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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May 10, 2010
- Contingency Plans for Southern Europe's Financial Crisis
- Despite the EU-IMF rescue package* for Greece, financial markets faltered amid fears that southern European counties’ debt crisis could spread. Stock markets in the U.S. and Europe fell, and the KOSPI Index on May 6 fell 2% as well. The values of the US dollar and the yen against the Korean won surged. The US dollar against the Korean won on May 6 rose by KRW 25.8, and the yield of 3-year government bonds went up by 0.08%p.However, southern Europe’s debt crisis is expected to have only a limited impact on the Korean financial market because the domestic financial institutions’ exposure to the region is insignificant. As of end-2009, Korean financial companies’ exposure to southern European countries – Greece, Spain, Italy, and Portugal – is USD 640 million, just 1.2% of the USD 52.8 billion total external exposure. The total borrowings of Korean banks from those countries are only USD 390 million.As market concerns over southern Europe’s debt crisis and its contagion to Europe as a whole might persist for a while, the FSC plans to strengthen its monitoring on financial markets and European capital flows. To this end, the FSC and the FSS will closely monitor capital inflows and outflows and thoroughly examine domestic banks’ foreign liquidity soundness and external borrowing conditions.The FSC will utilize hot-lines and other communications channels with domestic banks to promptly detect and preemptively address market problems. We will also examine and complement individual banks’ contingency plans to raise their capital.Furthermore, in order to ease concerns in financial markets, the FSC will closely work together with the Ministry of Strategy and Finance (MOSF) and the Bank of Korea (BOK).At a global level, the Financial Stability Board (FSB) is expected to closely monitor the future developments of the Greek rescue package and promote global coordination through sharing information on each country’s fiscal and economic conditions.*Please refer
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Mar 26, 2010
- Regulation on Banks' Loan-to-Deposit Ratios
- In the 2010 Financial Policy Agenda announced in December 2009, the FSC unveiled its plans to adopt banks’ loan-to-deposit (LTD) ratio as one of its bank liquidity guidance ratios, which aims to encourage sound management of banks and alleviating factors driving the asset competition among banks. As a step to follow up with the announcement, the Regulation on Supervision of Banking Business is slated to be amended to employ banks’ liquidity or LTD ratio to measure bank management soundness after a notice and adjustment period between March 26 and April 15.BackgroundFor the past few years, expansion in mortgages and SME loans triggered off an asset competition among banks. As a result, signs of instability in banks’ liquidity became apparent during the 2008 financial crisis as bank debentures and other market-based capital served as funding sources while resources that are required to support stepped up lending were not backstopped with deposits.Although domestic banks’ LTD ratio was around 100% at the end of 2004, the ratio had risen sharply between 2005 and 2007 reaching 127.1% at the end of 2007. However, following the persistent guidance from the regulator to reduce the ratio since the second half of 2008, banks’ LTD ratio had fallen to 110.4% as of end-January 2010.Proposed ChangesThe planned changes in the regulation will apply to commercial banks in principle having won-denominated loans in excess of KRW2.0 trillion. This will include foreign bank branches, of which only HSBC will apply with KRW3.3 trillion in won-denominated loans as of December 2009, and the National Agricultural Cooperative Federation (NACF), the only one among the special purpose banks given the policy-driven nature of their loans.The ratio is calculated through the following method, excluding CDs: Loan-to-deposit ratio = won-denominated loans won/denominated deposits* * Demand deposits, savings deposits, time deposits (figures from bank balance sheets)The target for banks’ LTD
