🚨 Can RWA Regulatory Easing Transform Finance?
Today Korean Economic News for Beginners | 2025.09.27
0️⃣ Government Wants to Reduce Household Loans and Boost Business Investment, But Effectiveness Questioned
📌 Proposal to Raise Mortgage RWA and Lower Business Investment RWA, Banks Say "Simple Regulatory Changes Have Limits"
💬 Financial authorities are adjusting Risk Weighted Asset (RWA) regulations to redirect money flow from real estate to business investment. The strategy involves applying stricter RWA ratios to mortgage loans to discourage banks from expanding household lending, while lowering RWA for business investment loans to increase corporate funding. However, banks are pushing back, saying "With existing household loan regulations already in place, RWA adjustments alone cannot achieve the desired fund reallocation" and worry that "it will only make loans harder for ordinary people to get." Questions about actual effectiveness are also raised, especially with international regulatory standards like Basel III becoming stricter.
1️⃣ Simple Explanation
The government wants to encourage banks to lend more money to businesses for investment rather than for real estate purchases. They plan to adjust something called 'RWA' regulations to do this, but there's debate about whether this method will actually work.
Let me first explain what RWA means. RWA stands for "Risk Weighted Assets," which is how banks calculate their assets (like loans) based on how risky they are. For example, mortgage loans are considered relatively safe and get a low weight, while personal loans are considered riskier and get a higher weight.
Banks must keep a certain amount of capital compared to their RWA. If the RWA weight for mortgage loans increases, banks would need to hold more capital for the same loan amount, making it more expensive for them. On the other hand, if business investment loans get lower RWA weights, it becomes relatively cheaper for banks to make these loans, encouraging them to lend more to businesses.
The government's intention is clear. They believe banks have focused too much on mortgage loans because they seemed safe, but this has contributed to rising real estate prices and increasing household debt. Instead, they want to make it easier for companies to borrow money for starting new businesses or expanding facilities, creating what they call "productive finance" that helps economic growth.
But reality isn't that simple. Banks are already restricted by household loan caps, DSR (Debt Service Ratio) regulations, and other rules that make it hard to increase household lending. Also, banks can't just increase business loans without considering the risk of defaults.
In the end, experts say that regulatory adjustments alone - the "stick" approach - has limits, and various "carrots" are needed to actually encourage banks to increase business investment lending.
2️⃣ Economic Terms
📕 Risk Weighted Assets (RWA)
Risk Weighted Assets are the total assets of a bank calculated by reflecting the risk level of each asset.
- Safe assets like government bonds get 0% weight, mortgage loans get 35%, and general business loans get 100%.
- Banks must hold a certain percentage of capital compared to their RWA, so higher RWA means more capital burden.
- The government wants to adjust these weights to guide banks' lending direction.
📕 Common Equity Tier 1 Ratio (CET1 Ratio)
The CET1 ratio is a bank's core capital divided by risk-weighted assets, serving as a key indicator of bank health.
- Domestic banks must maintain at least 4.5%, but actually keep around 10%.
- The higher this ratio, the better the bank's ability to handle losses.
- When RWA increases, this ratio decreases, putting pressure on bank stability.
📕 Basel III
Basel III is an international banking regulation standard introduced after the 2008 financial crisis.
- It includes requirements to increase bank capital ratios, strengthen liquidity, and limit leverage.
- It particularly strengthened regulations by reducing reliance on internal models for RWA calculations and setting minimum floors.
- Korea has been implementing it gradually since 2022, increasing pressure on banks.
📕 Productive Finance
Productive finance means providing funds to sectors that help real economic growth rather than consumption or speculation.
- Typical examples include loans supporting corporate facility investment, R&D, and new business ventures.
- In contrast, loans for real estate speculation or excessive consumption are classified as non-productive finance.
- The government is promoting various policies to encourage financial institutions to increase their productive finance ratio.
3️⃣ Principles and Economic Outlook
✅ How RWA Adjustments Work and Their Limitations
Let's analyze how RWA regulatory adjustments actually work and why they have limitations.
First, RWA adjustments are powerful tools that directly affect banks' profitability. If mortgage loan RWA weights increase from the current 35% to 50%, banks would need to hold more capital for the same loan amount. For example, to lend 10 billion won in mortgages, currently 3.5 billion won worth of RWA increases, but if the weight rises to 50%, it would increase by 5 billion won. This leads to higher capital costs, creating pressure to raise loan rates or reduce loan volumes. Conversely, if business investment loan weights drop from 100% to 75%, relative profitability improves, creating incentives to increase such lending.
Second, other regulations already constrain banks' lending directions in reality. Currently, domestic banks are bound by multiple layers of household loan suppression policies including total loan caps, DSR regulations, and stress tests. Simply adjusting RWA weights in this situation is unlikely to create dramatic changes. Instead, it's more likely to just raise loan rates for ordinary people and make loan screening stricter. For business loans too, banks must comprehensively consider corporate creditworthiness, collateral, and business prospects, so RWA reductions alone won't cause lending to surge.
