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Jul 01, 1998
- Strengthening of Prudential Supervision of Foreign Exchange
- 1. BackgroundRisks accompanying foreign exchange operations are mounting in Korea due to increased multi-national transactions, financial deregulation, tougher competition among financial institutions and the introduction of derivatives.However, foreign exchange management by the Foreign Exchange Management Act has been enforced mainly through focusing on aspects of the management of external assets and liabilities.○ The supervision of foreign exchange operations, executed mainly by the central bank, has given more weight to the stability of the foreign exchange market and monetary policy, rather than to assuring the soundness of commercial banks.〓 The supervisory function was not sufficient to manage the various risks, which may arise in foreign exchange operations, such as exchange risk, credit risk, liquidity risk, market risk, etc..○ It is necessary to strengthen prudential supervision over banks' foreign exchange operations, in order to prevent recurrence of the foreign exchange crisis through efficient management of the risks inherent in foreign exchange operations.2. Contents◎ In order to efficiently manage various risks in foreign exchange operations, the Banking Supervisory Authority is taking comprehensive measures.○ The foreign currency liquidity regulation system will be modified to enforce the Maturity Mismatches(GAP) Regulation, as well as the Foreign Currency Liquidity Ratio Regulation.○ The banks will set up and manage the limits on their foreign exchange operations under the Guidelines of the Banking Supervisory Authority.○ The Banking Supervisory Authority is also strengthening its off-site surveillance by improving banks' reporting systems, in order to facilitate risk evaluation and assure the soundness of foreign exchange operations in commercial banks.1) Strengthening of supervision on liquidity riskIntroduction of the Maturity Mismatches(GAP) Regulation○ After dividing assets and liabilities into 7 buckets1) according to their r
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Jun 29, 1998
- Reasoning behind bank selection of acquiring banks
- Reasoning behind bank selection of acquiring banks■ FSC made recommendations to sound banks under a PA arrangement to acquire banks which would most likely receive disapproval of rehabilitation plans ○ Shinhan Bank, Housing Commercial Bank, Kookmin Bank, Hana Bank and Koram Bank prepared necessary acquisition procedures and with consideration of its long-range business plan made selections as to which bank to acquire■Kookmin Bank and Housing Commercial Bank have maintained a comparative advantage in retail banking for households and SMEs. ○Hence, they chose to acquire banks that specialize in SME business such as Dae Dong Bank and Dongnam Bank■Shinhan Bank, Koram Bank, Hana Bank have maintained a comparative advantage in corporate and high net-worth individual business ○Hence, Shinhan Bank and Koram Bank preferred to acquire banks that have a strong branch network in the metropolitan area such as Dong Hwa Bank and Kyungki Bank ○Hana Bank with a relatively small number of employees choose to acquire Chung Chong Bank which has the least number of branch offices among resolved banks and will be bestowed with the opportunity to transform into a leading bank■In order to stand out as a leading bank (Type A in the following diagram), Kookmin Bank, Housing Commercial Bank (Type B) as well as Shinhan Bank, Koram Bank, Hana Bank (Type C) will each leadareas of which it has a comparative advantage and will exert to further expand its competitive edge ○The banking industry will be transformed into a competitive one led by increased market discipline and prompt corrective actions by the regulators ○To be ranked as a leading bank, it will have to strengthen corporate financing as well as international banking expertise and pursue scale and scope economy possibly through MAs.
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Jun 29, 1998
- FSC Press Release upon Ailing Bank Resolution
- ■ Final assessment results of the Bank Appraisal Committee were reported to the Financial Supervisory Commission on June 28, 1998. A special meeting of the Financial Supervisory Commission was held at 7:00 am on June 29, 1998 and utilizing input from the committee decided the following;○Banks whose rehabilitation plans are deemed feasible, such as Cho Hung Bank, Commercial Bank of Korea, Hanil Bank, Korea Exchange Bank, Peace Bank of Korea, Kangwon Bank and Chungbuk Bank each received conditional approval of rehabilitation plan and are required to submit an implementation plan containing strong management improvement plans by the end of July'○Banks whose rehabilitation plans are deemed not feasible, such as Dong Hwa Bank, Dongnam Bank, Dae Dong Bank, Chung Chong Bank and Kyungki Bank each received disapproval of rehabilitation plan and will have to transfer their assets and liabilities to Shinhan Bank, Housing Commercial Bank, Kookmin Bank, Hana Bank, Koram Bank, respectively■The government will exert utmost effort in minimizing clients' inconveniences during the course of bank resolution by implementing following measuresNot only payment settlement and deposit repayment businesses but also businesses of overdraft and bill discount will be carried out as normalIn order to restore financial market stability as soon as possible, liquidity situation will be improved and credit extention toward corporate clients of resolved banks will be enhanced1. Progress to-date■Submission of rehabilitation plans (April 30, 1998)○12 banks with BIS ratio that fell short of 8% as of December 1997 were required to submit rehabilitation plans■Accounting firms' evaluation on rehabilitation plans (May 1 - June 8, 1998)○In accordance to evaluation criteria agreed upon with the IBRD, the feasibility of the following elements were evaluated - capital adequacy, recapitalization plan, asset quality classification, reduction plan for risky assets, cost reduction scheme, managemen
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Jun 29, 1998
- FSC Chairman`s Announcement Upon Bank Resolution