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Feb 23, 2010
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Feb 01, 2010
- Domestic Banks’ Preliminary SBL Ratios
- Since August 2009, Korea’s financial authorities have been encouraging domestic banks to lower their average SBL (substandard or below loans) target ratio to 1% by end-December 2009.As of end-December 2009, domestic banks’ SBL ratios averaged 0.99% to meet their target ratios, excluding the KRW3.0 trillion in debt obligations that arose in December from the unexpected workout of the Kumho Group affiliates and a number of shipbuilders*. *Kumho Industries, Kumho Tires, SLS Shipbuilding, 21st Century Shipbuilding, etc.When setting the target ratio, corporate restructuring-related SBLs were allowed to betaken out of calculation because they were expected to take longer to resolve through sales, dispositions, and other means.If these corporate restructuring-related SBLs are included, the average SBL ratio is 1.22%.The SBLs resolved in H2 2009 during the targeting period were KRW17.7 trillion, an increase of 47.5% over the KRW12.0 trillion resolved in H1 2009.Detailed FiguresDomestic banks’ end-2009 SBL ratios inclusive of the large restructuring-related debt of KRW3.0 trillion in December was 1.22%, dropping sharply by 0.29 percentage points from the end-June 2009 ratio of 1.51% on the back of support to lower SBL.In terms of amount, the total SBLs were KRW15.7 trillion, down KRW3.9 trillion or19.9% from KRW19.6 trillion at end-June 2009.By class, the SBL ratios of both corporate and household loans each fell by 0.33 and 0.16 percentage points respectively in H2 2009 to 1.58% and 0.48%.The SBL ratio of small and medium-sized enterprises (SME) was 1.82%, falling by a significant 0.67 percentage points during H2 2009. The SBL ratio of household and mortgage loans, meanwhile, was 0.48% and 0.37% respectively, the lowest levels for both since figures began to be kept for both in March 2002 and December 2005.In 2009, domestic banks resolved KRW29.7 trillion in SBL, double the KRW14.0 trillion resolved in the preceding year.Of the KRW29.7 trillion, KRW9.5 trillion was re
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Jan 20, 2010
- Risk Assessment of Banks' Mortgage Loans
- Household mortgage loans extended by banks totaled KRW 260.1 trillion at the end of September 2009, of which KRW 112.0 trillion (43.1%) are loans with lump-sum redemption contracts, and the remaining KRW 148.1 trillion (56.9%) are loans with redemption by installment contracts.Forty percent of the loans with lump-sum redemption contracts, KRW 44.7 trillion, will reach maturity in 2010.Fifteen percent of the loans with installment contracts, KRW 22.3 trillion, will start to be repaid with interest and principal in 2010.Risk AssessmentCompared with previous years, the amount of loans with lump-sum redemption contracts due in 2010 is relatively moderate. * *KRW44.3 trillion (2008), KRW43.3 trillion (2009), KRW44.7 trillion (2010)The numbers are estimated at the end of the previous year, with Sept. figures used for 2010.The loans with installment contracts, KRW 22.3 trillion, which will start to be repaid with interest and principal in 2010, have also decreased from KRW31.2 trillion of 2009.In particular, given that the rollover ratio of lump-sum payment loans exceeds 95%, the actual amount of household debt which poses a burden of full repayment is just around KRW 2 trillion.The extension of interest-only payment period for loans with redemption by installment contracts also helped to ease household financial bur den; from Nov. ’08 to Oct. ‘09, interest-only payment periods were extended for KRW 10.5 trillion in loans.Considering stabilizing housing prices* and low loan-to-value (LTV) ratio**, it is unlikely that the households’ debt repayment burden will significantly increase. *Housing price change (%, qoq): -1.0(1Q09), 0.4(2 Q), 1.3(3Q), 0.3(Nov), 0.1(Dec) **L TV ratio (’0 9 July): Korea 47.1%, U S 74.9%, U K 85.2% (end-December 2007)*Please read the attached file for details.