Third, conflicts with international regulatory standards cannot be ignored. Basel III limits the use of internal models in RWA calculations and sets minimum floors (output floors). This prevents countries from arbitrarily lowering RWA to avoid capital regulations. Therefore, no matter how much Korea lowers RWA weights domestically, they may be limited by international standards. Particularly, Korea has been applying Basel III final standards since 2024, actually facing pressure to increase overall RWA.
RWA adjustments are certainly effective policy tools, but they can only be effective when harmonized with other constraining factors.
✅ Bank Responses and Actual Effects
Let's examine how banks might respond to RWA regulatory adjustments and what the actual effects might be.
First, banks are likely to respond with interest rate policies rather than immediately adjusting their loan portfolios. When mortgage RWA increases, rather than immediately stopping loans, they'll likely raise rates to maintain profitability. Conversely, even if business loan RWA decreases, rather than immediately increasing lending, they'll likely first lower business loan rates to enhance competitiveness. This suggests the effect might be limited to "gradual interest rate system adjustments" rather than the "rapid fund flow transformation" the government wants.
Second, in the medium to long term, it could lead to changes in banks' business strategies. If RWA adjustments continue, banks would need to change their organizational structures and business strategies. This might include downsizing mortgage loan departments while expanding corporate finance divisions, or upgrading corporate credit evaluation systems. Since business loans require more expertise than household loans, personnel recruitment and training would need to be supported. These changes take time but can have lasting effects once established.
Third, response strategies are likely to differ by bank. Large commercial banks already have diverse business areas, making adaptation relatively easy, but regional banks and savings banks with high mortgage loan dependence might face greater impact. Conversely, banks specializing in corporate finance might gain relative competitive advantage. This could lead to widening profitability gaps between banks, ultimately promoting industry restructuring. The government needs careful adjustments to minimize such side effects while achieving policy goals.
Banks' actual responses will vary greatly depending on the size and speed of regulatory changes and coordination with other policies.
✅ Alternative Approaches and Need for Complementary Policies
Let's examine other policy tools that could complement the limitations of RWA adjustments.
First, incentive policies using government guarantees or risk-sharing systems might be more effective. Rather than just lowering business loan RWA, expanding guarantees through credit guarantee funds or technology guarantee funds, or expanding cooperative financing with policy financial institutions could provide substantial help. For example, for SME innovation investments, the government could substantially reduce banks' RWA burden by sharing part of the losses. This would allow banks to reduce risk while securing profitability, increasing their motivation to expand lending.
Second, indirect guidance through tax benefits or fee incentives could also be considered. This would involve allowing corporate tax deductions or special reserve accumulations for business investment-related loans, while imposing additional charges on excessive household loans. This could have more direct and immediate effects than RWA adjustments. It would also avoid conflicts with international regulations, making the policy more sustainable.
Third, indirect approaches through fintech and alternative finance activation are also needed. Rather than relying only on traditional bank loans, diversifying funding channels for companies through new financial services like P2P lending, crowdfunding, and digital asset-backed loans. This approach could increase fund supply regardless of banks' RWA burden, multiplying policy effects. However, this would require establishing appropriate regulatory frameworks for investor protection and systemic risk management.
Ultimately, productive finance transformation can be achieved through a combination of various policy tools rather than the single tool of RWA adjustment.
4️⃣ In Conclusion
The government's attempt to transform productive finance through RWA regulatory adjustments has the right direction but appears to have limitations in terms of effectiveness. Simple regulatory adjustments alone are unlikely to dramatically change banks' lending behavior and may only increase side effects.
The biggest problem is realistic constraints. Banks are already in a situation where it's difficult to increase household loans due to total loan regulations and DSR regulations, and they must be cautious about business loans due to default risks. When international regulations like Basel III are added, the effects of RWA adjustments are inevitably greatly limited.
Moreover, RWA adjustments have a "stick" effect but lack a "carrot" effect. Increasing the burden on mortgage loans shows immediate effects, but reducing the burden on business loans doesn't make banks immediately increase lending. Without corporate creditworthiness, business viability, and collateral capacity, loans won't increase no matter how much regulations are eased.
Therefore, a more comprehensive approach is needed. Various policy tools must be combined including expanding government guarantees, building risk-sharing systems, providing tax incentives, and activating alternative finance. Particularly, investment incentives and regulatory improvements to increase companies' actual funding demand must also be implemented.
The concerns raised by the banking sector should also be heard. Rapid regulatory changes could harm financial stability and risk only reducing ordinary people's access to loans. Finding balance between achieving policy goals and minimizing side effects is key.
Above all, a long-term perspective is needed. Productive finance transformation is not something that can happen overnight but requires structural changes in the entire financial system. It takes considerable time for banks to develop new business models, companies to increase investment motivation, and institutional infrastructure to be established.
In the end, RWA regulatory adjustment can be a starting point for productive finance transformation, but it's not sufficient by itself. More comprehensive and systematic policy packages are needed to bring about fundamental changes in the financial system.
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