Chairman Lee Eog-weon of the Financial Services Commission presided over the inaugural meeting on transforming the financial industry and seeking a transition toward productive finance on September 19. Today’s meeting was joined by industry representatives from different regions and officials from different business sectors and sizes who shared their ideas and suggestions in collaborative efforts to seek growth in both the real economy and financial sectors.
Key Measures
I. Transforming Financial Industry for Productive Finance
In his opening remarks, FSC Chairman Lee said that the Korean economy is currently standing at an inflection point where the role of finance is considered to be ever more critical in providing solutions to various problems, such as low growth and wealth gap, and rebooting growth in the economy. To seek a transition toward productive finance, Chairman Lee introduced plans to pursue transformation of the following three areas—policy finance, financial business, and capital markets.
(Policy Finance) Policy financial institutions will lead the channeling of capital toward high-tech and venture businesses and local economies. The KRW150 trillion National Growth Fund intended for future strategic industries and their supply chains and infrastructures will provide targeted investments. The role of policy financial institutions for providing guarantees on real estate financing will be downsized, while that for providing technology financing will be boosted. At the same time, policy financial institutions will develop region-specific financing models intended to spur growth of local economies.
(Financial Business) By seeking improvements to the overall supervisory framework, specific sector-targeted transition measures will be pursued. In this regard, capital regulation in the banking and insurance sectors will be upgraded to bring them to more reasonable levels and to facilitate banks and insurance businesses to more actively supply capital to productive sectors. In order to prevent risk aversion from financial companies, there will also be improvements made regarding the inspection and supervision, exemption from liability, and key performance indicator (KPI) frameworks.
(Capital Markets) To make sure that businesses are able to seamlessly raise funds needed at each and every growth stage, there will be improvements made to capital markets. Business development companies (BDCs) and security token offering (STO) will be newly introduced to provide means for facilitating innovative venture and startup businesses to raise funds. At the same time, large securities businesses will be required to supply venture capital, and there will be continuous efforts to boost investor confidence in stock markets.
In the process of pursuing various productive finance initiatives, the FSC will closely communicate with financial businesses and seek swift and bold regulatory reforms in coordination with related industry groups. Moreover, in collaboration with research institutions, the FSC plans to examine the structural factors (e.g. tax, prudential rules, etc.) that could help induce a drive toward productive finance.
II. Establishing National Growth Fund
(Significance) As a key policy initiative in the government’s productive finance drive, National Growth Fund worth KRW150 trillion-plus will be launched for the next five years. The fund will pump prime investments for KRW500 trillion high-tech industry market over the next five years, help to strengthen the competitiveness of high-tech strategic sectors and their value-chains, support venture and technology businesses to scale up, and create added value to local economies.
(Overview) National Growth Fund worth KRW150 trillion will be created with the KRW75 trillion high-tech strategic industry fund and another KRW75 trillion originating from the private sector, individuals, and financial companies. The fund will be used to invest in future strategic industries and their overall ecosystems through a variety of methods, such as equity investment, low-interest lending support, infrastructure investment, etc. In particular, investments will focus on the artificial intelligence (AI), semiconductor, biotech, vaccine, robotics, hydrogen, secondary battery, display panel, future car, and defense sectors, and their related technology, infrastructure, and purchasing partners. The fund also aims to make available active support for the game and content industry, as well as for startups and venture businesses, which require investment from patient capital.
(Further Plan) The government will continue to seek megaprojects requiring investment from National Growth Fund. A comprehensive support program (for tax, regulation, financing, human resources, etc.) will be made available through close collaboration between related organizations. The FSC and the Korea Development Bank (KDB) plan to hold a series of meetings with financial companies, industry representatives, and related ministries to continuously promote National Growth Fund and boost efforts for communication and collaboration.
III. Making Capital Regulation More Reasonable for Banks and Insurers
Capital regulation for banks
Through a comparative analysis of BIS (Bank for International Settlements) standards and domestic rules, the capital regulation applied on the banking sector will be improved to make them more consistent with global standards and more reasonable to facilitate the channeling of capital away from real estate toward more productive sectors, such as venture business.
First, to help channel capital away from the housing and real estate market, the minimum risk weight applied on domestic home mortgage loans will be adjusted upward. Considering regulatory cases from overseas as well as capital burden on banks, the minimum risk weight for mortgage loans currently at 15 percent will be raised to 20 percent.
Second, the risk weight applied on banks’ securities holding will be improved. In comparison to the BIS standards of 250 percent in principle for unlisted stocks holding and 400 percent in exceptional cases, the current domestic rule of 400 percent of risk weight in principle is considered to be rather inflexible.
As such, to make it more congruent with the BIS standards, the risk weight for banks’ securities holding will be lowered to 250 percent in principle. However, the 400 percent risk weight will still apply for short-term holdings (less than three years) and venture capital investment.
Third, the risk weight standard applied on banks’ fund investments will be improved. The financial authorities will introduce specific criteria and guidelines to facilitate investments in policy-sponsored funds, which qualify for a 100 percent risk weight. A lack of specific guidelines thus far has resulted in low predictability for banks and a delay in launching policy-sponsored funds. In this regard, banks’ policy-sponsored fund investment criteria, which qualify for a 100 percent risk weight, will be as follows—(a) a policy-based fund with a specific purpose of economic assistance, (b) a certain level of subsidy or investment guaranteed by national or regional government, or policy financial institution, and (c) specific supervisory and regulatory restrictions established by government authorities.
Along this line, the financial authorities plan to seek improvements in the calculation of banks’ risk weighted assets regarding uncalled commitments and other areas of fund investments.
Capital regulation for insurance companies
The insurance industry has been implementing the new international accounting standards IFRS17 and the Korea Insurance Capital Standard (K-ICS) for three years since 2023. Although this shift has led to the refinement of insurance companies’ value assessment and the strengthening of risk management, there still exist redundancy and rigidity in regulations standing in the way of boosting efficiency in insurance companies’ asset management practices.
In particular, given that insurance companies are typically dealing with ultra-long-term liabilities, it is important to take into account the necessity of longer-term asset management congruent with their operating environment. As such, it is necessary to encourage insurance businesses to take part in the productive finance drive while ensuring prudential and sustainable ways for them to manage assets in line with asset-liability management (ALM). In this regard, the financial authorities will continue to have discussions with the insurance sector to come up with specific measures.
First, the market risk value of asset investments in the K-ICS ratio will be improved to bring it to a more reasonable level. Under the current regime, the market risk value of investments in funds that are eligible for borrowing or unlisted securities that are supported through policy programs tends to be calculated rather excessively, which discourages investment.
In addition, to promote investment in productive sectors as long-term safe havens in which insurance companies are encouraged to make investments, the financial authorities will consider ways to facilitate a matching adjustment in insurance companies’ asset-liability cash flows. Once set in motion, this matching adjustment is expected to provide more incentives for insurance companies to invest in productive sectors, while making them better equipped to respond to the risk of falling interest rates.
Further Plan
The rule changes regarding banks’ risk weights for mortgage loans, securities holding, and fund investment will be carried out in the first quarter of 2026. The authorities plan to set up a taskforce on transforming financial business to continue to explore additional areas and issues requiring improvements in the banking sector. In October, the authorities will introduce measures to improve capital regulation in the insurance sector and seek further reform areas going forward.