Banks are voicing the necessity of a postponement of the stress buffer capital regulation scheduled to be introduced in the second half of this year. This is because corporate loans have significantly decreased due to the burden of risk-weighted asset (RWA) ratios from exchange rate risks. Financial authorities are also considering easing soundness regulations to alleviate the burdens on financial institutions.
According to the financial sector on the 16th, the corporate loan balance of the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NongHyup) was 825.2093 trillion won at the end of last month, a decrease of 2.4937 trillion won compared to the end of February. Expanding to the entire banking sector, there was a decrease as well; according to the Bank of Korea's 'March Financial Market Trends,' the corporate loan balance was 1324.3 trillion won, down by approximately 2.1 trillion won from the previous month. The decline in corporate loans as of March is the first in 20 years since March 2005.
Banks explain that the decrease in corporate loans was an inevitable measure to maintain soundness due to risk-weighted assets (RWA). Even with the same asset size, a higher RWA indicates a lower retrieval possibility, and corporate loans have a higher RWA than secured loans. This leads banks to engage in risk management to lower the RWA, which is the denominator for the Capital Adequacy Ratio of the Bank for International Settlements (BIS).
The persistence of high exchange rates is also a reason for the reduction in corporate loans. When exchange rates rise, the won equivalent of foreign currency loans increases, leading to a rise in RWA. Since the end of last year, the won exchange rate against the U.S. dollar has consistently remained in the 1400 won range, making it challenging to actively market high-risk corporate loans.
A representative from a commercial bank noted, "The authorities' atmosphere is to actively support sectors or asset types that increase the RWA, such as small and medium-sized enterprises. However, it is true that an increase in RWA is burdensome for banks. The postponement of the stress buffer capital regulation is a demand to alleviate the overall burden on banks, in addition to the downward adjustment of risk weights."
The stress buffer capital demanded by the banking sector imposes an obligation on banks to hold additional capital reserves to strengthen loss absorption capabilities in crisis situations. Depending on the decline level of the common equity capital ratio based on crisis situation analysis (stress tests), a maximum obligation of 2.5 percentage points for additional capital reserves is imposed. The authorities postponed the regulation's implementation from the first half to the second half of this year due to concerns over falling capital adequacy ratios as exchange rates surged last year. This is because the introduction of the stress buffer capital could further worsen asset soundness figures such as the common equity tier 1 (CET1) ratio.
Last year, while postponing the stress buffer capital regulation, both the authorities and the banking sector expected corporate finance to expand. However, due to the continued high exchange rates and ongoing risks such as U.S. tariff policies, corporate finance has shrunk further. In this situation, to increase new corporate loans and supply funds to corporations, calls are growing for the inclusion of the postponement of the stress buffer capital regulation alongside the RWA weight adjustment that financial authorities are reviewing. It has been reported that the authorities have also begun review of related matters.
Another representative from a commercial bank indicated, "Given that the authorities are asking the banking sector to focus on supporting medium-term loans this year for physical settlement, it is a crucial time for policies that reduce the risks faced by banks." They added, "Discussions on additional regulatory relief will be conducted at the association level through the Banking Association."