Financial stability is a prerequisite to innovation and inclusive finance policies. FSC maintains close market monitoring for any signs of market volatility and works to ensure stability in the financial markets. There are risk factors originating from abroad and from within. FSC focuses on making our economy more resilient from external shocks, such as a disruption in the global supply chain, and supporting Korea’s material, component and equipment industries to help boost their global competitiveness. Internally, FSC is closely monitoring the trends in household debt and seeking reforms to corporate restructuring in order to prevent domestic risk factors from turning into systemic risks. Policies aimed at increasing financial stability also include enhancing fairness in the financial markets by introducing a comprehensive legal framework for the supervision of financial conglomerates, improving market discipline and promoting transparency in corporate disclosure and accounting practices.
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Nov 27, 2015
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Oct 30, 2015
- Direction for Recovery and Resolution Regimes
- CONTEXT AND PROGRESSAfter the Global Financial Crisis, there was a global consensus for the need of improving recovery and resolution regimes to prevent disorder in the financial market when financial conglomerate becomes insolvent and moral hazard of too-big-to-fail. At the G20 Summit in 2010, member countries agreed on adopting recovery and resolution plans (RRP) in line with the Key Attributes of Effective Resolution Regimes for Financial Institutions published by the Financial Stability Board for Systemically Important Financial Institutions (SIFIs). After close consultations with the relevant organizations and experts from financial and legal sectors, the Financial Services Commission (FSC) has determined the basic direction for improving the recovery and resolution regimes, namely introducing recovery and resolution planning framework and bail-in scheme. MAJOR CHANGES(1) Recovery and Resolution PlansRecovery and resolution plans assuming crisis situation will be produced on an annual basis and retained for that year, for major financial institutions identified as SIFIs. Recovery plan is financial institution’s ex-ante measures against insolvency, which aims to facilitate recovery of financial soundness through its voluntary normalization efforts. The plan will be drafted by each SIFI, assessed by the Financial Supervisory Service and reported to the FSC.Resolution plan, on the other hand, is an ex-ante plan drafted by the Korea Deposit Insurance Corporation and assessed by the FSC, to minimize negative impact on financial system after a troubled financial institution fails to recover its business based on voluntary endeavors. (2) Bail-in SchemeThis scheme is designed to require not only shareholders but also creditors to bear losses when a financial institution becomes bankrupt, thereby addressing moral hazard. The FSC is planning to provide a legal basis for ordering insolvent financial institution to convert debt to equity and/or write-off debt when deemed
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Oct 30, 2015
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Sep 07, 2015
- China's Economic Slowdown and Its Impact on Korea's Economy
- CHINA’S ‘NEW NORMAL’The IMF recently downgraded China’s economic growth forecast in 2015 and 2016 to 6.8% and 6.3% respectively, slower than the stable growth of 7% in three years since 2012. The growth rate of around 6% is still high, given the size of China’s GDP; however, the actual impact of such slowdown from 7% to 6% could be felt far more profound. China’s slowdown is attributed to excessive and inefficient investments by its massive economic stimulus plan. Inventory adjustments and deleveraging will weigh on China’s economy for a considerable period of time. It will be difficult to resolve oversupply in property market in a short period. To manage a soft landing of Chinese economy, the Chinese government set out a new economic model, so-called ‘Xin Chang Tai(新常態, new normal)’ since President Xi Jinping came to power in 2013. The new growth model is aimed to shift Chinese economy from export-driven rapid growth to consumption-led stable growth. It also includes structural reform, diversification of growth drivers and liberalization of financial markets. The effectiveness of the Chinese government’s stimulus plan to downward pressure is key to a soft landing of Chinese economy as it would take time for structural reform to achieve results. The Chinese government still has capability to prevent a hard landing of Chinese economy. However, emerging economies also need to be prepared in response to the spill-over effect of China’s new normal. IMPACT ON KOREA’S FINANCIAL MARKET There is a possibility that volatility might increase due to worries over China’s economic slowdown and potential spill-over effects of its structural reform. However, market participants view that it is unlikely for Chinese slowdown to cause a serious financial crisis. Since the 2008 global financial crisis, Korea’s economic fundamentals have been steadily improved. Its current surplus has grown to USD 89.2 billion in 2014 from USD 3.2 billion in 2008; its
