The Financial Services Commission (the “FSC”) has announced its plan to relax the KRW-denominated loan-to-deposit ratio (the “LDR”) requirement, which applies to Korean branches of overseas banks. This announcement was made at the 7th Financial Regulation Reform Committee meeting on April 5, 2023.
Currently, the LDR requirement applies to banks, including Korean branches of overseas banks, with outstanding KRW-denominated loans of KRW 2 trillion or more. They are required to have an LDR of 100% or lower.
The pending relaxation of the LDR requirement has two main aspects: (i) narrowing down the scope of Korean branches subject to the LDR requirement; and (ii) expanding the type of funds that can be included in the amount of deposits when calculating the LDR.
1. Narrowing Down the Scope of Korean Branches Subject to the LDR Requirement
According to the announcement, the banks will be subject to the LDR requirement if their outstanding KRW-denominated loans are KRW 4 trillion or more. This represents a major change from the current KRW 2 trillion threshold.
Under the current threshold, there are seven Korean branches of overseas banks that are covered by the LDR requirement. Once the threshold is raised to KRW 4 trillion, only two of them will remain subject to the LDR requirement. The other five branches should be able to expand their KRW-denominated loan portfolio as they will no longer be restricted by the LDR requirement.
2. Expanding the Type of Funds That Can Be Included as Deposit
At present, for the purpose of calculating the LDR, a Korean branch of a overseas bank is permitted to include long-term borrowings from its head office or offshore branches (the “Affiliate L-T Borrowings”) as part of its deposits up to its Capital B amount. Going forward, the Korean branch will be able to use not only all of the Affiliate L-T Borrowings, but also short-term borrowings from the same up to 50% of its Affiliate L-T Borrowings. This change will raise the deposit side of the LDR, effectively allowing the Korean branch to make more loans without breaching the LDR requirement.
The FSC is expected to amend the Banking Supervision Regulations during this second quarter of the year to implement the relaxation of the LDR requirement. It is estimated that the amendment would allow Korean branches of overseas banks to make additional loans of more than KRW 12.2 trillion.
As the lending capacity is expanded, it will be advisable for relevant branches to review and strengthen their customer protection and internal control systems for managing various risks, including those relating to credit, loan loss reserves, and capital ratios, so that the branches and their management can remain insulated from legal or regulatory challenges.