S&P: "Bank Regulatory Easing Weakens Capital Adequacy... Increased Downward Pressure on Credit Ratings"

On September 29, international credit rating agency S&P Global Ratings (hereinafter referred to as S&P) pointed out that the easing of capital regulations could weaken the capital adequacy of domestic banks.

S&P made this analysis in response to recent financial authorities’ efforts to rationalize capital regulations for banks in order to alleviate the concentration of funds in the real estate sector and to encourage the flow of capital into more productive areas.

On the 29th, as damage such as paralysis of the financial network continues due to a fire in the Data Center of the National Information Resources Service, citizens using commercial bank ATMs are showing a quiet scene with no users. 2025.09.29 Photo by Yoon Dongju

Recently, the government announced its “Direction for Promoting a Major Shift toward Productive Finance.” The core of this policy is to ease the concentration in real estate and strengthen the role of financial institutions so that funds are allocated to companies in need. As part of the detailed measures, the government unveiled a “Plan to Rationalize Capital Regulations for Banks and Insurers for Productive Finance.”

Among these, the policy related to the banking sector mainly includes lowering the risk weight for equities from the existing 400% to 250%, and raising the minimum risk weight for new mortgage loans from 15% to 20% to alleviate the concentration in real estate.

In its report, S&P stated that these regulatory changes would “allow banks to expand their exposure to equities and funds while maintaining their regulatory capital ratios at current levels.”

It further explained, “We assess banks’ capital adequacy based on our own capital model methodology and risk weights, and according to our criteria, this expansion of exposure is a factor that weakens banks’ capital adequacy.”

According to S&P’s assessment methods and scenarios, if the amount of equities and funds held by banks increases by 10%, the average risk-adjusted capital ratio of major banks would fall by 15 basis points (1bp = 0.01 percentage point) from about 8.45% at the end of last year.

In particular, S&P projected that “if major banks double their investments in equities and funds, the average risk-adjusted capital ratio could drop to 7.3%, and some banks could face downward pressure on their ratings.” This is only slightly above S&P’s lower threshold for appropriate capital and profitability, which is 7%.

S&P added, “While we do not expect domestic banks to aggressively expand their risk assets, the government’s encouragement of increased corporate finance activities such as venture investment may lead to a further rise in the proportion of investments in equities and funds.”