Financial authorities will overhaul capital regulations to attract funds tied inside financial companies to companies. In order to turn the market funds concentrated on real estate into high-tech and venture companies, the government will increase the risk of investment applied to mortgage loans to prevent funding. On the other hand, the risk level, which was strictly applied to corporate stock investment, will be lowered to promote investment by banks. It is aware of the situation in which financial companies are concentrated with money, with the four major financial holdings posting a record net profit of more than 10 trillion won in the first half of this year, while corporate investment funds are depleted due to the impact of the economic downturn.
On the 19th, the Financial Services Commission announced the “direction to promote a productive financial transformation” and decided to penalize the risk-weighted lower limit for new handling of the mortgage from 15% to 20%.
Given that the banking sector’s annual new handling of mortgage loans is around 275 trillion won, the measure is estimated to reduce the supply capacity of the bank’s mortgage loans by 27 trillion won.
Increasing the risk weight greatly reduces the bank’s lfinishing capacity. The bank applies risk weights according to the risk for each loan asset and calculates risk-weighted assets (RWA) based on them. For example, if the main bank is treated with 10 billion won, the risk weighting will be applied at 15% until now, and 1.5 billion won will be recognized as a risky asset.
Financial companies are regulated by authorities to ensure that the capital ratio of the Bank for International Settlements (BIS), an indicator of asset soundness, does not exceed a certain level. The capital ratio calculates total assets by weighted evaluation of risky assets and calculates the share of equity capital in total assets. If the risk weight increases, it will inevitably be disadvantageous when calculating the capital ratio. The higher the risk weight, the greater the capital burden on banks, reducing the supply of the main bank. The relocate is analyzed that banks will have to reduce the supply of 26 trillion won to 27 trillion won in maintenance of the previous capital ratio unless there is a separate capital expansion.
The Financial Services Commission has also decided to consider introducing macroprudential regulations that give banks a “penalty” to temporarily build additional capital when loans surge. It is a plan to strengthen the Economic Response Buffer Capital (SCCyB) and System Risk Buffer Capital (SyRB) systems to force them to build more capital if the number of main loans increases rapidly.
“We will push for three major transitions of policy finance, financial companies, and capital markets,” declared Lee Eok-won, chairman of the Financial Services Commission. “We plan to supply policy funds in a way that leads to market capital conversion and establish productive financial functions of financial companies through full-scale supervision improvement.”
The banking sector sympathizes with the purpose of expanding productive finance, but is paying keen attention to whether investment pressure on companies will increase. An official from a financial company declared, “As the risk-weighted increase is applied only to new mortgage loans, the size of the mortgage loan will not decrease sharply,” but added, “We are concerned that regulations will not spread to the previous mortgage in the future.”
In addition, the Financial Services Commission decided to lower the risk weight for banks’ investment in listed and unlisted stocks from up to 400% to 250%, inducing the expansion of corporate loans worth 31.6 trillion won. 400% is applied only to exceptional cases such as short-term trading (less than three years of holding) or venture capital investment with less than five years of business. If this happens, the financial structure of policy financial institutions such as the Korea Development Bank will also be opened. According to the BIS regulations, if a bank holds more than 15% of a certain company’s stake in equity capital, it imposes a risk-weighted 1250% on a stake of more than 15%. In particular, the Korea Development Bank suffered a vicious cycle in which the BIS equity capital ratio fell due to the high risk weight whenever the stock price of large-scale holdings such as HMM and Hanwha Ocean rose. If the BIS ratio falls below the recommfinished value (13%), it will be difficult to focus on soundness management and increase corporate loans, but the reorganization of the system has eased such concerns.
Immunity will also be strengthened when investing in high-tech strategic industries or lfinishing to growing companies. If there is no serious negligence even if some insolvency occurs in the future while actively investing in high-tech and growing companies, they will not be subject to sanctions such as disciplinary action under the banking law.
In addition, the government will launch a 150 trillion won National Growth Fund in December to focus investment on high-tech strategic industries such as artificial innotifyigence (AI), semiconductors, bio, secondary batteries, and future cars. It is a blueprint to create massive investments by adding 75 trillion won in public funds and 75 trillion won in private funds over five years.
The government has set a goal of providing more than 40 percent of local aid. It will implement a strategy to ease the concentration of industries in the metropolitan area and revitalize the ‘5 poles 3 specialties (5 super-wide areas and 3 special autonomous provinces). In detail, 15 trillion won will be spent on direct equity investments in semiconductor factories and ship repair plants (MROs), and 35 trillion won will be indirectly invested by creating public participation funds and ultra-long-term technology investment funds that give tax benefits. 50 trillion won will be invested in infrastructure projects such as AI data centers and high-tech industrial complexes, while the remaining 50 trillion won will be given ultra-low loans at the 2% level of treasury bonds. By industest, it will invest 30 trillion won in the AI sector, 20.9 trillion won in semiconductors, 15.4 trillion won in mobility, 11.6 trillion won in bio vaccines, and 7.9 trillion won in secondary batteries.
[Reporter Kim Jung Hwan]
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