Korea has for the first time allowed banks to designate
their loan loss reserves as common capital stock, but the move
is unlikely to boost banks’ ability to hedge
against loan losses.
The Financial Services Commission (FSC) announced on 7
October that it would eradicate excessive burdens on banks to
prepare against potential loan losses in an effort to boost
lenders’ profitability. But there is no immediate
impact expected on the profitability of banks, as earning
surplus for loan loss being recognised as common stock will
only improve banks’ own capital ratio. The
possibility of any change in how banks make provision for their
loan loss reserves and their earning surplus for loan losses
has also been ruled out.
"This (relief) will not necessarily mean that
banks’ ability to prepare against potential losses
will be enhanced," said Chan Moon Park, senior attorney at Kim
& Chang in...