[Financial Microscope] "Stop Real Estate Fund Concentration" in Unison... Solutions Proposed by the Financial Sector

Will the Risk Weight on Real Estate Loans Be Raised?
Financial Authorities and Central Bank Express Concerns
Proposal to Introduce Industry-Specific Risk Weights

Discussions to improve the phenomenon of fund concentration from the financial sector to real estate have become full-fledged. As the interest rate cut cycle is expected to continue with one or two additional base rate cuts this year, concerns are growing that real estate loans may expand again. Not only the Bank of Korea but also financial supervisory authorities such as the Financial Services Commission and the Financial Supervisory Service have expressed concerns about the possibility of banks' loan portfolios concentrating on real estate.

The financial sector unanimously states that "funds concentrated in real estate should be dispersed and moved to productive sectors." The important question is how to create such a structure. In addition to banks' own improvement efforts, the financial sector is also proposing institutional improvement measures such as revising risk weights and redistributing guarantee resources.

Will risk weights be revised? "Residential real estate: Korea 15% - Hong Kong 25%"

Heads of financial supervisory authorities have announced plans to redesign regulations and incentives to resolve the concentration of funds in real estate within the financial sector. The most likely measure is the possibility of revising risk weights.

In Korea, under the Basel Committee on Banking Supervision (BIS) capital regulations, risk weights are assigned to all loans to calculate risk-weighted assets. Loans with collateral or high-credit companies have lower risk weights. Real estate with collateral is recognized as a safe asset, so its risk weight was about three-fifths that of general corporate loans.

If the risk weight is high, the scale of risk-weighted assets also increases, negatively affecting a financial institution's BIS ratio. For banks subject to soundness regulations, there is a structural limitation where they tend to be reluctant to lend to corporate loans with high risk weights, especially to small and medium-sized enterprises (SMEs) and mid-sized companies with lower credit ratings. This has led to a structural increase in relatively safer real estate loans.

Ultimately, to prevent fund concentration in real estate, there are calls to raise the risk weights on real estate loans. Lee Bok-hyun, Governor of the Financial Supervisory Service, said, "Korea considers residential real estate a very safe asset and sets the risk weight at 15%, but it is questionable whether this is appropriate in the Korean context," adding, "Hong Kong applies 25% or other weights, so it is time for us to consider such options."

For loans to promising industries and new sectors to become active: "Risk weights must be lowered"

Strengthening loan regulations on real estate does not automatically mean that loan funds will flow to promising industries or new sectors. In fact, the industry handling loans is also demanding that risk weights be lowered to encourage active lending in these areas.

At the policy conference titled "Real Estate Credit Concentration: Current Status, Issues, and Improvement Measures" held on the 3rd, Park In-seon, Head of Corporate Credit Review Department at Shinhan Bank, said, "Primarily, banks themselves need to improve portfolios excessively concentrated in real estate," but added, "To shift the balance concentrated on real estate to new growth or promising industries, even artificial policy incentives should be actively implemented."

Park said, "Banks currently face growth constraints due to limited risk capital. If the total capital does not increase, the best way to direct limited resources to new growth and promising industries is to adjust risk weights, which the industry is sensitive to."

Currently, risk weights do not differentiate by industry. Banks use internal rating-based approaches to measure risk factors and calculate and manage risk-weighted assets. However, to actively move funds, it is necessary to institutionalize lowering risk weights for new growth and promising industries when calculating the actual BIS ratio. Park said, "Lowering risk weights for industries we want to guide in a more desirable direction would help facilitate lending."

Expanding guarantee support for new growth and promising industries: "Redistribute real estate-related resources"

More actively, there is also a proposal to redistribute guarantee resources of guarantee institutions to new growth and promising industries.

From the bank's perspective, which must manage soundness, it is difficult to provide loans unconditionally to new growth industries whose fund recovery prospects are uncertain. If guarantee institutions partially cover industrial risks through guarantee support, banks can lend more actively. In fact, banks that received Refund Guarantee (RG) from the Korea Trade Insurance Corporation last year for shipbuilding loans not only handled the RG amount but also executed additional loans for raw material purchases amounting to half of the RG amount.

Park emphasized, "If such opportunities are provided, funds concentrated in real estate can flow to growth industries," adding, "There seems to be an urgent need in the secondary battery materials sector." He suggested that since guarantee resources are limited, it is necessary to consider redistributing real estate-related guarantee resources to promising industries.

Kim Hyung-won, Director of Bank Supervision at the Financial Supervisory Service, also called it a "reasonable proposal," saying, "Such incentives could be a good way to redirect funds concentrated in real estate to productive sectors."