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Financial authorities “mandatory banks with insufficient stress test results to accumulate additional capital”

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Flag of the Financial Services Commission (provided by the Financial Services Commission) 2021.4.14/News 1

In order to improve the ability of the banking sector to absorb losses, the financial authorities introduce a ‘stress buffer capital system’ that compulsorily builds up more capital for banks that fail to pass a stress test that assumes a crisis situation such as a prolonged high interest rate. In addition, in preparation for the possibility of insolvency of loan assets, which surged during the pandemic, it was decided to promote a plan to impose additional capital accumulation obligations during the second and third quarters of this year.

On the 16th, the Financial Services Commission announced that it had discussed these issues at the 3rd Banking Management, Sales Practices, and System Improvement Working Group meeting the previous day.

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The financial authorities introduce a ‘stress buffer capital system’. Banks that underperform in the stress test are obliged to build up additional capital. For each stress test grade, 0.5% and 1% more capital is accumulated.

The stress test is an operation to check a bank’s ability to absorb losses, such as whether or not it maintains adequate capital, assuming a crisis situation such as high interest rates and high exchange rates, and the financial authorities conduct periodic inspections of the bank sector. However, it is pointed out that even if the result is insufficient, it is limited to the level of ‘recommendation’ for banks to accumulate additional capital, which is less binding.

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In the case of the US Federal Reserve (Fed), it is conducting stress tests on large banks and imposing additional capital contribution obligations on underperforming banks. Last year, 30 banks were required to raise additional capital of at least 2.5% and up to 9%.

The financial authorities are planning to revise the banking supervision regulations in consideration of overseas cases. An official from the Financial Services Commission said, “To enhance the reliability of the bank stress test, we will verify the entire test process and revise the system to strengthen follow-up management.”

A countercyclical capital buffer (CCyB) is also introduced. It is a system that requires banks to accumulate up to 2.5% of additional capital during credit expansion and eases the obligation to accumulate during a credit crunch so that it can be used for supplying funds. The financial authorities introduced the countercyclical capital buffer system in 2016 as part of the Basel III capital regulation, but so far, few banks have accumulated additional capital in the name of the system.

Financial authorities decided to push ahead with a plan to impose additional capital accumulation obligations during the second and third quarters, as the possibility of insolvency of loans that sharply increased during the spread of the novel coronavirus infection (Corona 19), such as self-employed loans, has increased in the face of rising interest rates.

In addition, in consideration of overseas cases, the introduction of ‘economic neutral CCyB’ will be introduced to maintain a capital buffer at all times in preparation for external shocks such as unexpected epidemics or geopolitical risks, even when the immediate need for accumulation is not great. In the case of the UK, a 1% economic neutral buffer was introduced in 2016 in consideration of difficulties in systemic risk assessment, and will be raised to 2% from July this year.

Meanwhile, the financial authorities are in the process of amending the banking supervision regulations to introduce the already announced ‘Special Bad Debt Reserve Savings Request Right’. As the current loan loss reserve is calculated based on the minimum reserve ratio in accordance with supervisory regulations, there were limitations in expanding loss absorbing capacity by preemptively reflecting future economic fluctuations. When the system is introduced, the financial authorities will be able to request additional capital from banks that are insufficient during adequacy assessment.

A system for checking the expected loss forecast model is also being established. The regular management and supervision system for the expected loss forecast model established by each bank for the accumulation of loan loss provisions is insufficient. in progress

When the system is introduced, banks must annually check its adequacy through an independent organization’s verification, etc., and submit the results to the Financial Supervisory Service. The Financial Supervisory Service may take necessary measures, such as requesting improvement, if it is determined that the inspection results are insufficient.

At a meeting the previous day, Vice Chairman Kim So-young of the Financial Services Commission said, “As concerns over volatility and uncertainty in the financial market have increased due to the recent Silicon Valley Bankruptcy in the US, it is an important time to improve the soundness of the financial sector.” It is necessary to actively promote related institutional improvements to enhance the loss absorption capacity of the banking sector, such as imposing a response buffer capital and promoting the introduction of a stress buffer capital that accumulates additional capital according to the results of the stress test.”

The financial authorities plan to materialize the detailed maintenance plan in the first half of this year and promote institutional improvement from the second half of this year.

Source: Donga

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