From Bricks to Bytes: Korean Regulators Rethink Bank Capital Allocation (Image supported by ChatGPT)
SEOUL, July 14 (Korea Bizwire) — South Korea’s financial authorities are preparing a sweeping overhaul of capital regulations to curb excessive bank lending in real estate and steer financial resources toward high-growth industries like artificial intelligence and biotechnology.
According to industry officials on July 13, the Financial Services Commission (FSC) is reviewing plans to raise the minimum risk weight for residential mortgage loans — a move aimed at discouraging banks from overconcentrating on low-risk, low-productivity lending.
The current lower bound for mortgage loan risk weighting stands at 15%. Raising it, potentially to 25%, would force banks to hold more capital against housing loans, limiting their ability to grow real estate lending portfolios and nudging them toward more productive sectors.
South Korea to Tighten Mortgage Risk Rules, Boost Investment in High-Tech Sectors (Image courtesy of Yonhap)
Risk weights determine how much capital banks must hold based on the perceived riskiness of their assets. Traditionally, mortgages have carried low risk weights due to their perceived stability, incentivizing banks to prioritize them over corporate loans or venture investments.
A senior FSC official acknowledged the need to reform what has become a “margin-focused business model,” where banks profit from the spread between deposit and loan rates, predominantly through mortgage lending.
At the same time, the FSC is considering new incentives to channel capital into government-backed policy funds and venture investment vehicles. These include clarifying existing exceptions that allow banks to apply a reduced 100% risk weight — down from the standard 400% — on investments in policy funds where a certain threshold of public capital is involved.
Currently, each case is reviewed individually. By establishing a clear guideline, the FSC aims to expedite capital inflows into government-aligned initiatives, including President Lee Jae-myung’s signature “100 trillion won fund” for supporting strategic industries like AI, biotech, and renewable energy.
The South Korean central bank warned recently the possibility of increased volatility in the financial market. (Image courtesy of Yonhap)
The fund structure envisions a 50 trillion won master fund, backed by public resources, which will be used to attract private-sector investment into sub-funds targeting various innovation sectors.
“If banks are allowed to apply lower risk weights to these investments, they’ll be much more willing to participate,” said one official from a related institution.
Further reforms under discussion include distinguishing long-term venture capital from speculative short-term investment, with the goal of easing capital charges for patient investment strategies. Critics in the venture capital sector have long argued that applying a flat 400% risk weight fails to recognize their strategic, long-term approach.
Still, not everyone is convinced. Some caution that loosening prudential standards for policy objectives could backfire. The Financial Supervisory Service (FSS), which oversees regulatory compliance, has yet to formally join the FSC’s task force, raising concerns over inter-agency alignment.
“One could argue the FSC is staying within global regulatory bounds,” said a senior banking official, “but using capital rules for policy-driven funding raises valid questions. Coordination with the FSS will be crucial going forward.”
M. H. Lee (mhlee@koreabizwire.com)
