FSS outlines 2017 policy goals

The Financial Supervisory Service, Korea’s financial regulator, is considering policies to fend off future risks like growing household debt and impending regulatory changes worldwide this year, top officials at the agency said Wednesday.

The watchdog emphasized “responsiveness” and “responsibility” during its annual “FSS Speaks” event where the regulator outlines its policy direction for the year to an audience of foreign financial companies in Korea.

“With respect to ‘responsiveness,’ we will try to better relate to the hardships faced by financial consumers and companies,” Zhin Woong-seob, governor of the Financial Supervisory Service, said in his keynote speech. “We will also make sure to fully meet our ‘responsibility’ of securing stability in the financial market, protecting financial consumers and supporting sustained growth of the financial industry.”

Koo Kyeong-mo, deputy governor, said even though the domestic financial market remained “stable” despite various unfavorable factors like the impeachment of President Park Geun-hye and U.S. interest rate hikes, potential risks still loom large. Banks will likely face limited growth as the government enacts policies to curb rising household debt, Koo said, while large securities companies are expected to have a bigger role in shaping the country’s investment banking sector.

To respond to increasing risk factors, the Financial Supervisory Service will focus on stabilizing the market and improving the soundness of financial companies. One of the key items on its agenda this year is slowing the rise in household debt.

Household debt reached a record-high 1,344 trillion won ($1.18 trillion) at the end of 2016. Koo said household loan trends across all financial sectors must be monitored closely, and financial companies must incorporate the stricter debt service ratio, which calculates the principal and accrued interest that must be repaid relative to the borrower’s income, into their loan screening model.

Min Byung-jin, director general of bank supervision at the agency, said the Financial Supervisory Service will set up a database for household loans and expand the system to encompass nonbanking financial companies. He added the agency will conduct “stress tests” throughout the year to check the stability of household debt.

When it came to Korea’s insurance industry, the topic of the day was a regulatory change to be adopted in 2021 that would require firms to report their debt in terms of market value rather than book value. This standard would put a burden on insurance firms to accrue additional capital as the size of their liabilities will increase.

The net income of the insurance industry nationwide stood at 4.3 trillion won in the first half of last year, and its return on assets was 0.88 percent. Both were the highest in the local financial industry, highlighting their importance in the Korean financial market.

To induce a “soft landing” of the regulatory change, the agency says it has taken some pre-emptive measures. The Financial Supervisory Service will gradually introduce a risk-based capital requirement system starting this year, in which the watchdog will extend the insurance liability duration from 20 years to 25 years before extending it to 30 years next year.

This would in effect widen the gap between asset duration and liability duration rather than at once when the regulatory change takes effect in 2021. It will give insurance companies time to steadily increase their asset duration.

“To our calculation, insurance companies must have about 60 percent of necessary capital ready by 2021,” said Jin Tae-guk, director general of insurance supervision at the Financial Supervisory Service.

BY CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]