Introduction of 'Special Allowance Reserve Requirement' to Enhance Banks' Loss Absorption Capacity

Financial Services Commission Announces Upcoming Amendments to Bank Supervision Regulations

[Asia Economy Reporter Yu Je-hoon] The financial authorities will introduce a 'special loan loss provision requirement' that allows banks to proactively and flexibly enhance their loss absorption capacity in response to uncertain economic conditions.

The Financial Services Commission announced on the 26th that it will implement a notice of amendment to the Banking Supervision Regulations containing this provision. The proposal is expected to undergo review by the Regulatory Reform Committee and the Ministry of Government Legislation between March and May and be implemented within the first half of this year.

Under the current Banking Supervision Regulations, banks are required to set aside loan loss provisions according to accounting standards for expected losses, and loan loss reserves to supplement loss absorption capacity. However, the current regulations stipulate that the minimum combined amount of loan loss provisions and loan loss reserves is calculated as the sum of amounts derived from minimum reserve rates based on asset soundness classifications, making it difficult to respond flexibly to economic conditions, according to the authorities.

Accordingly, the FSC has decided to introduce the special loan loss provision requirement. Based on the Financial Supervisory Service's evaluation of the adequacy of loan loss provisions and reserves, if it is determined that the provisions and reserves are insufficient relative to the bank's expected future losses, the bank can be required to additionally set aside loan loss reserves. Previously, there was no institutional basis for this, and the FSS had to request voluntary cooperation from banks when necessary.

The authorities will also establish an institutional basis within the Banking Supervision Regulations to periodically review banks' expected loss forecasting models. Accordingly, banks will annually verify the adequacy of these models through independent organizations and submit the results to the FSS. If the FSS deems the review results inadequate, it can request improvements or take other necessary measures.

The FSC stated, "We will promptly proceed with amendments to the Banking Supervision Regulations to establish an institutional foundation for enhancing banks' loss absorption capacity and ensure implementation within the first half of this year."