Korea to raise banks’ capital requirements by 2.5%P

(Yonhap)

South Korea’s financial authorities will raise the capital requirements for banks and financial holding companies by up to 2.5 percentage points by the end of 2024, a move is aimed at bolstering “buffer capital” to help financial institutions better handle crises. To meet these new regulatory standards, banks are expected to either increase capital reserves or reduce lending.

The Financial Services Commission (FSC) announced on Wednesday that it would amend the financial company supervision regulations, formally introducing stress buffer capital for banks and holding companies. This capital buffer is intended to ensure that financial institutions have enough loss-absorbing capacity to survive potential crisis scenarios. According to the FSC, based on stress test results and risk management assessments, banks could be required to set aside up to 2.5 percent of their risk-weighted assets, which include loans, receivables, and securities.

The new capital rules will apply to 17 banks and eight holding companies in Korea, but state-owned banks such as Korea Development Bank and Export-Import Bank of Korea are exempt due to their obligations to cover government losses in the event of a crisis. Newly established internet-only banks will receive a two-year grace period.

The minimum common equity tier 1 (CET1) ratio requirement currently stands at 9 percent and with the introduction of the new buffer capital rule, this ratio could increase to 11.5 percent. Industry experts believe that when factoring in the additional 1.5 percent buffer most banks already maintain, the CET1 ratio might need to exceed 13 percent to meet regulatory expectations.

Among the country’s top four financial holding companies, KB Financial Group and Shinhan Financial Group are well positioned to comply with the new rules. As of the end of the first half of this year, KB Financial’s CET1 ratio stood at 13.59 percent, the highest among the major players, followed by Shinhan Financial at 13.05 percent.

However, other banks, such as Hana Financial Group and Woori Financial Group, face greater challenges in meeting the new requirements. Hana Financial, with a CET1 ratio of 12.80 percent, is expected to announce plans to raise its capital ratio in the fourth quarter. Woori Financial, which has the lowest CET1 ratio among the five major financial holding companies at 12.04 percent, is under even more pressure as it moves forward with acquisitions of Tongyang Life Insurance and ABL Life Insurance. Analysts predict the CET1 ratio will likely fall due to these mergers, and the FSC is expected to closely examine this during its regular inspection of Woori Financial later in September 2024.

Once the new buffer capital is implemented, it will complete the government’s “three-piece capital strengthening package” that aims to prevent excessive credit expansion during periods of economic growth. According to an FSC official, banks that fail to meet the capital requirements, including the stress buffer, may face restrictions on dividend and bonus payments.