FSC Approves Rules Change Intended to Boost Loss Absorbing Capacity of BanksNov 01, 2023

The Financial Services Commission approved a partial revision bill of the supervisory regulation on banking business at the 19th regular meeting held on November 1. Under the revised rules, the financial regulators will be authorized to ask banks to set aside special reserve for credit loss. The revision also establishes a process of inspecting banks’ own estimated loss forecasting models. This is a follow-up to the previously announced plan to revamp prudential regulations in the banking sector.


First, the rules change will establish a regulatory ground authorizing the financial regulators to ask banks to set aside additional loss reserve when their accumulated level of loan loss provision and loss reserve are deemed to be inadequate. With the lack of regulatory grounds allowing the authorities to make such a request from banks, the Financial Supervisory Service (FSS) had to seek cooperation from banks to bolster their loss provisioning on a voluntary basis so far. However, from now on, the FSC will have an authority to demand banks to set aside additional loss reserve when deemed necessary. Making an actual request from banks to bolster special loss reserve will be carried out through an FSC’s formal deliberation process.


Second, the rules change will establish a process whereby the authorities are able to inspect banks’ models for forecasting their estimated loss, so that the authorities can verify the appropriateness of loss provisions prepared by individual banks and have them prepare loss provisions at levels suitable to their estimated future losses. Currently, banks’ loss provisions are prepared based on their own estimated loss forecasting models. However, the banks’ own estimates raised concerns about the appropriateness of their estimated losses in the post-pandemic period as their loss calculation was based on the low interest rate environment where delinquency ratio also stayed low. Therefore, from now on, banks will carry out self-inspection on the appropriateness of their loss provisions and submit results to the FSS, which in turn will check whether the banks’ estimated losses were properly measured and demand correction if deemed necessary. The banks’ self-inspection on their own estimated loss forecasting models will begin from this year.


The FSC expects that these measures will help to enhance the loss absorbing capacity of the banking sector and boost confidence about the soundness of domestic banks both internally and externally.


* Please refer to the attached file for details.