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| Financial Services Commission (FSC) Vice Chairman Kim So-young speaks during a task force meeting on ameliorating banking practices held at the Government Complex Seoul, Thursday. Courtesy of FSC |
By Anna J. Park
Financial authorities aim to require banks to set aside an additional capital reserve called a "countercyclical capital buffer" (CCyB), on top of lenders' mandatory capital reserve buffers required for their banking business. This is to make the banking sector more accountable and adaptable to potential external liquidity threats.
According to the Financial Services Commission (FSC), the country's top financial regulator, on Thursday, the government plans to impose local banks to prepare a certain percentage of liquidity assets as a CCyB during either the second or third quarter of this year. This is to ensure the banking sector's responsibility against growing uncertainties of the macro-financial environment.
A CCyB is designed to counteract excessive credit growth and to preserve credit supply in times of crisis. Normally, a CCyB varies between 0 and 2.5 percent of total risk-weighted assets held by banks.
The CCyB system was introduced in Korea in 2016, as part of the Basel III regulatory framework. Yet, it has remained at the current level of 0 percent so far. The financial authorities have attempted to increase the CCyB imposed on local lenders since late 2019 but it had to stay at zero percent due mainly to excessive market volatility amid the COVID-19 pandemic.
In the U.K., its regulator introduced a 1 percent CCyB in 2016, slated to be increased to 2 percent in July this year. Sweden plans to apply a 2 percent CCyB requirement on lenders in June this year. Australian financial authorities revised its CCyB system to make 1 percent the default of the country's legal framework.
In addition, the FSC is examining the application of differentiated capital buffer requirements for each bank, according to their separate risk management levels and the results of a stress test. Stress tests assess banks' capability to absorb losses under stressful external or internal conditions while meeting obligations to creditors and continuing normal loan business.
As the current local financial framework does not provide a legal ground for financial regulators to order a differentiated capital buffer requirement to each bank according to their stress test results, the financial authorities aim to revise the systemic framework so that they can impose separate capital buffer requirements on each lender.
In the case of the U.S., the Federal Reserve conducts stress tests on major banks, and imposes additional and separate capital buffer requirements to each lender according to the results.
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