The South Korean financial regulator will ease restrictions on domestic banks as part of its efforts to help them raise profitability and global competitiveness, it said on Friday.

At a meeting with banking industry officials, Yim Jong-yong, chairman of the Financial Services Commission said his commission will relax some excessive regulations on banks’ capital and fiscal soundness within the year. 

“The government will eradicate excessive burdens on banks’ capital requirements and factors that undermine their profitability in order to increase the banks’ appeal to investors,” Yim said.

The FSC will consider loan loss reserves as part of banks’ common capital stock, the chairman said.

Funds or other financial assets that are set aside to prepare against estimated losses from delayed loan payments or defaulted loans are currently not regarded as banks’ capital, which is felt as burdensome by local banks since they must meet standards for capital adequacy by the Bank of International Settlements, known as the BIS ratio.

“Such regulation has become even more burdensome amid the ongoing restructuring activities in the shipping and shipbuilding sector,” an executive at a local bank said.

If the regulation on loan loss reserves is lifted, the total capital ratio of banks is expected to rise about 0.6 percentage points on average, according to the FSC.

The financial authority will also revise the country’s banking law that requires banks to accumulate more than 10 percent of their net profits as earned surplus reserves up to a maximum of their total capital in order to help reduce burdens.

Once the revision is made, banks will be required to set aside 10 percent or more of dividends as reserves up to 50 percent of the total capital.

“This regulation has been stricter compared to other countries,” said Kim Jin-hong, director of the banking bureau at the FSC. “Easing the restriction will help our banks raise their market value globally and reduce financing costs.”

Domestic banks will be exempted from the duty of getting approval from the financial authority for starting new businesses under the banking law. The duty has been overlapping with a similar duty required by the country’s financial industry law, the FSC said.

In addition, banks will not have to report small overseas investments -- for example less than 1 percent of their total capital -- to the authority, which will encourage Korean banks to expand their businesses more broadly across the world, it added.

By Song Su-hyun (song@heraldcorp.com)