SK FSC Banks Loss Absorption Capacity

On Mar. 16, SK FSC, SK FSS indicated directions on loss absorption.

  • SK FSC, SK FSS indicated directions on prudential system for loss absorption capacity.
  • Follows SK FSC Mar. 2023 held the third meeting to discuss measures, see #163702.
  • Follows SK FSC, SK FSS Jan. 2023 proposed on loss absorption capacity, see #161342.
  • Background
  • As of Sep. 2022, the common equity capital ratio (CET1) was 12.26%, higher than regulatory requirement but lower than other major countries such as EU and UK.
  • CET1 measuring capacity adequacy has been dropping due to bond valuation decrease.
  • Delinquency rate is rising centered on household sector due to rise in loan interest.
  • Promote soundness system maintenance for preemptive risk management.
  • Future Directions
  • Imposing additional capital accumulation obligations based on countercyclical buffer (CCyB) during 2nd/3rd quarters to prepare for any future insolvency of loans.
  • Introduce a stress buffer system that imposes additional capital accumulation obligations in accordance with the results of stress tests for individual bank.
  • Introduction of right to request the accumulation of special bad debt reserve.
  • Establishment of expected loss forecast model inspection system on annual basis.
  • Future Plan
  • Materialize detailed plans in 1H2023; promote institutional improvement in 2H2023.
  • Expect to implement revisions to regulations on supervision of banks in 1H2023.
  • May 2023 Raise of CCyB Level
  • On May 24, 2023, SK FSC, SK FSS decided to raise CCyB level to 1%, to increase confidence in soundness of banks via improved loss absorption abilities against risks.
  • Domestic banks and bank holding companies shall accumulate 1% of countercyclical capital starting May 1, 2024, after a 1-year capital accumulation preparation period.
  • SK FSS and SK FSC will monitor impacts of CCyB on the market and promptly take actions by adjusting the level and implementation timing of CCyB, if necessary.
  • In Nov. 2023, SK FSC, FSS said revisions to banking rules were passed, see #190009.

Regulators SK FSC; SK FSS
Entity Types Bank; BHC
Reference Gd, PR, 5/24/2023; Gd, PR, 3/16/2023; CCyB
Functions Actuarial and Valuation; Compliance; Financial; Legal; Operations; Reporting; Risk; Treasury
Countries South Korea
Products Banking; Equity; Fixed Income; Loan; Securities
Regions AP
Rule Type Final
Rule Date 3/16/2023
Effective Date 5/1/2024
Rule Id 166240
Linked to Rule :190009
Reg. Last Update 5/24/2023
Report Section International

Last substantive update on 05/25/2023