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Jan 10, 2010
- The 3rd FSB Plenary Meeting Report
- The FSC Chairman Chin Dong-Soo attended the 3rd FSB Plenary Meeting in Basel, Switzerland, on Saturday January 9. Chairman Chin checked how financial reform recommendations the G20 leaders mandated the FSB to make have been implemented and reaffirmed future directions and implementation schedules for financial reforms that will be taken by the FSB in 2010.In regard with the financial crisis, he assessed that as many related issues have been addressed and financial institutions have now easier access to liquidity and capital, thus many financial support programs have been stalled or curtailed. He, however, pointed out that despite the overall recovery from the crisis across the globe, the gap among various markets and individual financial institutions has been widening; therefore, he agreed that financial support for SMEs and othervulnerable sectors necessary to support the real economy should be sustained.Proposals to Stabilize the Foreign Exchange Markets in Emerging EconomiesWith respect to the “Proposals to Stabilize the Foreign Exchange Market in Emerging Economies,” endorsed at the G20 summit in Pittsburgh in September and the G20 finance ministers meeting in November, the FSC, prior to the meeting, distributed to the FSB members the report on the detailed background of the proposals and specific plans to implement. At the plenary meeting, the Korean government shared with the FSB members the report on the detailed background and policies that the Korean government introduced to enhance the soundness of foreign currency market and strengthen related regulations with the aim to reduce foreign currency liquidity risk.The report reasserted the need for international coordination to build a global financial safety net to protect emerging economies vulnerable to foreign currency liquidity risk. The report net to protect emerging economies vulnerable to foreign currency liquidity risk. The report help emerging economies reduce foreign liquidity risk by creating a
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Nov 19, 2009
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Oct 01, 2009
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Sep 11, 2009
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Aug 28, 2009
- Legislation Notice of Amendments to the Enforcement Decrees of the Banking Act and the Financial Holding Companies Act
- BackgroundThe Banking Act and the Financial Holding Companies Act were recently amended and will be enacted on October 10, 2009. Improvements were made to the restriction on shareholding of commercial banks and bank holding companies (hereinafter referred to as “banks”) by non-financial business operators (NFBO).The Korean government decided on enforcement decrees regarding FSC oversight of bank ownership by NFBOs and private equity funds (PEF). The FSC has proposed amendments to the enforcement decrees of the relevant acts in order to improve and supplement the existing system, such as the reporting of changes to bank ownership. Thus, this legislation notice will be in effect fromAugust 28 to September 7, 2009.Main PointsA. Matter related to the delegation and enactment of the amended Acts1. NFBO’s participation in bank managementUnder the amended Acts, when an NFBO wants to own more than 4% of bank shares and participate in management through appointing directors to the board, it must do so with a pre-approval from the FSC. Moreover, a stringent post-approval supervision* will be in place to prevent any conflict of interest or illegal transaction.*eligibility assessment of the largest shareholder; limiting transactions such as the bank providing credit lines to the largest shareholder; and on-site FSS audits conducted when accused of illegal transactions.“Participation in management” is defined as follows:The number of senior managers elected by the NFBO exceeds the regulated number of, for instance, one or two persons.The NFBO is involved in major decision-making process and regular business operations, and can limit bank management’s decision-making authority through agreements and contracts.2. Approval of NFBO’s bank ownershipi) Under the amended act, an NFBO must gain approval from the FSC to acquire more than 4% of bank shares and become the largest shareholder or participate in management. The relevant enforcement decree dictates th
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Jul 30, 2009
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Jul 16, 2009
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Jul 10, 2009
- Plans to Advance Financial Infrastructure of Funds Market
