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| ATMs belonging to banks are lined up in a row in Seoul in this file photo. Korea Times file. |
By Yi Whan-woo
Major banks in Korea are under pressure to set aside more loan loss reserves amid fear of a global banking crisis prompted by the collapse of Silicon Valley Bank (SVB) and the newfound instability of Credit Suisse.
Also known as bad debt reserves, loan loss reserves are a partial risk coverage provided by governments to lenders based on the estimated amount of accounts receivable that are at risk of being unpaid by customers.
Financial regulators have called on expanding bad debt reserves to prevent the banking system from collapsing. But lenders find this excessive because the amount already more than doubled in 2022 from 2021 as a countermeasure against pandemic-induced economic risks.
The risks center on pandemic-hit small business owners and self-employed people who are believed to be on the verge of financial default because of government-granted delays in payment on bank loans as a relief effort.
The possible risk of default especially grew as the key interest rate was hiked sharply.
Correspondingly, the combined bad debt reserves of five major lenders ― KB Kookmin, Shinhan, Hana, Woori and NH NongHyup ― surpassed the 1 trillion won mark in mid-2022, up from 428 billion won a year earlier.
Under the circumstances, financial authorities are considering conducting their own stress testing on banks, to analyze whether the banks have enough capital to withstand a financial crisis, according to industry sources.
The banks so far have been running the tests on their own.
"The envisioned state-run stress test will assume a long-run aggressive monetary policy in and outside the country, extreme vitality in currency rates and all other worst economic circumstances one can think of," a source said.
It said those failing the test may be asked to increase their loan loss reserves by 0.5 percent or 1 percent from the current level.
It noted the U.S. Federal Reserve carried out its own test on major U.S. banks last year and called on 30 of them that failed to meet the criteria to expand loan loss reserves in a range of 2.5 percent to 9 percent.
Another source said the government is contemplating whether to increase the countercyclical capital buffer from the current zero percent.
Countercyclical capital buffer refers to extra capital required by regulators for financial institutions to ensure more resilience.
It is a regulatory tool under Basel III, a voluntary set of measures agreed upon by central banks all around the world.
Korea introduced a countercyclical capital buffer in 2016 but never imposed it on banks.
Speaking on condition of anonymity, a bank staffer said, "We've been following what the financial regulator has been asking, and it often becomes burdensome."
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