Banks have decided to ask the financial authorities to ease, in part, the timing and period for reflecting penalty surcharges in risk-weighted assets (RWA). Currently, when regulators impose a penalty surcharge, banks must reflect in RWA for 10 years capital equal to the amount plus 600%, which banks say is excessive. For example, if a bank receives a 1 trillion won penalty surcharge, it must reflect 7 trillion won in RWA. A higher RWA can reduce a bank's loan limit.
According to the industry on the 17th, banks plan to ask the financial authorities' new "financial sector regulatory rationalization task force (TF)" to ease RWA rules. The regulatory rationalization TF is expected to be formed as a sub-TF under the government's ongoing "productive finance grand shift council." Through the TF, the government identifies tasks to improve systems for the productive finance grand shift.
Banks argue that the current rules requiring immediate reflection of unfinalized penalty surcharges in RWA are problematic. Some penalty surcharges are reduced or canceled through civil or administrative litigation, they say, and long-term reflection in RWA reduces capacity for productive finance.
RWA is an indicator calculated to reflect the risk of financial assets held, such as loans, stocks, and bonds. As RWA burdens rise, banks' soundness ratios decline, reducing lending capacity. The global financial regulatory framework "Basel rules" classifies penalty surcharges on banks as credit or operational risk.
Banks face heavy penalty surcharge exposure next year due to issues such as the misselling of Hong Kong H-index equity-linked securities (ELS) and the Korea Fair Trade Commission (FTC)'s case related to collusion on loan-to-value (LTV) ratios for dwellings. Late last month, the Financial Supervisory Service gave prior notice of sanctions totaling 2 trillion won in penalty surcharges and fines to five banks: Kookmin, Shinhan, Hana, NongHyup, and Jeil. On that basis, the five banks would have to reflect 14 trillion won in RWA over 10 years. Banks also expect the FTC's penalty surcharges over alleged LTV collusion to reach at least several hundred billion won.
Banks want the timing for reflecting penalty surcharges in RWA to be pushed back to when a first-instance court decision is finalized, rather than at the time of the regulator's imposition, or to reflect only part of the amount before litigation ends. They also plan to propose reducing the RWA reflection period for penalty surcharges from the current 10 years to 5 years.
The financial authorities are cautious, saying the RWA rules were established in line with international standards. Loosening the application of those standards could hurt future assessments of Basel implementation and undermine external credibility.
An official at the financial authorities said, "There is room for discussion on when to consider the risk timing of a penalty surcharge as finalized," and added, "We are discussing options such as not reflecting it in RWA until the penalty surcharge is finalized."