- Background IssuesEven as the funds market has continued growing in volume and quality, investors’ interest in funds are expected to rise further from a number of factors, such as an aging population.Among other contributing reasons, tax exemptions on overseas stocks and the need to globally diversify private assets caused assets under management to increase sharply at overseas investment funds, climbing from KRW9.1 trillion at end-2005 to KRW54.9 trillion as of June 18 this year.As the availability of asset classes for investment has increased, the variety of funds has also broadened to include real estate, special asset, derivatives and other assets in their funds.But at the same time, the financial infrastructure related to the funds market has been pointed out to have room for improvement.In a few exceptional cases, investors who held overseas investment funds and fund of funds took advantage of other beneficiary owners by buying into a fund with prior information on the direction of stock prices as funds’ base prices are based on the previous day’s closing prices.In other instances, shortfalls in the financial infrastructure related to overseas investment could erode investor confidence as a result of discrepancies in the base price of overseas investment funds.There is also a loss in efficiency as trades, settlement, and the review of assets held in overseas investment funds are conducted manually.Improvement PlansTo raise the level of confidence in the base price and improve the efficiency of fund-related systems, the financial supervisory authorities are to jointly develop the financial infrastructure of the funds market with the funds industry.To prevent buying a fund with foreknowledge in the direction of stock prices, the applicable base price of overseas investment funds and fund of funds will be changed from the current T+1 day to T+2 days. To prevent the frequent resetting of the base price, the current base price tolerance will be adjusted after
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Jul 09, 2009
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Jun 22, 2009
- Restructuring Plan for SMEs
- BackgroundTogether with large companies with debts of more than KRW50 billion, the companies in construction, shipbuilding and shipping industries are now under a full-fledged restructuring process as credit risk assessment have wrapped up on them. SMEs will also be subjected to restructuring programs through creditor bank-led credit risk assessment.Restructuring ScheduleThe credit risk assessment will be conducted on SMEs in order according to the size of their debts given a large number of firms involved and limited information available for them.The first round of credit assessment will be completed by July 15 on SMEs which have KRW5.0 billion or more in borrowing and are required to have external audit. This includes 5,214 basic assessment target companies out of a total of 10,738 SMEs, excluding public and special purpose corporations, and confirmed 861 companies as detailed assessment target companies according to the following financial factors; 3-year operating cash flow deficit, 3-year interest coverage ratio below 1, precautionary and below companies.The second round of credit risk assessment, which will be finished by the end of September, will center on SMEs that have between KRW3.0 billion and KRW5.0 billion in borrowing and are subject to external audit. Unlike the first round of assessment where only financial factors were considered, the second round is expected to include qualitative factors such as the level of delinquencies, discounted bills, and uncommitted overdraft rates. Qualitative factors will also be applied to companies that underwent the first round of assessment for inclusion in the in-depth assessment.The third round of credit risk assessment is due to be completed by the end of November this year. The assessment will include companies that are not subject to external audit or sole proprietorships with more than KRW 3.0 billion in debt, and those that have between KRW1.0-3.0 billion in debt and are subject to external audit.Each credito
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Jun 11, 2009
- Corporate Credit Assessment Results
- 18 creditor banks have carried out regular assessments of large individual companies with credit facilities in excess of KRW 50 billion sinceApril. In the second stage of the credit assessments, 433 companies were analyzed, and as a result, 33 companies are targeted for restructuring.Of the 33 companies, 22 companies are C-rated which will accept creditor-led workout programs, and 11 companies are D-rated which will have to develop self-normalization efforts and apply for corporate restoration process.Compared to the results from regular credit assessments in previous years*, this year there has been a large increase of companies that are up for restructuring. This is believed to have been resulted from creditor banks’ active efforts for restructuring.*2006/07/08: 3, 7, and 0 respectivelyThe total sum of credit facilities rendered to the 33 selected companies amounts to KRW 3.4 trillion. An increase of KRW 980 billion* of additional loan loss provisioning is expected within the financial sector.*Banks/Mutual savings banks/Credit specialized companies: KRW 830bn, 30bn, 20bn respectivelyThe assessments were originally planned to be completed by the end of June, but have been finalized earlier than expected to speed up the restructuring process. Consequently, the Mediation Committee for Creditor Financial Institutions will head the accelerated process of workout programs on selected companies to normalize operation as soon as possible.Creditor banks will start conducting credit assessments of corporations with credit facilities under KRW 50 billion in July. The Corporate Credit Support Task Force will oversee the operation to ensure that the ongoing restructuring process goes as smoothly and effectively as possible.Please be aware that, to minimize disruptions in regular operational activities of the companies that will undergo restructuring, their identities are not revealed.* Please refer to the attached PDF for details.
