Financial authorities will raise the risk weight on home mortgage loans and lower the risk weight on stocks. The move tweaks related regulations to curb mortgages so that capital in the financial sector can flow into productive areas such as venture corporations rather than dwellings and real estate.
On the 19th, Financial Services Commission Chairman Lee Eok-won presided over the "1st great transition to productive finance" meeting at the Korea Federation of Small and Medium Enterprises in Yeongdeungpo District, Seoul, and said, "To ease the concentration of funds into dwellings and real estate, we will raise the lower bound of the risk weight for new bank mortgages from the current 15% to 20%."
If the lower bound of the risk weight for mortgages is raised, the amount of mortgages banks can extend will shrink. This is because, under the Bank for International Settlements (BIS) ratio regulations, banks must hold a certain ratio of capital against risk-weighted assets. Banks would need more capital to maintain mortgages at current levels. That would lead to a decrease in new mortgage supply.
Financial authorities decided to lower the risk weight related to banks' stock holdings from the current 400% to 250%. However, a 400% risk weight will apply only to unlisted stocks or venture capital invested for short-term trading purposes. The authorities projected that this would reduce risk-weighted assets in the banking sector by 31.6 trillion won, expanding capacity for loans to corporations.
Amendments to the Detailed Regulations on Supervision of the Banking Business related to changes in mortgage and stock risk weights will be pursued in the first quarter of next year. The authorities will continue to review additional improvement tasks for the banking sector through the "financial company transition" task force (TF).
The meeting also discussed management plans for the 150 trillion won "National Growth Fund," which will invest in the ecosystem and infrastructure of future strategic industries. The National Growth Fund is composed of 75 trillion won from the advanced strategic industry fund and 75 trillion won from private, national, and financial-sector funds. The authorities estimated that the fund would generate added value equivalent to 1% of nominal gross domestic product (GDP) for one year.
Financial authorities will identify "megaprojects" that could serve as symbols of the National Growth Fund and provide an integrated package solution covering regulation, taxation, fiscal policy, finance, and workforce development.
The authorities also decided to review support measures for adjusting asset-liability cash flows so that insurers can become long-term stable investors. The idea is to induce insurers to invest in assets with yields higher than Government Bonds. The authorities explained that, in the case of unlisted stocks, risk had been overestimated relative to fundamentals, dampening investment incentives.
Financial-sector participants at the meeting emphasized rationalizing prudential and investment regulations and revitalizing the Kosdaq market. Industry representatives requested improvements to the corporate venture capital system, the introduction of a shared growth finance index for small and midsize corporations, and measures to boost mergers and acquisitions (M&A).
Lee said, "Criticism persists that Korean finance seeks easy interest income, such as collateralized lending," adding, "It is time for finance, which serves as the rudder for the national economy, to solve the problems it faces and lead growth to shape the future of a rebounding Korean economy."