When you do something wrong at school, teachers scold you. When you fail to finish your work in time, your boss suggests you to fix it. Then, what about the banking business? If it goes in a wrong direction or needs to be regulated, who or what can stop it?
Well, that is what I am going to explain from now on. Are you familiar with the concept of ‘Basel?’
It was first introduced in 1988 for banks to maintain more than 8 percent of Bank for International Settlement (BIS) ratio. This regulation was designed for the purpose of preventing unnecessary competitions in financial market.
Since its first introduction and after going through a series of financial crises, the second Basel accord was issued in 2004. It was an international standard for regulation of equity and risk capital. The next version, Basel III, came in recently in 2010, which requires international banks to manage the liquidity risk as well as the regulated equity.
Now, applying the Basel standard to domestic financial system, the FSC is revising the regulations on banking business. So, how will the adoption of Basel standard contribute to easing the current problems in banking business?
First, a minimum capital requirement will be divided into three criteria; 4.5% of common equity Tier 1, 6% of Tier 1 capital, and 8% of the total capital. This is different from the current 8% of the total capital ratio which might be an outdated standard for complicated financial market these days.
This is not the end of key revisions. Another change is establishing capital buffer of 2.5%. As you can guess from the word ‘buffer’, capital buffer means a kind of cushion for banks to keep the capital ratio stable without causing losses. For this ends, banks need to hold a certain amount of capital. Then, what is the difference between the minimum capital requirement and capital buffer? While minimum capital requirement is mandatory, capital buffer is not. When failing to satisfy it, banks are only limited in dividend payment or share repurchase.
Last but not least, revision of conditions for corrective measures and evaluation of management status will take effect. Depending on the equity capital ratios, banks are required to follow corrective measures. Also, conditions and terms will be subdivided into three ratios; total capital, Tier 1 capital, and common Tier capital. Adding to this, the capital adequacy will be evaluated by total ratio, Tier 1 ratio, and equity-to-assets-ratio.
This is an ongoing matter at this stage, as it is a ‘plan’ for revision to regulations on supervisions of banking business. Additional measures would be brought up later on, if regarded necessary. For example, provisions constraining liquidity and leverage ratios are not included in the current plan, which might be considered in key revisions for the next time. This progress does not mean that FSC is missing out some important provisions required. Rather, it should be considered that FSC is constantly working towards implementation of policy measures which are most appropriate and demanded in banking businesses. To do so, FSC will examine and design regulatory measures step by step. So, let us hope this plan work successfully in Korea.
* For the official document regardindg this matter, you may refer to Financial Services Commission’s Press Release (available in English/pdf format), http://www.fsc.go.kr/downManager?bbsid=BBS0048&no=82221