Enterprise debt to be bigger while household debt to be fixed in KRW 40 trillion…Financial sector to change capital regulation
Kim Dong Wook | east@ | 2018-01-22 11:04:14
The Korean government is expected to manage the financial system in order to transform the flow of capital funds into the `productive financing` centered on corporate loans, which is focusing on household loans and real estate. Through this, the government plans to limit the increase in household loans, mainly mortgage loans, to around KRW 40 trillion.
The Financial Supervisory Commission, the Financial Supervisory Service and the Bank of Korea announced the revised capital regulation for `productive finance`.
The key to this reform plan is not to narrow down the path from the financial sector to household loans but to fix the various capital ratio regulations so as to expand the corporate loan channel supported by innovative companies such as mid-term ventures.
First, regulations on lending by banks will be revised in order to transform the existing lending structure of household loans into productive financing.
First, in the calculation of the BIS capital adequacy ratio, mortgages with mortgage rates exceeding 60% are classified as `high LTV` and the risk weights are doubled.
The BIS ratio is the share of equity capital divided by risk weighted assets. The measure will raise the risk weights of 35-50% to 70% for the bank`s main bourse.
Besides, the bank`s average BIS ratio drops 0.14 percentage points as risk weighted upward. The bank plans to gradually adjust the ratio over the next two years for each bank to worry about falling sharply.
The loan-to-deposit ratio is also changed.
Meanwhile, the bank deposit rate should be less than 100%. Currently, the same weighting is applied to household loans by 15% and corporate loans by -15%. In this case, the bank`s average KD rate, which averages 96.8%, rises to 97.5%. One commercial bank will have a loan-to-deposit ratio that exceeds the regulatory limit of 100%. In order to meet the loan-to-deposit ratios, there is a need to secure more deposits, but the deposit interest rate is unlikely to rise sharply as it is only KRW 11 trillion (1.3% of the total).
Also, bumping capital to respond to the sector will be introduced next year. When increasing household loans, the banks would have to build more capital. If the FSC decides to accumulate 0 ~ 2.5% of cushion capital in household loans, the ratio of household credit to the exposures (risk exposure) of each bank will be used to determine the additional common stock ratios. Banks that fail to comply with them are restricted from paying dividends or paying bonuses.
The capital regulation of the second financial sector, such as insurance companies, savings banks, and mutual-financing associations, is also restructured to restrain the main bourses. At the moment, savings banks have a risk weight of 70% for high-risk state banks with LTV> 60%, like banks. In the case of insurers, the risk factor for high-risk state bonds will increase from 2.8% to 5.6%, and the risk factor for credit loans will rise from 4.5% to 6.0%.
Household loans will be cut off thoroughly, but corporate loans will be expanded.
First, in the evaluation of bank management status, `SME loan loan support performance` is newly created and the evaluation weight is set at 5%. When a new workout is granted to a workout corporation, it is classified as having a higher asset quality than an existing loan as it is given a right of repayment. The burden of provisioning for bad debt is also reduced.
On the other hand, machinery and equipment that are easy to evaluate and dispose of through the `Machine Exchange` are recognized as `Eligible collateral`. In addition, long-term investments by small and medium-sized venture companies in securities firms will help smooth the supply of funds by eliminating the addition of risk amounts. In particular, for KOSDAQ stocks, risk weights are reduced from 6 to 12 percent to 5 to 10 percent.
Kim Yong-bum, vice chairman of the Financial Supervisory Service, said, "If the regulation is enacted smoothly, it will induce household credit cuts of up to 40 trillion won over the medium to long term." A financial official said, "We are expecting a maximum of five years for the mid- to long-term scope, and the increase will be suppressed rather than the decrease in the total amount of household loans."
By Kim Dong Wook east@
[ copyright ⓒ The Digitaltimes ]
The Financial Supervisory Commission, the Financial Supervisory Service and the Bank of Korea announced the revised capital regulation for `productive finance`.
The key to this reform plan is not to narrow down the path from the financial sector to household loans but to fix the various capital ratio regulations so as to expand the corporate loan channel supported by innovative companies such as mid-term ventures.
First, regulations on lending by banks will be revised in order to transform the existing lending structure of household loans into productive financing.
First, in the calculation of the BIS capital adequacy ratio, mortgages with mortgage rates exceeding 60% are classified as `high LTV` and the risk weights are doubled.
The BIS ratio is the share of equity capital divided by risk weighted assets. The measure will raise the risk weights of 35-50% to 70% for the bank`s main bourse.
Besides, the bank`s average BIS ratio drops 0.14 percentage points as risk weighted upward. The bank plans to gradually adjust the ratio over the next two years for each bank to worry about falling sharply.
The loan-to-deposit ratio is also changed.
Meanwhile, the bank deposit rate should be less than 100%. Currently, the same weighting is applied to household loans by 15% and corporate loans by -15%. In this case, the bank`s average KD rate, which averages 96.8%, rises to 97.5%. One commercial bank will have a loan-to-deposit ratio that exceeds the regulatory limit of 100%. In order to meet the loan-to-deposit ratios, there is a need to secure more deposits, but the deposit interest rate is unlikely to rise sharply as it is only KRW 11 trillion (1.3% of the total).
Also, bumping capital to respond to the sector will be introduced next year. When increasing household loans, the banks would have to build more capital. If the FSC decides to accumulate 0 ~ 2.5% of cushion capital in household loans, the ratio of household credit to the exposures (risk exposure) of each bank will be used to determine the additional common stock ratios. Banks that fail to comply with them are restricted from paying dividends or paying bonuses.
The capital regulation of the second financial sector, such as insurance companies, savings banks, and mutual-financing associations, is also restructured to restrain the main bourses. At the moment, savings banks have a risk weight of 70% for high-risk state banks with LTV> 60%, like banks. In the case of insurers, the risk factor for high-risk state bonds will increase from 2.8% to 5.6%, and the risk factor for credit loans will rise from 4.5% to 6.0%.
Household loans will be cut off thoroughly, but corporate loans will be expanded.
First, in the evaluation of bank management status, `SME loan loan support performance` is newly created and the evaluation weight is set at 5%. When a new workout is granted to a workout corporation, it is classified as having a higher asset quality than an existing loan as it is given a right of repayment. The burden of provisioning for bad debt is also reduced.
On the other hand, machinery and equipment that are easy to evaluate and dispose of through the `Machine Exchange` are recognized as `Eligible collateral`. In addition, long-term investments by small and medium-sized venture companies in securities firms will help smooth the supply of funds by eliminating the addition of risk amounts. In particular, for KOSDAQ stocks, risk weights are reduced from 6 to 12 percent to 5 to 10 percent.
Kim Yong-bum, vice chairman of the Financial Supervisory Service, said, "If the regulation is enacted smoothly, it will induce household credit cuts of up to 40 trillion won over the medium to long term." A financial official said, "We are expecting a maximum of five years for the mid- to long-term scope, and the increase will be suppressed rather than the decrease in the total amount of household loans."
By Kim Dong Wook east@