Supervision
General Restrictions and Prohibitions on Business Activities
The business activities of financial institutions are subject to certain restrictions and prohibitions that are intended to prevent illegal or anti-competitive activities while promoting sound business practices, competition, and consumer protection.
Banks
The Banking Act provides restrictions on certain business practices of the banks. It also prohibits certain activities and limits the amount of credit that may be extended to a single counterparty for safety and soundness reasons.
Restrictions on Business Practices
Banks must operate with Chinese walls and other internal controls that are designed to identify, evaluate, and prevent any conflict of interest that may arise with their customers. Such systems must be integrated into the organization's overall internal control systems. When making a loan, banks may not demand a tie-in from the borrower such as a compensating deposit. When acquiring a third-party collateral or debt guarantee for a loan, banks may not demand unjustified claim or security interest from the borrower or the guarantor.
Prohibited Business Activities
Banks are prohibited from engaging in certain investment activities for safety and soundness. In respect of securities investment, banks must limit their exposure to securities that are susceptible to extreme price volatility or liquidity risks. The exposure limit must also be proportionate to the level of capital available to readily meet any potential losses.
Ownership of land and other real properties that are intended for business operations is limited to 60 percent of the bank capital. The limitation is intended as a safeguard against excessive or prolonged exposure to illiquid assets. Ownership of real properties for purposes other than business operations is prohibited unless ownership stems from the acquisition of collateral from defaulted borrowers. The disposition of such property, however, must be completed within a year from the date of the acquisition.
Limits on Large Credit Extensions
The extension of credit is regulated to minimize significant counterparty risks and prevent unsound bank lending practices. Credit extension is broadly understood to include not only loans made or renewed, but also any loan guarantees or lines of credit granted and other transactions that obligate a person to pay money or its equivalent to the bank.
- Credit Extension to Counterparty and Group of Counterparties: Credit extension to a single counterparty (borrower) may not exceed an amount equivalent to 20 percent of the bank’s capital (shareholders’ equity). In addition, the limit on credit extension to a single counterparty and connected counterpartiesㅡcollectively referred to as the “same counterparty”ㅡis set at 25 percent of the bank’s capital
- Aggregate Credit Extensions: Credit extension to a same counterparty exceeding 10 percent of a bank's capital is deemed a large credit extension. The aggregate amount of large credit extensions must be less than five times the amount of capital.
- Credit Extension to Large Shareholders: Credit extension to a single shareholder may not exceed an amount equivalent to 25 percent of the bank's capital or an amount equivalent to the shareholder's equity in the bank, whichever is smaller. In addition, the aggregate amount of credit to be extended or extended to the bank's shareholders may not exceed 25 percent of the bank's capital.
- Credit Extension to Subsidiaries: Credit extension to a single subsidiary of the bank may not exceed an amount equivalent to 10 percent of the bank's capital. In addition, the aggregate amount of credit extended or to be extended to the bank's subsidiaries may not exceed 20 percent of the bank's capital.
- Credit Extension between Parent and Subsidiary Banks: No credit may be extended by a subsidiary bank to the parent bank. Credit extension to a single subsidiary bank may not exceed 10 percent of the subsidiary bank's capital, and the aggregate amount of credit extensions from the parent bank to the subsidiary banks may not exceed 20 percent of the subsidiary banks' capital.