South Korea’s top financial regulator Tuesday called on local lenders to build up their capital conservation buffer to absorb losses in preparation for the prolonged COVID-19 crisis.

“(The FSC) urges banks to strengthen their loss-absorbing capacity through measures such as increasing allowances for bad debts, while continuing to help lending in the real economy amid the pandemic,” Financial Services Commission Vice Chairman Sohn Byung-doo told a meeting of senior financial policymakers. 

“The International Monetary Fund as well as the US Federal Reserve have also recommended commercial banks to prepare larger capital conservation buffers to absorb losses by either halting dividend payments or buybacks of their own shares while the coronavirus outbreak continues.”

The capital conservation buffer was introduced in the Basel III set of reform measures -- introduced in 2019 -- developed by the Bank for International Settlements to ensure that banks have an additional layer of usable capital that can be drawn down when losses are incurred. 

The FSC will continue to help the local banking industry to support the real economy, while protecting its fiscal health in the long term, Sohn added. 

As for the state fund of 40 trillion won, set up to protect key industries, Sohn stressed its careful use.

“If possible, the stimulus programs previously offered by the government should be operated first to finance domestic industries, making the newly launched fund keep enough cash to spare for other emergency situations,” he said. 

Meanwhile, local lenders’ financial support, including extension of debt maturity and loan programs with favorable interest rates, offered to low-income families as well as small and medium-sized businesses from February 7 to June 26, amounted to nearly 146 trillion won ($121 billion), according to the FSC. 

By Choi Jae-hee (cjh@heraldcorp.com)