Basel III capital framework for domestic banks began on December 1, 2013. As a result of the implementation of the new capital standards since then, the minimum capital standards and the phase-in arrangements for domestic banks are virtually same as those put forth by the Basel Committee on Banking Supervision.
In full compliance with the Basel Committee’s stricter capital standards, banking regulations provide that domestic banks’ common equity tier 1 (CET 1) must be at least 4.5 percent of the risk-weighted assets and tier 1 capital 6.0 percent of the risk-weighted assets. Total regulatory capital, which consists of tier 1 capital and tier 2 capital, must be at least 8.0 percent of the risk-weighted assets at all times. Phase-in of conservation capital buffer above the 8 percent minimum has also been set to begin in 2016.
In addition to Basel III’s enhanced capital standards, liquidity coverage ratio (LCR)ㅡdefined as a ratio of stock of high quality liquid assets to net cash outflows for a 30-day periodㅡtook effect at the beginning of 2015 requiring domestic commercial banks to meet a minimum ratio of 100 percent. For foreign bank branches, the minimum has been set at 20 percent for 2015 but will increase by 10 percentage points each year thereafter to become 60 percent by 2019. For the specialized banks excluding the Export-Import Bank of Korea, the minimum starts at 60 percent for 2015 but will increase by 10 percentage points each year thereafter to meet 100 percent in 2019.
Basel III Minimum Capital Requirement and Phase-in Arrangement
|Common equity tier 1 ratio||4.5||4.5||4.5||4.5||4.5|
|Capital conservation buffer||-||0.625||1.25||1.875||2.50|
|Common equity tier 1 plus capital conservation buffer||4.5||5.125||5.75||6.375||7.00|
|Tier 1 capital||6.0||6.0||6.0||6.0||6.0|
|Total regulatory capital||8.0||8.0||8.0||8.0||8.0|
|Total regulatory capital plus capital conservation buffer||8.0||8.625||9.25||9.875||10.5|
|Liquidity coverage ratio||60||70||80||90||100|
Nonbank Financial Companies
Mutual Savings Bank
BIS minimum capital requirements became effective for mutual savings banks (MSBs) on December 31, 1998. The minimum capital rules have since been incorporated into the supervisory guidance standards and used for prompt corrective action evaluations. As part of enhanced prudential standards for MSBs, the minimum capital requirement was set to be raised from 5 percent to 7 percent effective July 1, 2014, for MSBs with KRW2 trillion or more in assets at the end the previous accounting period. For MSBs with less than KRW2 trillion in assets, the minimum ratio has been set at 6 percent from July 1, 2014, to June 30, 2016, and to 7 percent effective July 1, 2016.
For prompt corrective action or PCA, an MSB with assets in excess of KRW2 trillion is issued a management improvement recommendation (MIR) for minimum capital ratio below 7 percent, a management improvement demand (MID) for minimum capital ratio below 5 percent, and a management improvement order (MIO) for minimum capital ratio below 2 percent. Similarly, an MSB with assets less than KRW2 trillion is issued MIR for minimum capital ratio below 6 percent (7 percent after July 1, 2016), MID for minimum capital ratio below 4 percent (5 percent after July 1, 2016), and MIO for minimum capital ratio below 1.5 percent (2 percent after July 1, 2016).
Specialized Credit Finance Companies
A uniform rate of 7 percent minimum capital requirement applies to specialized credit finance companies with the exception of credit card companies, to which an 8 percent minimum capital requirement applies. The minimum ratio for credit unions is 2 percent.
Financial Investment Services Providers
Net operating capital ratio (NOCR), a variant of net capital ratio (NCR), was first introduced for securities companies in April 1997. After some modifications, NOCR was replaced by NCR in April 2014 in order to better reflect financial investment services providers’ loss-absorbing capacity and risk exposures on a consolidated basis. With the initial adoption of NCR, financial investment services providers that were licensed as brokers and dealers (tier 1 group) became subject to the NCR requirement, but the others remained subject to the NOCR requirement. (Tier 2 group comprises collective investment services operators and tier 3 group companies providing investment advisory services, discretionary investment services, and trust services.) Financial investment services providers that opted for early NCR adoption may do so from January 2015. Others that did not opt for early NCR adoption will become subject to NCR beginning in January 2016.
Minimum NOCR and NCR for Prompt Corrective Action
The minimum NCR for financial investment services providers that are licensed as brokers and dealers (tier 1 group) is 100 percent. Tier 1 group companies whose NCR is in the 50 to 100 percent range are subject to management improvement recommendation (MIR), those whose NCR is in the 0 to 50 percent range management improvement demand (MID), and those whose NCR is below 0 percent management improvement order (MIO).
The minimum NOCR for financial investment services providers that are in tier 3 group is 150 percent. MIR is issued for NOCR in the 120 to 150 percent, MID for NOCR in the 100 to 120 percent range, and MIO for NOCR 100 percent.
Risk-based capital (RBC) replaced solvency regime for insurance companies in April 2009 and took effect in April 2011 following a two-year grace period that had been given to ensure a smooth transition to the new capital regime. The Insurance Business Act, the governing legislation for insurance business, sets the minimum RBC ratio of 100 percent. RBC functions as a minimum regulatory capital for insurance companies to be determined on the basis of the risks to which an insurance company is exposed. It is expressed as a ratio of available capital to required capital. For insurance supervision, the RBC ratio provides the basis for the supervisory rating of insurance companies (RAAS) and any follow-up prompt correction action needed.
Available capital, the numerator of the RBC ratio, is the risk buffer available to cover any unpredicted losses that insurance companies may sustain; it is similar to solvency margin under the solvency margin regime. Available capital is calculated by first aggregating an insurance company’s core capital, which primarily consist of capital stock (paid-in capital and capital surplus), retained earnings, and accumulated other comprehensive income, and supplementary capital such as subordinated debt and loan loss reserves, then deducting from the aggregate capital items including prepaid expenses, deferred acquisition cost, and goodwill, and any capital shortfalls of the insurance company’s subsidiaries.
Required capital, the denominator of the RBC ratio measuring the insurance company’s total risk, is capital calculated from the insurance company’s underlying exposures to insurance risk, interest rate risk, market risk, credit risk, and operational risk.