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Aug 25, 2015
- Opening Remarks by FSC Chairman at Market Monitoring Meeting over Current Stock Market Conditions
- The FSC Chairman Yim Jong-yong convened a meeting with the FSS, KRX, and KCIF at 7 a.m. on August 25 to monitor global and domestic financial market conditions and to discuss measures to weather through the current market turmoil. *Please find in the following the summary of the Chairman’s opening remarks at today’s meeting. ***********Korea’s stock market is undergoing tough times with heightening concerns over external factors such as China’s stock market plunge, the Chinese yuan devaluation and the prospect of Fed’s rate hike. The KOSPI has sharply fallen to a year-low of 1,829.81 on August 24 from the year’s high of 2,173.41 on April 23 2015, as global stock markets tumble. Foreign investors turned net sellers since June this year. Korea’s stock market, however, fell less than other major markets in the Asia region. Stock prices in Korea dropped 13.5% compared to the end of May this year, while 30.4% in China, 22.5% in Hong Kong and 23.6% in Taiwan. The amount of net sales by foreigners in Korean stock market is relatively small. Foreign investors sold 0.36% of market capitalization in Korean stock market from June to August, while 0.51% in Taiwan, 0.49% in Thailand, 0.51% in Malaysia over the same period. These are evidence that market participants home and abroad see Korea’s market fundamentals sound. As external uncertainties seem to continue for some time, I would like to ask relevant institutions to join our efforts and take actions to reduce volatility in Korea’s capital markets. To this end, we need to continue our efforts to restore market confidence and keep foreign investors informed accurately about Korea’s economy and financial sector. In the longer term, it is important to make Korea’s capital markets robust enough to withstand external shocks by pushing ahead structural reforms and strengthening competitiveness of our capital markets. I would like to ask heads of relevant institutions here today to join our efforts on the foll
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Aug 21, 2015
- FSC Holds Meeting over Recent Global Financial Market Condition & Its Impact on Korea's Stock Market
- The FSC held a meeting with the FSS, KRX, and KCIF at 8 a.m. on August 21 to discuss recent global financial market condition and its impact on Korea’s stock market.GLOBAL FINANCIAL MARKET CONDITIONGlobal stock markets recently went down with heightening global risk factors such as China’s stumbling stock market, its currency devaluation and speculation about the Fed’s rate hike. - Stock markets in major economies mostly went on a downward trend since June this year. Emerging markets slumped further compared to advanced ones. - Global stock funds are flowing into advanced market out of emerging markets amid growing uncertainty over global financial condition. IMPACT ON KOREA’S STOCK MARKETVolatility in Korean stock market has increased recently as foreign investors began to sell and stock prices stumbled with growing external uncertainty. - Foreign investors have turned net sellers of KRW 4.3 trillion KOSPI shares since June this year as external uncertainties heightened.- The KOSPI and KOSDAQ indexes have slumped recently. * KOSPI: 1,916(end-2014) → 2,173(April 23, 2015) → 1,915(August 20, 2015) KOSDAQ: 543(end-2014) → 783(July 20, 2015) → 657 (August 20, 2015) Recent adjustments in stock market prices are seen largely due to external factors such as diminishing global market confidence, rather than domestic market factors. - While foreign investors are selling shares in most of Asian stock markets, the amount of net sales by foreigners in Korean stock market is relatively small.- Korea’s stock market indexes did not fall sharply, compared to those of Asia’s major markets. Market fundamentals in Korea are sound, and global financial markets remain stable in comparison to previous market turmoil in 2011 and 2013. We see market participants do not have to react excessively to recent market developments. - Korean stock prices are relatively undervalued. Korea’s foreign exchange reserves stood at USD 374.7 billion, the world’s sixth largest as o
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Jul 22, 2015
- Household Debt Management Measures
