The Financial Services Commission proposed revisions to a set of rules on banks and financial holding companies on September 5, introducing the large exposure limit recommended by the Basel Committee on Banking Supervision (BCBS) to help improve regulatory consistency with global standards and boost management over large-scale concentration risks.
In 2014, the BCBS set out the supervisory framework for measuring and controlling large exposures and recommended its members to begin implementing the large exposure limit by January 2019. In Korea, the large exposure limit has been implemented through an administrative guidance since March 2019. However, a formal process to make this rule into an official regulatory framework has been postponed due to the coronavirus situation. BCBS’s large exposure limit is currently adopted by sixteen countries including the U.S and the EU, and within this year, a regulatory consistency assessment program is expected to take place in Korea.
In this regard, the revision proposal for the rules on banks and financial holding companies being announced for public comment today is similar to the banks and financial holding companies’ credit extension limit being observed under the current law in that it requires banks and financial holding companies to keep large exposures to a counterparty (or a group of affiliated counterparties) within 25 percent of their core capital (20 percent for D-SIBs). However, the revision proposal adopts a broader term for counterparties as it includes entities in both controlling relationship and economically dependent relationship. The revision proposal also incorporates a wider scope of credit exposures as it includes both credit extensions such as loans and financial products such as stocks and bonds as well as third-party guarantees. Thus, the revised rules will allow a more comprehensive and integrated way of managing counterparty credit risks.
The authorities will grant a two-year grace period to the Korea Development Bank (KDB) to ensure that there is no abrupt shortage of funds made available for companies undergoing restructuring. The large exposure limit rule will not apply to internet-only banks and the Export-Import Bank of Korea.
The revision proposal will be put up for public comment from September 5 to 15 and go into effect from January 1, 2024.
* Please refer to the attached file for details.