Joon-Ho Hahm, Yonsei University

Abstract

This paper evaluates the impact of the new Basel accord and the recent credit guarantee reform proposal on bank capital requirements in Korea. Utilizing a unique dataset of commercial bank loan exposures for 5,362 externally audited non-financial firms, we conduct simulation analyses for various credit guarantee reform scenarios under the alternative approaches specified by Basel II. We find that, first, in the absence of credit guarantee reform, the new Basel accord does not necessarily lead to an increase in bank capital requirements. While banks would suffer most under the foundation-IRB approach, regulatory capital requirements may actually decrease under the standardized and advanced-IRB approaches. Second, while the credit guarantee reform invariably increases bank capital requirements, its adverse impact can be alleviated under Basel II due to the lower risk weight applied to guaranteed exposures and the SME and retail adjustments allowed for unprotected exposures. Third, as for the combined impact, Basel II and the credit guarantee reform together may not lead to a significant increase in bank capital requirements. In the most conservative worst case, the BIS capital ratio of Korean banks would fall by approximately 1.7 percentage point under the foundation-IRB approach. However, the net impacts are likely to be modest for other approaches. Our findings suggest that, despite the widespread and increasing concern, Basel II and the credit guarantee reform would not produce significant discouraging effects on SME lending in Korea.