Financial holding companies and banks facing approximately 1 trillion won in fines for mis-selling Hong Kong H-index equity-linked securities (ELS) are expected to see their capital regulatory penalty period reduced from 10 years to three years. Financial authorities predict this will create approximately 99 trillion won ($72 billion) in lending capacity.
The Financial Services Commission (FSC) announced capital regulation rationalization measures at the "5th Productive Finance Transformation" meeting held at the Korea Federation of Banks building in Jung-gu, Seoul, on Wednesday.
Under the new rules, financial incidents will be excluded from risk-weighted asset (RWA) calculations if they meet two conditions: capital costs have been recognized for three years or more, and the incident accounts for 5% or more of net operational risk losses. To qualify, financial institutions must either exit the business where the incident occurred or implement recurrence prevention measures, including improvements to accountability structures, and obtain approval from the Financial Supervisory Service Governor. This means financial holding companies required to pay fines for Hong Kong H-index ELS mis-selling could have their capital burden eased in approximately three years.
Banks' long-term overseas equity investments and retained earnings from foreign branches will also be added to the RWA calculation exclusion list. The FSC also expressed caution regarding the introduction of stress buffer capital, stating that "tightening regulations too strongly could restrict capital supply."
Regulations on the insurance sector will also be eased. When investing in policy programs, the risk coefficient used to calculate the Korea Insurance Capital Standard (K-ICS) will be lowered from 49% to 20% or below. Infrastructure investments with a 20% risk coefficient will now include renewable energy and artificial intelligence (AI) facilities.
Financial authorities estimate these measures will create total lending capacity of 98.7 trillion won, comprising 74.5 trillion won in corporate loans from banks and 24.2 trillion won in infrastructure loans from insurers. FSC Chairman Lee Bok-hyun emphasized that "these measures are a form of policy supplementary budget." ▷See Pages 1 and 9 of this newspaper, April 16
