Fitch Ratings says regulation of the banking sector has strengthened noticeably in Korea, as in many other developed markets, since the onset of the 2008 global financial crisis. This includes closer monitoring of loan quality, enhanced supervision of liquidity and funding, and encouraging banks to maintain adequate capitalisation. Fitch is confident the banks will meet regulatory minimums (including under Basel III) relating to liquidity/funding and capitalisation as they are phased in.
In particular, a tighter regulatory framework for foreign-currency funding and liquidity has helped to lower risks in this area somewhat. Fitch expects bank capitalisation to modestly improve on the back of relatively low dividend payout ratios (although there is pressure to increase the ratios), while banks are also being strongly encouraged to maintain adequate buffers for loan impairments.
However, as in many other jurisdictions, the system would benefit from stronger regulatory enforcement. Proactive and more consistent enforcement across all financial institutions helps the stability of banking systems. Korea's regulatory regime is made complex by its plethora of regulations. Banks can find it challenging to maintain adherence while the regulators at times also face difficulties in enforcing rules effectively, especially in relation to policy banks and non-bank financial institutions.
The policy sector plays a more significant role in the Korean financial system than in any other developed market, yet their policy mandate may be subject to potentially conflicting objectives from their respective ministries.
