Capital requirements

Capital adequacy

Describe the legal and regulatory capital adequacy requirements for banks. Must banks make contingent capital arrangements?

Under the Banking Act, banks are required to maintain capital of at least 100 billion won and local banks should maintain capital of at least 25 billion won.

In addition, according to Basel III, the Bank for International Settlements (BIS) capital adequacy ratio should be maintained at 8 per cent or more, with the ratio of common stock of 4.5 per cent and the ratio of basic capital (tier I) to 6 per cent or more, as indicators of capital adequacy. Basel III’s Counter Cyclical Buffer system was introduced in Korea, and the FSC set the buffer rate at zero per cent in 2016 and maintained it at zero per cent until the end of 2018. Furthermore, the leverage ratio of capital divided by total assets must be maintained at 3 per cent or more based on its base capital. The short-term liquidity coverage ratio must be more than 100 per cent (60 per cent or more for foreign bank branches).

Banks in Korea have no obligations for contingent capital arrangements.

How are the capital adequacy guidelines enforced?

The Director-General of the FSS must monitor the soundness of a bank’s management by analysing the management of the bank and evaluating the management practices of it after examination and reflect the results in its supervision and inspection. The Director-General of the FSS may request the bank to submit a plan or agreement for improvement or conclude a management improvement agreement with the bank if it is deemed that there is a possibility the bank will be unable to meet the requirement of capital adequacy (see question 16) or that there are unsound business areas.

Undercapitalisation

What happens in the event that a bank becomes undercapitalised?

The FSC can issue management improvement recommendations, management improvement demands, and management improvement orders when the capital adequacy indicators are insufficient or the management result evaluation grade is below a certain level. The minimum capital requirement is part of factors considered for issuance of a banking licence, and if the requirement is not met, the banking licence may be revoked or all business operations suspended.

Insolvency

What are the legal and regulatory processes in the event that a bank becomes insolvent?

If the bank is bankrupt, the banking licence will be cancelled, and the related procedure will be the same as the dissolution discussed for question 12.

Recent and future changes

Have capital adequacy guidelines changed, or are they expected to change in the near future?

Since the capital adequacy ratio has been changed in accordance with Basel III (see question16), it is necessary to meet the above criteria by 2019 in keeping with the timetable provided.