South Korea’s new capital buffers to strengthen banking system’s resilience

No capital raising or sheet adjustment is expected from the country’s biggest banks.

Korean financial authorities’ activation of a countercyclical capital buffer (CCyB) for banks and bank holding companies strengthens the banking system’s resilience to shocks, says Fitch Ratings.

The country’s Financial Services Commission has reportedly signaled to financial institutions that they will be subject to a new buffer requirement that they will have to meet by May 2024.

The buffers are not expected to drive significant new capital raising or balance sheet adjustment for major Korean banking institutions— Kookmin Bank, Shinhan Bank, KEB Hana Bank, and Woori Bank– as they have already met the enhanced capital requirements.

“Nevertheless, we expect the [new capital buffers] to strengthen the banks’ focus on preserving capital buffers in the near term, as credit risks around exposures to vulnerable borrowers crystallise amidst a weaker economic environment,” said Fitch Ratings’ financial institutions director Matt Choi and senior director Heakyu Chang.

Banks’ solid earnings prospects in the near term should help this goal, despite the increased demand for larger dividend payouts, Choi and Chang further noted.

“We also believe [that] banks may take a more cautious approach to balance sheet growth, both domestically and overseas,” they added.

Some Korean banks already had plans to raise additional capital prior to the announcement activating the CCyB. 

Fitch views the introduction of the countercyclical capital buffer as more of a structural reform than an effort to curb mounting risks associated with the economic cycle. 

However, Fitch pointed out that in announcing the measure, Korean authorities highlighted the still-rapid corporate loan growth and the high level of credit-to-GDP and total credit compared with long-term averages as factors supporting the activation of the new buffers.