Financial Authorities Strengthen Reserve Requirements for Savings Banks' Real Estate PF

[Asia Economy Reporter Kim Jin-ho] Financial authorities are strengthening the standards for loan loss provisions on real estate project financing (PF) loans to enhance the soundness management of savings banks. They have also imposed obligations to strengthen internal controls by establishing loan loss provision standards in advance and to improve crisis management capabilities by mandating crisis situation analysis.

The Financial Services Commission announced on the 27th that it had approved an amendment to the Mutual Savings Banks Supervision Regulations based on these contents. The amendment was made to strengthen soundness management in response to the recent significant increase in the asset size of savings banks.

First, for real estate PF loans of savings banks, the provision to lower the loan loss provision rate, which applies to banks and insurance companies, will be deleted. The regulation that lowered the provision rate for normally classified assets when guarantees are provided by investment-grade companies (from 2% to 0.5%) will be removed. For assets classified as requiring caution, the provision to lower the rate when the related asset is an apartment (from 10% to 7%) will also be deleted, unifying the rate to 10%.

Additionally, internal controls have been strengthened by requiring savings banks to establish additional loan loss provision standards in advance and operate them consistently.

The loan loss provision standards must be set through deliberation and resolution by the board of directors (or the risk management committee), and the standards and results must be reported to the Financial Supervisory Service.

The regulation also stipulates the implementation of a crisis situation analysis system by savings banks. The Financial Supervisory Service will recommend appropriate countermeasures and self-help plans for vulnerabilities revealed through crisis situation analysis.

Furthermore, the regulations have been amended to allow management evaluations to be conducted not only during comprehensive inspections at headquarters but also during sector inspections when necessary.