The financial authorities will drastically ease capital regulations for the banking and insurance sectors to secure an additional 100 trillion won for productive finance. In banking, the period for reflecting penalty surcharges in the calculation of risk assets will be reduced to 3 years from the current 10, and in insurance, capital accumulation rules will be eased by more than half for long-term investments in policy programs.
Lee Eog-weon, chairperson of the Financial Services Commission, on the 16th held the "5th productive finance grand transition meeting" at the Korea Deposit Insurance Corporation (KDIC) in Jung-gu, Seoul, and prepared a plan to rationalize capital regulations for the banking and insurance sectors.
The financial authorities projected that the rationalization of capital regulations will secure up to 98.7 trillion won in additional capacity for productive finance supply, including 74.5 trillion won in banking and 24.2 trillion won in insurance.
Under the rationalization plan, for large loss events in banking with a low probability of recurrence, such as government penalty surcharges, the period for reflecting related losses in operational risk will be shortened to 3 years. Currently, when a bank receives a penalty surcharge, about seven times the amount must be reflected in risk-weighted assets (RWA) for 10 years.
The financial authorities said that if recurrence prevention measures are in place and any remaining legal risks are resolved—such as completion of sufficient compensation and conclusion of legal disputes—they will exclude the loss event from operational risk calculation through an exclusion review. Banks that received penalty surcharges related to the misselling of Hong Kong H-index equity-linked securities (ELS) and collusion on the loan-to-value ratio (LTV) for mortgage loans are expected to see a significant reduction in capital accumulation burdens.
Banks' structural foreign exchange positions will be expanded to include overseas long-term equity investments and retained earnings of overseas branches. A structural position refers to an exception applied when reflecting the investment of a financial company's local subsidiary or branch that has expanded abroad in market risk.
If a bank redevelops an outdated credit scoring model, the financial authorities will promptly review it to invigorate credit supply to corporations. Improving credit scoring models can enhance the ability to identify growth companies and, with improvements in soundness and profitability, raise capital ratios.
For insurers, when investing in policy programs such as the Public Growth Fund, the risk factor under the new risk-based capital regime (K-ICS) will be reduced to 20% or lower from 49% (for unlisted stocks, etc.). A risk factor is an indicator that determines how much additional capital an insurer must accumulate based on the risk level of insurance products and assets. When an insurer invests in risky assets, it must accumulate more capital to prepare for losses.
The risk factor for qualifying venture investments will also be reduced to 35% from 49%. Qualifying venture investments refer to cases where investments are made in the shares of corporations verified as venture businesses under the Special Act on the Promotion of Venture Businesses, or through venture funds such as new technology business investment partnerships.
The scope of "qualifying infrastructure" eligible for the infrastructure special measure for insurers (applying a 20% risk factor) will include renewable energy and artificial intelligence (AI) infrastructure.
The matching adjustment regime will also be activated. The matching adjustment is a system in which, when the cash flows of specific assets and insurance liabilities are similar, the yield of the relevant assets—not Government Bonds—is used as the discount rate for those liabilities. Under the current regime, strict requirements, such as demanding fixed cash flows for assets and liabilities with 100% matching, meant there were no actual cases of use. Accordingly, matching adjustments will be allowed for variable-rate assets within a certain mismatch ratio (e.g., within 10%).
The risk factor for mortgage loans handled by insurers will also be improved. For mortgages with an LTV of 60% to 80%, the risk factor will be raised to 4.0% from the current 3.5% to align with the banking sector level.
For certain government-guaranteed infrastructure loans, the guaranteed portion will be classified as risk-free (risk factor 0). The method of measuring risk amounts will also be rationalized, such as excluding leverage funds when the policy states the borrowing purpose is liquidity management and the borrowing period is specified as within one year. Insurers will introduce internal models for calculating required capital and improve the criteria for calculating the liquidity premium.
Lee Eog-weon said, "Based on the secured capacity to supply funds, please respond swiftly to the funding needs of small business owners and small and midsize companies, which are suffering more from the Middle East situation, and become a 'reliable pillar of the people's economy.'"