- Our country as a whole has brought out all its wisdom to cope with the recent foreign exchange crisis. However, we continue to witness considerable weaknesses in our financial and corporate sectors and there are still signs of structural problems embedded in our system. As a result, we are currently in a liquidity crunch and the economy has yet to turn around.As a way to break away from structural impediments and vicious circle of degradation and to ultimately strengthen economic fundamentals, the government with unprecedented commitment has underwent structural reform with key focus on the financial and corporate sectors restructuring.On June 18th, 55 corporations were identified as non-viable in accordance to the assessments conducted by creditor banks. Today based on bank appraisal committee's evaluation of rehabilitation plans submitted by each bank, I would like to unveil the results as follows.Cho Hung Bank, Commercial Bank of Korea, Hanil Bank, Korea Exchange Bank, Peace Bank of Korea, Kangwon Bank, Chungbuk Bank, a total of 7 banks will be subject to conditional approval on its rehabilitation plan and will have to prepare and submit implementation plans including strong reformative actions and recapitalization commitments by the end of July. After that in case this plan is disapproved or not implemented to a satisfactory level a business transfer or merger order will be imposed on the bank.Banks such as Dong Hwa Bank, Dongnam Bank, Dae Dong Bank, Chung Chong Bank and Kyungki Bank whose rehabilitation plans were disapproved will be ordered to have its assets and liabilities transferred to Shinhan Bank, Housing Commercial Bank, Kookmin Bank, Hana Bank, Koram Bank, respectively.Throughout this transitional process the government will exercise its utmost effort to protect bank savings and ensure that customers will be able to attend business at these banks as usual.To this end, despite of the fact that the resolved bank's good assets and liabilities will be tran
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Jun 18, 1998
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Jun 05, 1998
- Results of Corporate Viability Assesstment
- 1. Progress to-date of Corporate Viability AssessmentA total of 313 corporates, including corporates in 11 business groups that are recipients of cooperative assistance, as well as troubled corperates belonging to the big 64 business groups were assessed in the recent corporate viability assessmentAs for the corporates belonging to the top 5 business groups, they were excluded at first as they were deemed to not have problems in connection with repayment of liabilities. However, under the judgement that the assessment of those corporates in accordance to the soundness of the individual corporate is needed as well, they were added onto the list of corporates to be identifiedCorporate Viability Assessment Committees at each bank came up with internal assessment results by June 13 and following a period of reconciliation to resolve discrepancies among banks the final results were conceived on June 17The banks’ assessment process was based on the principle of voluntary decision-making and after a sufficient level of discussion between members of the assessment committees, objective measures such as voting were utilized to arrive at final resultsIn principle, criteria for viability assessment was left for each bank to decide on their own. However, there were some common criteria. For example, financial standings, capacity to create profit-making opportunities or capabilities to endure financial costs were commonly considered throughout the evaluation process.- Instead of evaluating a corporate’s viability under the current high interest rate environment, normal interest rate levels were applied when calculating a corporate’s future value,- Much weight was placed on the corporate’s future value when it came to making reconciliation toward the viability of a certain corporate during deliberation sessions between banks.2. Results of Corporate Viability AssessmentThe recent assessment revealed that 55 corporates, which represent 17% of total number of corporates subj
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Jun 05, 1998
- Corporate Viability Determination and Future Action
- Corporate Viability Determinationand Future ActionUnder the Financial and Corporate Sector Restructuring Promotion Plan (announced on April 14, 1998), each bank was required to set up a corporate viability determination committee. On a voluntary basis, these committees determined the viability of corporates and under the responsibility of the main creditor banks, creditor banks consulted with each other to smooth out any discrepancies among themselves. The first set of outcomes on corporate viability determination was reported to the FSC through the Banking Supervisory Authority on June 2, 1998.Although the voluntary assessments by the banks are appreciated, the result itself is somewhat incomplete and seems to need some polishing for the following reasons ;In particular, non-performing loans of banks need to be dealt with in a swift manner, and banks need to be more aggressive toward liquidating non-viable corporates, since the injection of public funds is inevitable for normalization of financial system.① Affiliates of the biggest 5 chaebols were excluded from the determination of corporate viabilityAlthough affiliates of the 5 chaebols don’t face loan repayment problems due to the mutual guarantee and the possible assistance at the group level, the soundness of the individual corporate itself or the debt servicing capability of the individual corporate, based on the corporate’s own projects, should also be evaluated.As such, the procedure of determining corporate viability should include an assessment of future corporate viability based on a more proactive approach. Non-viable corporates are to exit from the market when deemed appropriate.② As for large corporations which benefited from cooperative loans, some creditor banks were confronted with conflicts of interest and may have postponed proactive decision making. Thus, the misgivings in the financial market could continue to linger.③ By inviting outside experts to the corporate viability determinatio
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May 21, 1998
