1. Main Policy Direction

The financial industry is increasingly shaping the back-bone of knowledge-based economy of the 21st century of global and digital age. Fully recognizing such trend, financial regulatory authorities have taken policy directions which are to ensure strengthening the financial industry for the stable and sound financial markets and future economic growth.

Accordingly, the government has shifted its focus from government-led restructuring policies to market-oriented approaches for continuous restructuring financial markets. Further, financial institutions will be encouraged to be more actively engaged in “software” reform to strengthen profitability and competitiveness.

2. Continuous Financial and Corporate Restructuring

Reform in the Financial Sector

• Preventive Supervisory and Prompt Corrective Action Measures: The terms and conditions of Management Improvement Arrangement, which is to be signed between ailing financial institutions and authorities, will be intensified to prevent managerial risk before PCA is enforced.

• Continuing Reduction of Bad Loans: By monitoring commercial banks’ progress, on quarterly basis, with their efforts to reduce the ratio of substandard and below to total loans to the targeted 5% or below by the end of this year

• Bank Mergers Among Sound Banks: To be more globally competitive by achieving greater economies of scale and by creating universal banking system The merger trend has been set off by the financial holding company and the merger between Kookmin Bank and Housing & Commercial Bank (H&CB), and other banks are encouraged to follow suit.

Reform in the Corporate Sector

• Effective Credit Risk Evaluation: To activate the corporate credit risk assessment system in full scale, by which creditor banks can assess credit risk of each of their debtor companies for the prevention of further increase of ailing assets, and, when necessary, for the timely exit of non-viable companies from the market The monthly progress results of the system will be used as input factors when evaluating management performance, and the system in all the banks will be reviewed during the month of April.

• Quick Resolution of Ailing Companies: To speed up the CRV establishment procedure, which is one of market-based corporate restructuring programs The Korea Asset Management Corporation (KAMCO) will provide the CRV with liquidity assistance from the restructuring funds raised from the IBRD and other investors.

• Sound Accounting Practices: To stiffen measures against such accounting mal-practices as window dressing Review of quarterly financial reports by CPAs will become mandatory by phase. Also, the yearly quota for CPAs to pass the exam will be increased to 1,000 from the current 750, to adequately meet the auditing needs. Any companies who engage in deceptive financial accounting and reporting will be sanctioned through such ways as demanding immediate loan collection or imposing penalty interest rates.

• Transparent Disclosure: Companies and external auditors who engage in deceptive financial accounting and reporting will be disclosed on the Internet.

3. Software-Level Reform

The government will look into ways in which financial institutions’ software-level reform could be facilitated. For instance, such measures as to improve the financial infrastructure, disseminate international best practices, and monitor general progress with the reform are being considered. Meanwhile, financial institutions will be encouraged to voluntarily engage in innovative restructuring process to strengthen their competitiveness.

• Profit-Based Management: To induce more profit-oriented management the profitability indicators will be given more importance than before when evaluating the overall soundness of financial institutions.

• Credit Based Loans: The financial institutions are encouraged not to impose any collateral condition on the loans that are extended to financially sound companies, which have high credit ratings.

• Toughened Risk Management System: Financial institutions’ risk management system will be closely reviewed on regular basis, and the review results will be taken into a consideration for financial institutions’ management evaluation. Best practices will be selected among the leading financial institutions and circulated for the rest to emulate.

• Supervision of Electronic Financial Transactions: The proportion of the IT part in the overall evaluation will be increased. In addition, financial institutions’ accountability, compensation standards and notification duties to their customers will be more clearly defined to ensure smooth electronic transactions.

4. To Strengthen the Prudential Regulations

Continuous efforts will be exerted to improve the quality of financial supervision through more efficient prudential regulations and market-friendly, consumer-oriented supervisory tools.

• New BIS Standards: The new BIS standards, which take account of such potential market risk factors as the interest rate and exchange rate volatility, will be applied from January 2002. The preparatory tasks, including full research and analysis of the new system, are scheduled to be completed by this year.

• Universal Banking Supervision: Under the current trend of universal banking service, comprehensive examination methods will be introduced to prevent the financial accidents involving many financial institutions.

• On-Site Supervisor: The FSS will dispatch on-site supervisors to the financial
institutions, whose internal control system is deemed inadequate.

• Market-Friendly Supervision: Any financial institutions which are recognized for their good management performance will be rewarded with exemption for a certain period from the required overall on-site examination. The scope of examination, which has been assigned to self-regulatory institutions, will be expanded. Further, accounting firms can be allowed to conduct the examination. Also, the Bank of Korea and Korea Deposit Insurance Corp. (KDIC)’s joint examination with the FSS will be more actively encouraged.

5. Financial Market Stability

To promote the stability of financial markets, the investment pool for the stock markets and corporate financing channels will be expanded.

• Reorganization of Stock Markets: The reorganization plan for the stock markets will be prepared to cope with the global trends of consolidation among the stock exchanges. Also, the electronic Alternative Trading System(ATS) will be allowed to diversify trading patterns.

• Expansion of Stock Investment Pool: To induce long-term stock investment, a quarterly basis dividend system will be introduced and tax exemption will be awarded to the long-term investors. Also, the stock investment by pension funds will be encouraged by eliminating the legal restrictions.

• Mezzanine Financing: Regulatory impediments will be lessened to reinforce financial institutions’ right to claim equities of venture firms in return for the financing.

• Project Financing: A new measure is underway to induce project financing, which is determined by the expected cash flow from the project.

6. Effective Measures to the Opening of Financial Market

• Foreign Exchange Risk Management: The FSS will examine financial institutions’ foreign exchange risk management system during the first half of this year. In particular, their overseas branches and off-shore funds will be under close scrutiny.

• Multilateral Cooperation: Ways to advance supervisory tools will be sought after; for instance, steps will be taken to strengthen cooperative ties with OECD and international financial supervisory authorities. A special task force will be formed, which is to take charge of the preparation for the 2002 Integrated Financial Supervisors Conference in Seoul.

* Please refer to the attached PDF for details.