- The government announced today a package of measures to manage household debt. A consultative body was formed among relevant government agencies in March this year to discuss and come up with comprehensive and preemptive measures to manage household debt in response to potential internal and external risks. The measures are focused on accelerating the improvement of household loan quality, strengthening the assessment of a borrower’s repayment ability, tightening household debt management in the non-banking sector, and strengthening banks’ ability to respond to internal or external shocks. CURRENT STATUS OF KOREA’S HOUSEHOLD DEBTThe household debt has grown fast recently after years of stabilized growth around 6%. Particularly, mortgage lending from banks has been rising fast since the second half of last year , which is attributed to multiple factors such as eased mortgage restrictions and growing demand for loans with interest rate cuts. Mortgage lending by banks which amounted to KRW 375 trillion at the end of March 2015 maintains its financial soundness with a delinquency rate of 0.39% at the end of March 2015. Banks have sufficient capability to absorb potential losses with a BIS capital adequacy ratio of 13.9% at the end of March 2015. Since the government-led KRW 32 trillion program was launched in March this year to help mortgage borrowers switch to fixed-rate and amortized loans, the shares of such mortgages continue to increase and hit 30%, initially targeted by the end of 2016, in the first half of this year. In addition, 70% of household debt is held by households in the highest income brackets – fourth and fifth quintiles. Household financial assets are more than twice household financial liabilities. Given the soundness of household debt, the possibility is limited that household debt risks would cause a systemic risk.As household debt continues to grow faster than income with a slow economic recovery, however, the government needs to take pree
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Jul 01, 2015
- Laws to Curb Market Disruptive Activities to Take Effect from July 1, 2015
- As of July 1, 2015, the Financial Investment Services and Capital Markets Act(“FSCMA”) was amended to regulate so-called “market disruptive activities”, a newly created category of unfair trading activities in addition to the traditional insider trading and market manipulation activities. Under the amended FSCMA, those who engage in market disruptive activities will face a monetary penalty up to 1.5 times the undue profit gained from such activities. KEY PROVISIONS1. Types of market disruptive activities (1) Market Disruptive Activities using information Monetary penalty will be imposed on anyone who uses material non-public information that he or she produced or acquired in relation to his or her job responsibilities, or acquired from insiders and first-level tippees (e.g., second and third-level tippees) or in an improper manner (e.g., computer hacking, stealing, blackmailing, etc.), for his or her trading in listed securities, listed derivatives or OTC derivatives with listed underliers. (2) Market Disruptive Activities manipulating market pricesMonetary penalty will be imposed on anyone who engages in any of the following activities that affect or may affect market prices unfairly even in the absence of the specific intent: (i) Submitting a large number of quotations that are highly unlikely to be executed, or correcting or cancelling such quotations repeatedly after submission;(ii) ‘Wash sale’ without any real intent to transfer the rights;(iii) Matching orders aiming for the profit/loss transfer or tax evasion; and(iv) Spreading rumors or devising a scheme that could mislead others on the supply demand or price of listed securities or listed derivatives, or distort their prices.2. Calculation of Monetary Penalty For the market disruptive activities, monetary penalty up to KRW 500 million may be imposed; provided that if undue profit gained from such activities exceeds KRW 500 million, 1.5 times the undue profit shall be the maximum monetary penalty
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Mar 30, 2015
- Additional KRW 20 trillion To Be Provided for the Mortgage Refinancing Program.
- The government will provide an additional KRW 20 trillion starting March 30 for the government’s mortgage refinancing program totaling KRW 40 trillion,1 after comprehensive review and consultation with relevant organizations.2We recognized mortgage borrowers’ high interest and demands to switch to fixed-rate, amortized mortgages at lower interest rates as its initial amount of KRW 20 trillion was sold out in just four days since its launch on March 24.3 The government considered it is the right time to push ahead a “Big Operation” to make the structure of household debt more stable in response to possible interest rate hikes.With the KRW 40 trillion mortgage refinancing program, the government estimates that the share of fixed-rate, amortized mortgages out of banks’ total mortgages would rise by as much as 10 percentage point. The program is also expected to reduce household debt by KRW 1.1 trillion per year as borrowers with switched mortgages worth KRW 40 trillion in total would start to repay the principal and interest payments together over a long term.The additional