Financial watchdog to raise capital standards for savings banks

[Photo by Yonhap]

South Korea’s financial authorities are pushing to raise the savings banks’ capital standards towards those for commercial banks to enhance their soundness.

According to sources from the financial sector on Tuesday, the Financial Supervisory Service (FSS) is working to amend the ‘Detailed Regulations on Supervision of Mutual Savings Bank Business’ to elevate the capital calculation standards for savings banks to the level of commercial banks. The final plan will be confirmed after consultation with the Financial Services Commission.

The FSS is considering narrowing the scope of loan loss provisions recognized as capital for savings banks. Loan loss provisions set aside for loans classified as ‘normal,’ ‘precautionary,’ and ‘substandard’ are currently recognized as part of the savings banks‘ capital (supplementary capital).

The new approach would only recognize provisions for ‘normal’ and ‘precautionary’ loans as capital, similar to commercial banks. The plan also aims to make it difficult for preferred shares, which require repayment, to be recognized as capital, just as with commercial banks, in an aim to prevent savings banks from artificially inflating their capital.

“Savings banks that fail to manage customer deposits properly will get a clear message that major shareholders should take responsibility by increasing their capital or seeking new ownership via mergers and acquisitions (M&A),” a source said.