Large exposure limits for banks to be extended again amid SVB fallout

The Korea Times

The Korea Times

Finance

Mon, December 4, 2023 | 16:29

Economy

Large exposure limits for banks to be extended again amid SVB fallout

Posted : 2023-03-13 16:00

Updated : 2023-03-13 16:31

An analyst monitors news related to the closure of Silicon Valley Bank at the headquarters of Hana Bank, Seoul, Monday morning. Yonhap

The bank's collapse likely to put brakes on government's drive on specialized banks

By Lee Yeon-woo

The financial authorities will extend the large exposure (LEX) limits for banks again this year because of expanding market volatility caused by the collapse of Silicon Valley Bank (SVB) following a liquidity crunch.

According to the financial industry, Monday, the Financial Service Committee (FSC) issued an administrative guidance, ordering the extension of LEX limits until next March to ensure that the sum of a bank's exposure values to a single counterparty or group of connected counterparties does not exceed 25 percent.

The LEX standard, set by guidelines from the Basel Committee on Banking Supervision (BCBS), seeks to monitor and limit the losses that an internationally active bank can face from clients' fallout, according to the Bank for International Settlements (BIS).

"We will continue to run large exposure limits and extend them for a year, in line with the BCBS' recommendations, to prevent banks from suffering huge losses due to counterparties' bankruptcy," the FSC stated.

To stabilize the market, financial authorities are also considering extending measures aimed at supplying liquidity to the country's short-term funding market. Last October, several regulations were lifted, including a six-month delay in the application of a higher liquidity coverage ratio (LCR), which is required for each bank.

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The FSC and the Financial Supervisory Service (FSS) received opinions about the extension from financial institutions and banks on March 7. They are expected to extend the measures within this month.

"Whether to extend the temporary measures to stabilize markets will be announced through official channels after receiving opinions," an official from the financial authority said. "The prevailing opinion is that such measures should be extended until the market stabilizes."

Daejeon Mayor Lee Jang-woo, far right, discusses the establishment of an investment bank in his city with officials of Silicon Valley Bank (SVB), at the SVB office in California, Jan. 9. Courtesy of Daejeon City

Concerns rising over plan to launch specialized banks in Korea

The abrupt closure of SVB, which had been playing a significant role as a source of funds for Silicon Valley's venture capital, is likely to hinder the government's recent drive to launch Korean versions of specialized banks.

Since last month, financial authorities here have been discussing the introduction of various measures such as a small license and challenger banks to increase competition in the local banking sector. Both measures allow lenders to strengthen certain functions and offer specialized customer services, with SVB serving as a reference for those models.

Daejeon Metropolitan City is also known to have pushed for the establishment of investment banks specializing in corporate financing, using SVB as a role model. The project was part of President Yoon Suk Yeol's presidential election pledges.

The collapse of SVB, however, has raised concerns about the potential risks of launching multiple specialized banks. Specialized banks are criticized for their instability because banks that focus on only certain parts of loan services find it difficult to bounce back if impacted, compared to other commercial banks that offer a wide range of loan services.

"SVB's major customers are startups based on technology or healthcare, as it focuses on the venture capital industry, unlike other commercial banks that have business models are based on household deposits," said Kim Yumi, a market strategist at Kiwoom Securities.

"Such a bank has a limit because it focuses only on a certain industry, and the stability of deposits has no choice but to fall."

S&P, a global credit ratings agency, noted that "small local banks and banks newly established within the last two years find it hard to raise funds from the market compared to major banks, and most of them are unprofitable."

yanu@koreatimes.co.kr