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May 20, 2009
- Short Selling Permitted on Non-Financial Stocks
- The Financial Services Commission made a decision today to start allowing short selling transactions of non-financial company stocks beginning June 1.However, for the time being, the ban on short selling for financial stocks will continue to be in effect due to volatility still lingering in the market. These stocks include stocks of banks, securities companies, and insurance companies that are traded in the Kospi and the Kosdaq markets.Furthermore, as stipulated in the Financial Investment Services and Capital Markets Act (FSCMA), naked short selling will not be permitted, but only covered short selling will be permitted.To effectively monitor and supervise the short selling activities, a Short Selling Confirmation System will be placed, as well as Short Selling Execution Guidelines. Systemic Enhancements relating to Short Selling1. Disclosure of short selling and stock borrowing information in the stock market through the Korea Exchange (KRX) and the Korea Financial Investment Association (KOFIA).2. Establishment of Short Selling Confirmation System (March 2009) to effectively enforce short selling regulations. Under this system, an investment broker is required to verify whether he or she has followed the short selling regulations correctly.3. The Execution Guidelines for Short Selling (May 2009) have been drawn up to introduce a concept of ‘net short position’ in order to set a clear standard of what is considered short selling and what is not. The ban on short selling of non-financial stocks will be lifted on June 1, 2009, to give ample time for investors and financial investment companies to conduct preparations.Only the financial investment companies that have completed their preparations according to the guideline measures will be allowed to start placing short sell orders and conduct brokerage transactions for clients.The FSC intends on removing the ban also on short selling of financial stocks given further signs of improvements in the markets.* Please
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May 18, 2009
- 2009 Corporate Restructuring Fund Management Plan
- Amid a global financial crisis, the government has taken a number of steps to facilitate and expedite corporate restructuring of distressed companies in order to dismiss concern of worsening financial soundness of financial institutions. In line with this effort, on May 13, the legislative bill relevant to the establishment of the Korea Asset Management Corporation (KAMCO) was amended to enable the Corporate Restructuring Fund to be set up within the KAMCO. The National Assembly has previously passed a motion on providing debt service guarantees for bonds that will be issued for the envisioned KRW 40 trillion Fund throughout 2009 and 2010.Subsequently, the 2009 Corporate Restructuring Fund Management Plan will be submitted to the National Assembly in late May, after a cabinet meeting held on May 19.The planned amount for the Fund in 2009 is KRW 20.2 trillion, which is subject to changes in further economic developments, whereas the actual total bond issuance for the Fund will depend on the amount of distressed assets it needs to purchase, and prevailing market conditions. The payments for the purchase of the distressed assets will be made by bonds from the Corporate Restructuring Fund, so as to minimize the impact on the bond market. The liquidity support of KRW 120 billion for the companies experiencing temporary liquidity shortage is included in the Fund as well.The majority of the Fund, KRW 20 trillion, will be used to acquire impaired loans from financial institutions and distressed assets from companies undergoing restructuring. This will preferentially include acquisitions of KRW 4.7 trillion of financial institutions’ non-performing loans from project financings and KRW 1 trillion worth of struggling ships that are in operation.The implementation of the Corporate Restructuring Fund is expected to enhance and expedite the restructuring process to preempt deterioration of asset quality of financial institutions. Through effectively utilizing the Fund in the p
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Apr 30, 2009
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Apr 23, 2009
- Restructuring Plans for the Shipping Industry
- 1. BackgroundIn recent years, shipping companies have continuously grown in size* driven by drastic rise in freight rates (Baltic Exchange Dry Index (BDI)).Starting from the end of last year, the business environments have gotten drastically worsened with sudden freefall of freight rates. Consequently, many had to curtail their operations and some became insolvent.For instance, Samsun Logics, the 9th biggest in terms of asset size, filed for petition for a rehabilitation program in February.Although the freight rates have gone up a bit lately, up to 2,084 by March 4, due to prevalent oversupply, a recovery in full scale is deemed difficult.As such, there has been some concern about increasing insolvency among shipping companies as it might burden other related industries, especially shipbuilding or financial companies. Furthermore, their insolvency can be easily spread over to the overall shipping industry because of the complex, multi-layered chartering contracts.Most certainly, if the number of chartering contract cancellation continues to increase, then shipbuilding and financial companies will inevitably face the risk. Therefore, the following restructuring plans, which are to be carried out on a day-to-day, ongoing basis, will help contain increasing insolvency in the shipping industry and to revamp the industry so as to strengthen its competitiveness in the global market.2. Restructuring PlansA. Continuous restructuring of shipping companiesIn line with the existing corporate restructuring procedures* supported by the Corporate Restructuring Promotion Act, creditor banks will conduct credit risk assessment of subject shipping companies on an ongoing basis.*Already, companies whose total loans amount to KRW 50 billion or more are subject to annual mandatory credit risk assessment, due June every year, by their creditor banks.To facilitate the restructuring process, creditor banks will be advised to complete risk assessments by early May this year for shipping c