KRW 20 trillion is the maximum amount that the Korea Housing Finance Corporation can afford to provide additionally, given its capital capacity. There will be no further injection of funding to expand the program.Only those with floating-rate, interest-only mortgages from banks are eligible for the refinancing program. Banks will receive applications for the five working days starting March30. If the value of mortgages applied for the program exceeds KRW 20 trillion, borrowers with lower-price houses will be given a priority.We acknowledged that there is a demand for expanding the eligibility to those with fixed-rate mortgages repaying the principal. The program, however, is not to merely reduce borrowers’ debt servicing burden. The purpose of the program is to improve the quality of household loans by switching floating-rate, interest-only mortgages to fixed-rate, amortized ones.Therefo
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Jan 26, 2015
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Dec 24, 2014
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Sep 29, 2014
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Aug 26, 2014
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Jun 18, 2014
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Apr 09, 2014
- FSC Plans to Overhaul NCR Rules for Securities Companies
- BACKGROUNDThe net capital ratio (NCR) has been serving as a key index to assess financial soundness of securities firms since it was first introduced in April 1997. The NCR has been widely used as standards for financial authorities to take prompt corrective actions, grant membership of KRX, or evaluate primary dealers.However, it has been pointed out that the current NCR rules no longer reflect changes in securities market and business model. The current NCR rules, mainly focused on regulating brokerage business in domestic market, restrict security firms from engaging in investment banking business or expanding into overseas markets. With the current method of computing NCR, it is difficult to exactly evaluate securities firms’ financial soundness or loss absorbing capacity.Against this backdrop, the FS C plans to overhaul net capital ratio (NCR) rules for securities companies, as part of its effort s to revitalize the country’s capital markets.KEY CONTENTS1. Modification to the NCR formulaCurrently, the NCR is calculated as a percentage of net operating capital to gross risks. Net Capital Ratio (%) = (net operating capital/grossrisks) × 100 Under the current formula, however, securities firms are forced to hold unnecessarily excessive capital. Securities companies are needed to secure an additional amount of net operating capital, bigger than the increased amount of risks, to maintain the same level of NCR. The current NCR makes investors difficult to figure out amounts of net equity capital of securities firms, leading the m to the misperception that higher NCR means the better financial soundness.The FSC plans to modify the NCR formula as follows: (net operating capital – gross risks)/ sum of equity capital required to maintain each business unit’s licenseThresholds for corrective actions will be adjusted to corresponding to the modification to the NCR formula.Securities companies will be allowed to choose which formula they would use until the end of
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Apr 08, 2014
- Enforcement Decree of the Covered Bond Act Approved at Cabinet Meeting
- The Enforcement Decree of the Covered Bond Act was approved by the Cabinet today to come into force starting from April 15, 2014. The Enforcement Decree is to stipulate details mandated by the Covered Bond Act such as qualifications for cover assets, evaluation basis and issuance cap.KEY CONTENTS OF THE COV ERED BOND ACT AND ENFORCEMENT DECREE1. Eligible issuersFinancial institutions are required to meet both institutional and eligibility requirements to issue covered bonds.- (institutional requirement) banks, Korea Housing Finance Corporation, Korea Finance Corporation, and other equivalent institutions designated by Enforcement Decree- (eligibility requirement) a financial institution with equity capital of more than KRW 100 billion, a BIS ratio of more than 10%, and risk management system2. Cover PoolThe minimum ratio of collateralization is 105%. Underlying assets in a cover pool need to be evaluated by market prices if there are credible market prices as a reference price. In the absence of market prices, the assets can be evaluated by book value or acquisition prices.- (underlying assets) home mortgage loans, public bonds, ship and aircraft mortgages, high-quality assets with a stable cash flow- (liquid assets) cash, CDs, liquid assets converted into cash within three months- (other assets) recovery from underlying assets, gains earned through management, operation and sales of assets3. Issuance CapCovered bond issuance is limited to 4% of the issuer’s total assets.* Please refer tothe attached PDF for details.
