Korea’s capital relaxation is no boost to banks’ loss absorption

Author: Brian Yap | Published: 28 Oct 2016

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...