S. Korea to announce its plan to support financial institutions

The South Korean government has decided to temporarily relax regulations that ensure financial liquidity and stability to encourage financial institutions to support economic players that are affected by COVID-19. The scheme is expected to provide maximum 394 trillion won for the financial sector.

The new package of measures was announced by the Financial Service Commission on Sunday. For the banking industry, the government has lowered the minimum liquidity coverage ratio (LCR), a ratio of high quality liquid assets to net cash outflows for 30 days. Currently, the liquidity coverage requirement is 80 percent for foreign currencies and 100 percent for won and foreign currencies combined, which will be adjusted to 70 percent and 85 percent, respectively. This would give more room for banks to utilize their assets.

The loan-deposit ratio (LDR) requirement will also be eased until June next year. Banks are required to have an LDR of 100 percent, but they will be allowed to have a higher LDR if it is within five percentage points. The minimum LDR for savings banks and financial cooperatives will also be increased by 10 percent points. In addition, startup loans for every industry except for real estate will be given less risk weight in order to facilitate bank loans.

For all financial institutions, securities market stability funds will have a lower risk. Stocks are usually assigned a 300 percent risk weight. By reducing the risk for securities market’s stability funds to 100 percent will allow financial institutions to make contributions with more ease.

The government expects that, with the implementation of the new package, banks will have from 206 trillion won to 393.7 trillion won more for loans. “The government will provide bailouts, field checks and incentives to encourage financial institutions to supply funds to business, small and large,” said an official from the financial authorities.

The new scheme has been met with a great response, but pundits argue that risk assessments for loans cannot help but be carried out in a more conservative manner considering these are not normal times.


Gun-Huk Lee gun@donga.com