Chairman Lee Eog-weon of the Financial Services Commission held a meeting with the CEOs of twelve mutual savings banks and related organizations and discussed ways to promote sound development of mutual savings banks on February 23.
A Summary of Remarks by FSC Chairman
Amid an enduring risk of default originating from real estate market volatility, digital transition in the financial industry, and a polarization in the savings banks sector, it is now crucial to have a structural transformation in the industry for the survival and growth of savings banks.
Against this backdrop, the FSC has prepared a set of measures to promote sound development of savings banks to facilitate their transition away from the short-term profit driven and community-centered operational model toward a more real economy-oriented and nationwide operational approach.
In this regard, the financial intermediary function of savings banks should move away from real estate and collateral operations toward the real economy sector, such as SMEs, MMEs, and small merchants, in a more balanced way. To help savings banks retain their competitiveness amid changing business environment, the FSC will seek to overhaul relevant regulations pertaining to their operating practices. In order to propel a transition toward productive finance and remove regulatory hurdles for savings banks, a condition of sound management practices should be met. Therefore, the FSC also plans to carry out regulatory reforms regarding the soundness and governance structure of savings banks commensurate with the size and role of savings banks.
Key Measures
a) Promoting a transition toward productive finance and upgrading rules on operating practices to make them more reasonable
The FSC will seek to overhaul regulations to make the financial intermediary function of savings banks more balanced across the real economy, transitioning away from the real estate sector toward SMEs, MMEs, and small merchants. To this end, the FSC will seek regulatory reforms in the following areas. First, the securities holding limit currently applied on savings banks will be brought down to a more reasonable level to free up their capacity to supply financing to innovative growth industries (e.g. increasing unlisted stocks holding limit from 10% of equity capital currently to 20%). Second, the major business financing function of savings banks will be opened up to MMEs from mostly SMEs-focused previously. Third, the FSC will consider and seek ways to expand savings banks’ supply of credit to individual business owners (sole proprietors) and small merchants by allowing online P2P (peer-to-peer) lending business and making changes to the operation of the mid-range interest rate loan product offered through savings banks in stages. Fourth, there will be an adjustment made to how the loan-to-deposit ratios are calculated for loans issued in the Seoul metropolitan area (weight increase to 105% from 100% currently) and the non-Seoul metropolitan areas (weight decrease to 95% from 100% currently) to encourage more credit supply to regional economies.
In addition, the FSC will seek to overhaul rules on the operating practices of savings banks to help them retain competitiveness and ensure continuous growth. First, large-scale savings banks that meet certain qualifications (BIS capital adequacy ratio of 13% or above) will be allowed to handle debit cards and prepaid electronic payments of their own. Second, for medium- and large-scale savings banks with total assets of KRW1 trillion or more, the maximum level of credit being extended to corporate entities and sole proprietors will be adjusted to a more reasonable level. The current credit extension limit of KRW12 billion for a corporate entity and KRW6 billion for a sole proprietor will be raised to KRW14 billion and KRW7 billion, respectively, with an extra limit allowed for non-Seoul borrowers (between KRW500 million and KRW1 billion). Third, to improve upon the categorization of business functions for savings banks and make it more consistent with other financial sectors, the current “main-and-side business” categorization system will be changed into a “core-concurrent-and-incidental business” categorization system. Fourth, there will also be an upgrade to the broadcast advertising rules applied on savings banks to reflect changing business environment.
b) Improving rules on the soundness management and governance structure of savings banks
In order to ensure a continued transition to productive finance, the FSC will improve upon the soundness management framework of savings banks commensurate with the size and role of individual savings banks. First, large-scale savings banks with assets worth KRW5 trillion or more will be required to meet more rigorous capital rule standards (equivalent of bank capital rules) in stages. Second, with the introduction of forward looking criteria (FLC) for categorizing the asset soundness of business loans, savings banks will be able to maintain reserves based on the future repayment capacity of businesses. Third, for smaller-sized savings banks with assets worth KRW1 trillion or below (when BIS capital adequacy ratio is 12% or higher and delinquency rate 4% or below), the mandated period of external audit of financial statements will be eased from once every quarter currently to a semi-annual basis. Fourth, to make sure that large savings banks can continue to grow with a sound and transparent ownership structure in place (particularly for savings banks that have an aim to grow in the size of a commercial bank), the ownership rules commensurate with the size of assets will be adopted (maximum 50% equity for asset size of KRW20 trillion or above, maximum 34% equity for asset size of KRW30 trillion or above, and maximum 15% equity for asset size of KRW40 trillion or above). Fifth, the ownership and governance structure of savings banks will be further bolstered in line with the public good nature of their service offering and the ensuing responsibility required from them through more rigorous examinations conducted on the appropriateness of largest shareholders.
Additionally, the FSC will seek regulatory improvement to make savings banks subject to a capital buffer rule and restrict dividend distribution when falling below a required capital level. The liquidity monitoring and risk management system for savings banks will also be strengthened by making upgrades to the real-time deposit monitoring system. An industry-wide asset management corporation will be set up by savings banks to more effectively manage NPLs (nonperforming loans). Moreover, there will be a regulatory ground established to guide savings banks with the management and disposition of unintended acquisition of real estate properties (non-business related) taking place in the process of collecting collaterals. Under this rule, savings banks will be subject to the duty to dispose of these properties within a specific time period (e.g. within three years).
In closing, FSC Chairman Lee Eog-weon said that the measures being announced today are not intended as a short-term solution but a foundation to kickstart a necessary structural transformation that will help to boost the soundness and competitiveness of savings banks over a medium- to long-term horizon. With these measures in place, savings banks are encouraged to step up efforts to boost accountability, have more flexibility in their supply of finance, strengthen consumer confidence, and increase the supply of community finance and microfinance opportunities. In the process, the FSC will promptly work on legislative and regulatory updates and continue to maintain close communication with the industry, related organizations, and consumer groups to ensure a seamless implementation of these measures.
* Please refer to the attached PDF for details.