The Financial Services Commission and the Financial Supervisory Service plan to rationalize sector-by-sector capital regulations to secure up to 98.7 trillion won in additional resources for productive finance, including 74.5 trillion won from the banking sector and 24.2 trillion won from the insurance sector.
The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) held the fifth meeting on the great transition to productive finance on the 16th, chaired by Lee Eog-weon, chair of the Financial Services Commission. Lee Eog-weon asked banks to move away from business practices centered on existing collateral and guarantees and expand funding to areas with high future growth potential, strategic industries, and export sites.
For the insurance sector, leveraging its characteristic of managing long-term assets, they requested an expansion of long-term investments in national infrastructure and the energy transition. They also asked for a swift response to the funding needs of small business owners and small and midsize enterprises struggling due to the Middle East crisis, based on the secured capacity to supply funds.
The financial authorities will pursue a plan to exclude from the calculation of operational risk any large-scale loss events with a low likelihood of recurrence if certain conditions are met. If remaining legal risks have been resolved—such as through the establishment of recurrence prevention measures, completion of sufficient compensation, and conclusion of legal disputes—the events can be excluded after a review for exclusion. Once implemented, the common equity tier 1 (CET1) ratio of the five major banking groups is expected to rise by up to 26 bp (1 bp = 0.01 percentage point).
In addition, the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) decided, taking into account overseas examples, to expand the scope of recognized structural foreign exchange positions to include long-term overseas equity investments and retained earnings of overseas branches. Through this, they plan to exclude these from market risk calculations and ease capital ratio volatility caused by exchange rate fluctuations. When this measure is implemented, an increase of up to 12 bp in CET1 by holding company is expected. Banks will also push to improve internal credit rating models. When redeveloping models whose credit risk discriminatory power has deteriorated, the authorities plan to expedite approval of changes through batch reviews of similar cases and checks focused on key items.
Capital regulation rationalization will also be pursued in the insurance sector. Referring to global norms, they will rationalize risk factors and overhaul the calculation framework for the risk-based capital ratio (K-ICS) to expand investment capacity. Plans include reducing risk factors for policy program investments, lowering risk factors for eligible venture investments, and expanding infrastructure investments, including renewable energy and AI infrastructure.
They will also push to improve the matching adjustment system, classify certain government-partially-guaranteed infrastructure loans as risk-free, and rationalize the measurement of risk amounts related to leveraged funds and blind funds. They plan to enhance the sophistication of capital calculations by introducing internal models for insurers and improving the calculation standards for liquidity premiums. Through these system improvements, the insurance sector is expected to secure up to 24.2 trillion won in additional capacity to supply funds.