Korea on the Load Ahead

Korea on the Road Ahead

Financial Market Stability

MAIN CONTENT

Measures to ease credit crunch (operation of Bond Market Stabilization Fund)

  • Execute KRW 5 trillion from Bond Market Stabilization Fund in 1Q09 and create additional funds from the remaining KRW 5 trillion in 2Q09 if necessary

Operation of Stock Market Stabilization Fund

  • Create Stock Market Stabilization Fund (financed by the Korea Exchange, Korea Securities Depository and Korea Financial Investment Association) to boost demand in the stock market (1Q09, KRW 515 billion)

Increase bond inclusion in Long-Term Corporate Bond Fund

  • Foster independence of asset management* to increase demand for long-term corporate bond funds (1H09, revision of related laws)
    * Mostly corporate bonds Include financial bonds such as credit card bonds

Inclusion of bonds and commercial papers in MMFs

  • Temporarily ease the limit on composites of MMFs at financial companies (including certificate of deposit) so that MMF can be used to purchase bonds and commercial papers (1H09, revision of related laws)

Introduction of new bond products

  • Introduce a short-term bond system to facilitate short-term funding of companies (draft the proposal to enact the Electronic Securities Act in 1Q09 for submission to the National Assembly in 2Q09)
  • Utilize the current Asset-Backed Securitization Act to support the issuance of structured covered bonds and assist banks' funding of foreign currency capital (ongoing)

Support for foreign currency liquidity

  • Ease regulation on banks' foreign currency liquidity ratio (seven-day gap ratio) in 1Q09
    * Encourage lengthening of external debt maturity (ongoing) and encourage banks to supply foreign currency capital to export and import companies

RECENT PROGRESS

Measures to ease credit crunch (operation of Bond Market Stabilization Fund)

  • Purchased bonds worth KRW 2.97 trillion from December 2008 to March 2009 (of the initial amount of KRW 5 trillion)

Operation of Stock Market Stabilization Fund

  • Completed financing of KRW 515 billion from November 2008 to March 2009. Fund is currently being managed.

Increase bond inclusion in Long-Term Corporate Bond Fund

  • Expanded coverage to include not only corporate bonds but financial bonds such as credit card bonds (revision of Enforcement Decree of the Restriction of Tax Reduction and Exemption Act on February 4, 2009)

Inclusion of bonds and commercial papers in MMFs

  • Compulsory measure introduced to invest more than 40% of MMF assets in bonds and commercial papers (March 16 press release, 'Measures to Rationalize MMF Asset Management Regulations). Revision of Financial Investment Industry Rules is in progress to legalize this measure.

Introduction of new bond products

  • Proposal to enact the Short-Term Bond Law (March 2009), Ongoing support for the issuance of structured covered bonds

Support for foreign currency liquidity

  • Eased foreign liquidity regulations (January 2, 2009)** and completed MOUs with banks (November 14, 2008)*, conducted monthly assessments (assessing previous month's results at the beginning of each month)
    * Set targets for mid-to-long term borrowing ratios and export finance support through MOUs
    ** Seven-day gap ratio reporting changed from daily to monthly basis
  • As an exception, credit limits on trade financing for imports and exports may be exceeded upon decision of the Korea on the Load Ahead (beginning December 8, 2008)
    * On two occasions (December 8 and 12, 2008), eight banks were granted a total of KRW 10.6 trillion in extended credit limit

FUTURE PLANS

Measures to ease credit crunch (operation of Bond Market Stabilization Fund)

  • Determine based on market conditions whether to set aside the remaining KRW 5 trillion

Operation of Stock Market Stabilization Fund

  • Funds to be managed according to market conditions

Increase bond inclusion in Long-Term Corporate Bond Fund: Completed

 

Inclusion of bonds and commercial papers in MMF

  • Aim to revise Rules on Financial Investment Business (promulgation in May, enforcement in August)
  • Closely monitor inflow/outflow and asset management (additional purchase of bonds and commercial paper) of MMF

Introduction of new bond products

  • Enactment of Short-Term Bond Act (targeting submission to National Assembly in June)
  • Ongoing support for issuance of structured covered bonds

Support for foreign currency liquidity

  • Monitor implementation of MOU on a monthly basis and encourage mid-to-long term borrowing and expansion of trade financing

Enhancement of Financial Companies'Soundness

MAIN CONTENT

First Stage: Reinforce the self-supporting efforts of financial companies

  • (Banking Sector) Recapitalize banks through issuance of subordinated bonds and hybrid securities to increase capital
  • (Insurance Sector) Increase capital and issue subordinated bonds under the responsibility of major share-holders so that solvency margin ratio above 150 percent can be maintained
  • (Microfinance Sector) Increase retained earnings to prepare for profit deterioration, increase capital by major shareholders

Second Stage: Recapitalization

  • (Bank Recapitalization Fund) Create KRW 20 trillion fund* (1Q09), accept applications from financial companies and begin to inject capital (1H09)
    * Bank of Korea (KRW 10 trillion), Korea Development Bank (KRW 2 trillion), and private investors (KRW 8 trillion)
  • (Mutual Savings Banks) Create 'Normalization of Non-viable Mutual Savings Bank Fund?of KRW 100 billion (within 2 years) and expedite restructuring (ongoing)

