Banks and Bank Holding Companies to Be Required to Accumulate 'Stress Buffer Capital' Starting Year-End

Dividend and Bonus Restrictions When Stress Buffer Capital Not Accumulated
Minimum Capital Regulation Ratio Raised According to Common Equity Capital Ratio Decline
Financial Authorities Announce Regulation Changes by 21st

Starting at the end of this year, banks will be required to mandatorily accumulate additional capital called Stress Buffer Capital to prepare for crisis situations. Failure to accumulate this capital may result in restrictions on profit dividends or bonus payments.

On the 11th, financial authorities announced that they will conduct a public notice of regulatory changes until the 21st to introduce Stress Buffer Capital for banks and bank holding companies, including amendments to the Banking Supervision Regulations, Enforcement Rules of Banking Supervision, Financial Holding Company Supervision Regulations, and Enforcement Rules of Financial Holding Company Supervision.

So far, financial authorities have been promoting improvements to the banking soundness system by announcing directions for system improvements after discussions by the Banking Management, Business Practices, and System Improvement Task Force (TF) last year to enhance the loss absorption capacity of the banking sector. The introduction of the Stress Buffer Capital is a follow-up measure to this.

Since 2016, South Korea has operated a risk assessment system including the Internal Capital Adequacy Assessment Process (ICAAP) for domestic banks and bank holding companies under the Basel Pillar 2 framework. However, since 2022, with rising interest rates and increasing domestic and international uncertainties, the need has arisen to utilize crisis scenario analysis results as a more direct supervisory tool to ensure banks can maintain their functions even in unexpected crisis situations.

Once the Stress Buffer Capital system is introduced, banks will be required to accumulate additional capital up to a maximum of 2.5 percentage points (P) based on the decline in common equity tier 1 capital ratio from crisis scenario analysis results, by raising the existing minimum capital regulatory ratio. If banks fail to comply with the minimum capital regulatory ratio including the Stress Buffer Capital, restrictions on profit dividends and bonus payments may be imposed.

The application targets are 17 domestic banks and 8 bank holding companies. Korea Development Bank, Export-Import Bank of Korea, and Industrial Bank of Korea, which have difficulty in independently raising capital and have government loss compensation obligations in case of crisis, are excluded from the Stress Buffer Capital application. Additionally, newly established internet-only banks are granted a two-year grace period after their establishment.

This amendment will be implemented from the end of this year after going through the Regulatory Reform Committee review and the Financial Services Commission resolution following the public notice of regulatory changes.