The Financial Services Commission introduced plans to facilitate a prompt resolution process for insolvent (or distressed) financial companies on October 29 through proposed rules changes to the Act on the Structural Improvement of the Financial Industry and the Depositor Protection Act.
Key Revision Details
The prompt resolution process for insolvent (or distressed) financial companies is aimed at preventing risk contagion and systemic risk in the financial industry and establishing safeguards to ensure sufficient protection of rights for relevant shareholders and creditors.
a) Scope of application
The types of financial institutions that will be subject to the prompt resolution process will be limited to those that are eligible to be covered by deposit protection insurance, which include banks (excluding Nonghyup Bank and Suhyup Bank), insurance businesses (excluding reinsurance), securities firms, savings banks, and financial holding companies. The financial companies that are not eligible to be covered by deposit protection insurance, such as specialized credit finance businesses, certain groups of asset management companies, and trust businesses, are not subject to the prompt resolution process because they are less prone to the risk of a potential bank run as they have no bank-like deposit-taking function and often manage investor funds through third-party custodians. For Nonghyup Bank and Suhyup Bank and mutual finance businesses that are supervised separately under different laws and have their own resolution proceedings, authorities will examine the applicability of the prompt resolution process on a medium- to long-term.
b) Instigating conditions
To initiate a prompt resolution process, a specific set of instigating conditions should be met. First, the financial institution in question should be insolvent or distressed (at risk of becoming insolvent). Second, it should be deemed highly likely that the insolvency at the financial institution poses a threat to financial stability or raises the alarm for a broader financial crisis. Third, there should be no other alternative measures at disposal under the Act on the Structural Improvement of the Financial Industry to prevent this from happening. If these conditions are met, the FSC will be able to designate a financial institution for initiating a prompt resolution process. Also, the decision to designate a financial institution for a prompt resolution process will require a two-thirds assenting vote from the FSC, a deliberative body consisting of members from the Ministry of Finance and Economy, the Financial Supervisory Service, the Korea Deposit Insurance Corporation, and the Bank of Korea.
c) Insolvency resolution mechanisms
The availability of insolvency resolution mechanisms will be broadened up under the Act on the Structural Improvement of the Financial Industry to include not only business suspension, suspension of duty on executive officer, and appointment of a custodian, but also transfer of contracts, third-party takeover, capital reduction, and revocation of license. Thus, after considering wide-ranging factors, such as the feasibility of a takeover and the size of assets, the financial authorities will be able to choose the most appropriate resolution mechanisms in crisis situations.
d) Speedy resolution process
To guarantee a speedy resolution process, there will be procedural exemptions made available at every step of the way and throughout the entire resolution process under relevant laws. This will help to streamline the resolution proceedings that used to take about 150 days previously and significantly reduce it to within three to four days.
e) Safeguards for stakeholders
There will be an additional safeguard established to more thoroughly protect the rights of stakeholders. With the principle of NCWOL (No Creditor Worse Off than in Liquidation) in place, creditors or shareholders in a prompt resolution process will not accrue a loss larger than that in an ordinary liquidation scenario. An FSC-appointed external reviewer will inspect the settlement and if it finds that the value of loss accrued is larger than that in a potential liquidation scenario, the creditors and shareholders will be entitled to compensation from the deposit insurance fund.
Within six months from disposing a decision to pursue a prompt resolution process, the FSC should report to the National Policy Committee of the National Assembly.
Further Schedule
The revision proposals for the Act on the Structural Improvement of the Financial Industry and the Depositor Protection Act will enter a 42-day comment period from November 2 to December 14, 2026. The proposed amendments will then go through a successive legislative review and approval process before being introduced at the National Assembly.
The FSC expects that the proposed measures will help to more effectively and preemptively cut off the chances of risk contagion emanating from a distressed or insolvent financial company, while facilitating a prompt resolution process to ensure stability in financial markets and protect consumers in times of risk situation.
* Please refer to the attached PDF for details.