The Financial Services Commission and the Financial Supervisory Service announced on December 19 a set of measures intended to ensure financial market stability and enhance the financial sector’s capacity to support domestic businesses and the real economy in preparation for a potential expansion of market volatility caused by ongoing uncertainties at home and abroad.
After having a series of market monitoring and industry group meetings with financial companies, the capacity enhancement measures for financial companies’ soundness, liquidity, and financial conditions have been drawn up well within the scope of international standards, such as the Basel III framework.
First, the stress capital buffer requirement for banks that was initially set to be introduced this year will be postponed until the second half of 2025. Authorities will reexamine the exact timeline and method for introducing stress capital buffers in the first half of 2025.
Second, with regard to the foreign exchange (FX) positions of banks, the non-hedgeable types of FX positions, such as investments on overseas branches that are not significantly exposed to the risk of short-term volatility in the FX market, will not be counted toward the calculation of their FX risk exposures.
Third, when insurance companies make contributions to the stock market stabilization fund through purchase of the fund, the amount being calculated toward the risk exposure of their K-ICS (Korea Insurance Capital Standard) ratios will be reduced from the entire amount to half the amount.
Moreover, the following measures have been prepared to lower the burden of financial companies in issuing loans and investing in domestic companies, thereby enhancing financial companies’ capacity to support domestic businesses and the real economy.
Fourth, changes will be made to the 400 percent risk weight currently applied across the board on new technology investment funds, venture funds, and other types of investment association funds established outside the confines of the Financial Investment Services and Capital Markets Act (FSCMA) to enable the application of variable risk weights according to actual invested assets.
Fifth, businesses will be allowed use credit ratings provided by overseas external credit assessment institutions (ECAIs) for calculating the risk weight of assets. Currently, businesses with credit ratings from domestic ECAIs are assigned the risk weight accordingly. However, businesses with no credit ratings from domestic ECAIs are assigned a 100 percent risk weight. Permitting the use of credit ratings provided by overseas ECAIs will help to resolve the problem of this high risk weight applied on businesses with no credit rating from domestic ECAIs.
Sixth, improvements will be made to the application of risk weight on non-financial holding companies when calculating their market risk-weighted assets. Currently, non-financial holding companies are categorized as “other financial businesses” in the Korea Standard Industrial Classification, and a higher level of risk weight is applied on them than other types of businesses, such as manufacturing and services. Thus, changes will be made to more realistically reflect the actual characteristics and peculiarities of individual non-financial holding companies.
The FSC and the FSS will immediately implement the measures being announced today and finish up making necessary upgrades to regulations until the first quarter of 2025.
Authorities will continue to closely monitor situations to make sure that financial companies’ enhanced capacity can be directed at market stabilization and support for domestic businesses and the real economy. Based on market conditions in the future, authorities will consider drawing up additional measures when it becomes necessary.