The financial authorities placed an order to strengthen the financial sector's ability to respond to a crisis because there were growing concerns that a typhoon could hit the economy due to the tightening of money lines by central banks of major countries and the prolonged war in Ukraine.
In particular, considering that there is a possibility that loan insolvency will increase after September, when the loan maturity extension and repayment grace period for small businesses ends, we strongly demand the need to expand the bank's loss absorption capacity.
This sense of crisis is evident in the recent remarks of the head of the financial supervisory authority to increase the provisioning amount.
According to the financial industry today (5th), Financial Supervisory Service Commissioner Jeong Eun-bo said at a meeting with bank presidents on the 3rd of last month, "It is necessary to expand the loss absorption capacity so that banks can perform their fund intermediary function without setbacks despite internal and external shocks." We should not be complacent, but rather conservatively evaluate potential credit risk and build up sufficient provisions for bad debts,” he emphasized.
On the 18th of last month, at a meeting with reporters after the Financial Supervisory Advisory Meeting, he pointed out that "in an uncertain situation like the present, it is necessary to manage problems related to insolvency in advance and, if necessary, to accumulate a large amount of provision in advance."
President Jung's intensive remarks regarding provisioning are not only increasing uncertainty in the internal and external economic environment, but also the fact that the profitability of the banking sector is improving recently.
The net profit of domestic banks in the first quarter of this year (January to March) was 5.6 trillion won, up 0.7% from the same period last year.
An increase in interest income due to an increase in interest rates led to an increase in the net profit of the banking sector.
An official in the financial sector said, "The increase in the loan-depository margin has intensified the demand from the authorities to increase the provisioning deposit." "The controversy over provisioning is expected to continue until mid-August, ahead of the second quarter settlement."
The problem is that the issue of provisioning is not simple.
A loan loss allowance is money that is set up preemptively in case of expected loan loss.
Domestic banks are accumulating provisions according to the ratio of non-performing loans, but the explanation of the bank is that there is insufficient basis for accumulating additional provisions as the ratio of non-performing loans continues to be low.
Non-performing loans refer to non-performing loans with a delinquency period of 3 months or more among loans from financial institutions.
An executive in charge of finance at a commercial bank said, "We are fully aware that there are concerns about the potential deterioration in asset quality of vulnerable borrowers and we are managing asset quality as conservatively as possible internally." You can't build it arbitrarily just because you want to build it."
In fact, as of the end of March, compiled by the Financial Supervisory Service, the ratio of non-performing loans (NPLs) of domestic banks was 0.45%, a record low.
On the other hand, some point out that the low non-performing loan ratio is a distortion caused by loan extension and repayment deferral.
Seo Young-soo, director of Kiwoom Securities, said, "The provisioning rate of large domestic banks is around 0.44%."
He said, "Banks in developed countries such as the United States are preparing for future crises by increasing provisions despite the decline in delinquency rates when the Corona 19 crisis occurs. 1.16%), which is a significant increase compared to the previous year.”
In order to resolve the discrepancy between the current provision standard and the potential for insolvency, the financial authorities are operating a task force (TF) to improve the provision method jointly with the bank.
Even today, banks reflect future prospects through economic growth forecasts when calculating loan loss provisions.
However, it is reported that they are discussing ways to additionally reflect variables such as the risk of an interest rate rise or the possibility of a fall in the value of collateral, believing that this alone could underestimate the potential risk of insolvency.
The financial authorities are also ordering financial institutions to strengthen their loss absorbing capabilities by expanding their equity capital in addition to accumulating provisions.
While provisions represent the ability to respond to expected losses, the equity ratio represents the ability to respond to unexpected losses.
An official from the financial authorities said, "Currently, domestic banks are complying with all minimum capital regulations, so banks have to prepare for capital accumulation by themselves. However, under the Basel 3 regulatory system, supervisory authorities If this is necessary, there is a basis (pillar 2) for requesting additional savings.”
Inside and outside the financial sector, if the financial authorities determine that it is necessary to further expand the equity capital of the banking sector, it is predicted that there is a possibility of using the counter-cyclical buffer capital, which has only been introduced.
The counter-cyclical capital is a system that allows additional capital to be accumulated during credit expansion, suppressing excessive credit expansion, and smoothing credit supply by relieving the accumulated capital during credit contraction or credit crunch.
The Financial Services Commission has maintained the reserve level at 0% since the introduction of the counter-cyclical capital system in 2016.
The Bank for International Settlements (BIS) recommends that the supervisor set the ratio in the range of 0-2.5% of risk-weighted assets.