Securitize eligible residential mortgage loans through the Korea Housing Finance Corporation

  • Acquire from financial companies residential mortgage loan bonds that have potential to be non-performing(KRW 3.5 trillion in 1H09, KRW 7 trillion in 2009)

Purchase non-performing assets through the Korea Asset Management Corporation

  • Acquire NPLs of financial institutions and project-financing NPLs of savings banks (more than KRW 0.9 trillion in 1Q09, KRW 3 trillion in 2009)

Strengthen risk management of microfinance sector companies

  • Monitor potential risk factors, conduct continuous checks on liquidity status, purchase bonds of credit-specialized financial companies through the Bond Stabilization Fund

Measures for non-viable (or potentially non-viable) financial companies

  • Conduct restructuring on (potentially) non-viable financial companies using reserves from Deposit Insurance Fund under the principle of minimum cost and fair loss distribution

RECENT PROGRESS

First Stage: Reinforce the self-supporting efforts of financial companies

  • Recapitalized KRW 18 trillion for banking sector (November 2008 ?January 2009) and KRW 219.1 billion for insurance sector (five companies), conducted stress tests on savings banks, guided non-banking financial institutions on recapitalization and restriction on dividend

Second Stage: Recapitalization

  • (Bank Recapitalization Fund) Created and announced KRW 20 trillion Bank Recapitalization Fund (February 25) and provided KRW 3.96 trillion to eight financial institutions (March 31)
  • (Mutual Savings Banks) Started 'N ormalization of Non-Performing Mutual Savings Bank Fund?(March)
  • Established Financial Stability Fund to preemptively recapitalize all financial institutions, prepared Proposed Revision to the Act on the Structural Improvement of the Financial Industry and submitted the proposed revision to the National Assembly (April 1)

Securitize eligible residential mortgage loans through the Korea Housing Finance Corporation

  • Issued KRW 860.7 billion in mortgage-backed securities (Bogeumjari Loan KRW 493.6 billion, housing guarantee loans of financial institutions KRW 367.1 billion) in 1Q09

Purchase non-performing assets through the Korea Asset Management Corporation

  • Completed KRW 1.9 trillion purchase in 1Q09 (non-performing mortgage loans of households and SMEs KRW 0.7 trillion, project financing loans of mutual savings banks KRW 1.2 trillion)
  • Prepared Proposed Revision to the Korea Asset Management Corporation Act (establishment of KRW 40 trillion Restructuring Fund to support the asset soundness of financial institutions) and submitted the proposed revision to the National Assembly (April 1)

Strengthen risk management of microfinance sector companies

  • Conducted stress test on potential risk factors of mutual savings banks, monitored daily liquidity of credit-specialized financial companies, purchased KRW 0.43 trillion of bonds of credit-specialized financial companies through the Bond Stabilization Fund

Measures for non-viable (or potentially non-viable) financial companies

  • Yes Mutual Savings Bank was established on March 19, 2008 as a bridge savings bank for Jeonbuk Mutual Savings Bank, a non-viable financial institution, under the minimum cost principle. This deal was completed through a transfer of contract on April 1, 2009.

FUTURE PLANS

First Stage: Reinforce the self-supporting efforts of financial companies

  • Push for self-recapitalization of banking and insurance sectors, and capital increase by major shareholders
  • Encourage recapitalization of non-banking financial institutions through the continuous monitoring of financial soundness

Second Stage: Recapitalization

  • (Bank Recapitalization Fund) Monitor and evaluate the monthly results of support to the real sector given by banks that have been assigned credit lines
  • (Mutual Savings Banks) Conduct regular stress tests and take preemptive actions to prevent non-performance by increasing capital if necessary
  • Pass the Act on the Structural Improvement of the Financial Industry (regarding the establishment of the Financial Stability Fund) at the National Assembly

Securitize eligible residential mortgage loans through the Korea Housing Finance Corporation

  • Additional KRW 2 trillion of MBS-Swap planned in 2Q09

Purchase non-performing assets through the Korea Asset Management Corporation

  • Purchase KRW 4.7 trillion of project financing loans at risk of non-performance
  • Establish Restructuring Fund to support the acquisition of financial institutions?NPLs and assets of restructuring companies, and pass the Proposed Revision to the Korea Asset Management Corporation Act at the National Assembly

Strengthen risk management of microfinance sector companies

  • Closely monitor funding by credit-specialized financial companies and the supply of bonds of credit-specialized financial institutions. Purchase bonds of credit-specialized financial institutions through Bond Stabilization Fund on an ongoing basis if necessary

Measures for non-viable (or potentially non-viable) financial companies

  • Carry out expeditious resolution of non-viable financial institutions through the Korea Deposit Insurance Corporation
97 Yeoui-daero, Youngdeungpo-gu, Seoul, 150-743 Korea, TEL:+82-2 2156-8000 Copyright Financial Services Commission. All Rights Reserved.