market risk'. This measure, which aims to reduce capital burdens arising from recent foreign exchange volatility, will be implemented immediately to strengthen banks' capital buffers.

The process for approving changes to banks' credit rating models will also be streamlined, thereby shortening the review period.

Furthermore, the introduction of a 'stress capital buffer', which would require banks that do not pass the authorities' stress tests to hold additional capital, will be effectively deferred. The timing of its introduction will be reviewed in consideration of domestic and international economic conditions.

For the insurance sector, various risk coefficients will be rationalized to expand the capacity for supplying funds. The solvency ratio (K-ICS) requires insurance companies to maintain available capital of at least 100 percent of required capital in order to cover unexpected crises. The calculation methods for various risk amounts, which are the main components of required capital, will be eased.

First, when investing in policy programs such as the National Growth Fund, the risk coefficient for unlisted stocks and similar assets will be lowered from 49 percent to 20 percent or less. To this end, a special provision for policy programs will be established, and if a plan to invest for more than 10 years is set up—including unlisted stocks and funds—the special provision will apply.

Venture investments will also be relaxed. For investments in stocks of venture companies or venture funds under the Special Act on the Promotion of Venture Businesses, the risk coefficient will be reduced from 49 percent to 35 percent, which is the level applied to listed stocks. In the case of fund investments, the same standard will be applied to the entire amount without decomposing individual assets. The scope of infrastructure investments eligible for a 20 percent risk coefficient will also be expanded from roads and ports to include renewable energy and artificial intelligence (AI) infrastructure.

Additionally, the regulation on asset-liability cash flow matching will be partially eased, allowing a mismatch of up to 10 percent for variable interest rate assets. This will help reduce credit risk amounts related to insurance companies' loans and bonds. The risk calculation methods for leverage funds and blind funds will also be improved to be more flexible.

However, capital regulations related to mortgage loans in the insurance industry will be strengthened. The risk coefficient for the loan-to-value (LTV) ratio range of 60 to 80 percent will be raised from 3.5 percent to 4.0 percent to align regulatory standards with those applied to the banking sector.

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