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Feb 27, 2014
- Measures to Improve Structural Soundness of Household Debt
- BACKGROUNDAs of the end of 2013, Korea’s household debt amounted to KRW 1,021 trillion. The government has been taking a series of measures so far to improve the quality of household loan and to rein in the pace of household debt growth. As a result, the government significantly lowered a possibility that household debt issue might be worsened into a systemic risk.Morgan Stanley(Oct. 2013) evaluated that Korea’s household debt risk is manageable, citing grounds such as financially stable structure of household assets and mortgage rules on loan-to-value(LTV) and debt-to-income(DTI) ratios. The IMF stress test result (Jan. 2014) also shows Korea’s household debt has a low possibility to pose a systemic risk in the event of economic shock.Despite such achievement, the household debt issue still exposes vulnerability in some parts. The share of floating-rate and interest-only mortgages remains high. Low-income households’ ability to repay debt deteriorated.The FSC and relevant ministries jointly announced today a package of measures to improve the structural soundness of household debt, as part of the government’s follow-up measures to push forward the three-year plan for the next phase of Korea’s economic growth.KEY CONTENTS1. The government will set the ratio of households’ debt to income as a key target indicator in managing household debt and lower the ratio by 5%p until the end of 2017.2. The government will set new targets for banks to increase the proportion of fixed-rate and amortizing loans out of total mortgages, up to 40% by the end of 2017.3. The government will prompt banks to offer a variety of loans tailored to consumers’ debt repayment ability such as loans with a cap on floating rates or loans amortized over a mid-term maturity, for example, 5 to 10 years.4. Borrowers with fixed-rate and amortizing loans will be granted a bigger tax exemption up to KRW 18 million, up from the current ceiling of KRW 15 million. For loans with a long-term
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Jan 17, 2014
- Plan to Improve Security of Derivatives Transactions
- The FSC, the FSS, the KRX, and the KoFIA jointly announced a plan to improve security of derivatives transactions in a bid to prevent accidents of huge losses caused by erroneous orders as well as to reduce settlement risks and excessive price fluctuation in derivatives trading.BACKGROUNDAlgorithmic trading through direct market access (DMAs) has been increasing in Korea’s derivatives market. For KOSPI 200 options trading, for example, algorithm ic trading accounts for about 40%. However, there is a potential risk in algorithmic trading that huge losses could be incurred by erroneous orders due to system errors as witnessed in a recent incident of Hanmag Securities.Huge losses consequent on erroneous orders could undermine derivatives markets’ stability as well as securities firms’ soundness. The FSC and relevant agencies came up with a plan to improve security of derivatives transaction, while ensuring such measures would not curt ail derivatives trading.KEY CONTENTS1. Strengthen securities firms’ internal controlThe FSC will encourage securities firms to voluntarily reinforce their internal control standards to prevent excessive orders that exceed limit bid or limit offer. The FSS and the KRX will also strengthen their oversight on such trading.2. Introduce price banding limitsCurrent safety mechanisms such as price limits and circuit breakers (CBs) exposed limitations in responding to excessive price fluctuations. To such backdrop, the FSC plans to introduce price banding limits on futures and options trading. Upon implementation, investors will only be allowed to place orders of futures and options transaction within a certain range of the latest trade price during market hours.3. Improve remedies for erroneous ordersCurrently, derivatives price could only be corrected when the two respective parties of the transaction reach to an agreement. However, the KRX will be given direct authority to cancel orders if such transaction is deemed to pose threats to
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Nov 25, 2013
- Basel III Regulations To Be Implemented To Domestic Banks From December 2013
- Basel III capital regulations will be phased in to domestic banks from December 1, 2013, as part of strengthened prudential regulations for banking sector which have been under discussion since the global financial crisis.KEY CONTENTS1. Minimum capital requirementsThe current capital adequacy ratio for banks is a minimum 8% of their risk-weighted assets (RWAs). Under the Basel III, banks will be required to meet detailed adequacy ratios for each category of capital.From December 2013, banks need to hold at least 3.5% of their risk-weighted assets as common equity capital1, 4.5% as Tier capital, which make their overall minimum capital requirement to 8%.2Changes in Minimum Capital Regulations upon Implementation of Basel III Dec. ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 Minimum Equity Ratio (Total Equity Ratio + Capital Conservation Buffer Ratio 8.0 8.0 8.0 8.625 9.25 9.875 10.5 Total Equity Ratio 8.0 8.0 8.0 8.0 8.0 8.0 8.0 Tier 1 Capital Ratio 4.5 5.5 6.0 6.0 6.0 6.0 6.0 Common Equity Tier 1 Capital Ratio 3.5 4.0 4.5 4.5 4.5 4.5 4.5 Minimum Capital Conservation Buffer Ratio - - - 0.625 1.25 1.875 2.5 2. Qualifying conditions for regulatory capital under Basel IIIUnder the Basel III, banks’ total capital, currently composed of Tier 1 and Tier 2, will be divided into common equity capital, additional Tier 1, and Tier 2 capital. Qualifying conditions for each capital class will be modified to enhance quality of banks’ capital.From December 1, 2013, up to 90% of non-qualifying instruments as contingent capital3 already issued will be recognized as regulatory capital under the Basel III. The percentage will be gradually reduced by 10% points per year.4Types of Capital after Revision of Basel III Capital Regulations Common Equity Capital (A) Equity with priority to be conserved from bank’s loss and last to be redeemed from bank’s liquidation. Equity which is subject to redemption only in case of bank’s liquidation. (e.g. capital, capital surplus accrued from i
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Jul 12, 2013
