SEOUL, Dec. 19 (Korea Bizwire) – South Korea will relax a regulation on the capital ratio of local banks this week in a move to reduce their financial burden, the country’s finance regulator said Monday.
The Financial Services Commission (FSC) will allow them to designate their loan-loss reserves as common capital stock under the revised rule to take effect Tuesday.
Currently, funds or other financial assets set aside to cover estimated potential losses from overdue loans or defaults are deducted from capital stock.
The restriction has been a burden on the banks as they are required to meet the strict capital adequacy ratio standards set by the Bank for International Settlements (BIS), especially amid the country’s restructuring of the shipping and shipbuilding industries.
The eased capital base rule will have the effect of raising the capital ratio of the banks by an average of 0.6 percentage point in first quarter of 2016, the financial regulator said. Under the eased regulations, the proportion of common capital stock would climb 0.9 percentage point as well, the regulator said.
For instance, the common capital stock ratio of Woori Bank, a leading lender here, will increase from 8.68 percent to 9.89 percent, as its 1.9 trillion won (US$1.5 billion) of loan-loss reserves will be regarded as common stock capital.
That of the Korea Development Bank, which has massive loans extended to troubled shipbuilders and shippers here, will also be lifted from 11.97 percent to 12.64 percent.
The change, however, would not necessarily mean that banks’ improved capability to deal with potential losses, it added.