Korean banks will apply accord from end-2007
SEOUL - South Korea's 19 commercial banks will all be required to comply with the new Basel capital accord from the end of 2007, irrespective of which option they choose to measure their risk capital under the international agreement to bolster bank safety.
This was announced just before Christmas by Lee Kang-se, director of the New Basel Accord Office at the Financial Supervisory Service (FSS), the country's integrated regulator.
The FSS is still in discussion with the banks about which of the three designated approaches they will adopt to measure their credit and operational risks. But whether they are permitted to choose the simplest, intermediate or most advanced approaches, all 19 commercial banks will begin complying at the same time, unlike in Europe where the new accord - Basel II - will have a staggered two-year introduction, starting from the beginning of 2007.
Broad guidelines on the way that Basel II will be applied in South Korea were issued in October. A more definitive text is to be issued later this year. As in the US and some European countries, the FSS is also planning a fourth quantitative impact study (QIS 4), to gauge the affect that the new regulatory capital rules will have on the banks. This study is likely to start in the spring.
Of South Korea's 19 commercial banks, eight are nation-wide commercial banks, six are regional, and five are policy banks, such as the Korea Development Bank.
The previous impact study (QIS 3), undertaken two years ago, suggested that, under the Basel II rules, capital ratios could, on average, fall 1% or 2% from the current average of 10% to 11%. However, at the time, the banks were "not very well prepared," says Lim Chul-Soon, head of the first New Basel Accord Team, which deals with planning and credit risk. Because of the financial crisis that rocked the country in 1997-98, the banks' probability of default levels are quite high, he says.
By becoming more sophisticated, adjusting the risk distribution of some portfolios, and raising new capital, the banks may be in better shape when the next impact study is undertaken, Lim says.
A second New Basel Accord Team is concerned with operational risk issues and pillars 2 and 3. Whereas, pillar 1 sets the minimum capital levels for banks, pillar 2 involves supervisory oversight of banks' risk models, and pillar 3 deals with information disclosure and market discipline.
Announcing the start date for South Korea's banks, Lee Kang-se was reported by the Korea Times to have said: "the South Korean banking system has improved greatly since the 1997 financial crisis. However, it has to go the extra mile to satisfy international standards." To remain healthy, "banks are expected to shed non-performing loans, and increase capital and loan-loss reserves for years to come," the director said.
He added that: "Korea is not obliged to follow the accord as it is not [one of the 13 countries represented on the Basel Committee, which designed the new capital rules]. But entering the accord along with the advanced countries will reinforce [South Korea's] competitiveness."
Early last year the FSS and the Korea Federation of Banks formed a task force to try and iron out some of their differences over the introduction of Basel II.
