Press Releases - Financial Services Commission

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Jul 30, 2010

Privatization Plan for Woori Financial Group

The Public Funds Oversight Committee has held the 22nd Meeting today to finalize its plans to sell the remaining shares of Woori Financial Group (WFG) held by the Korea Deposit Insurance Corporation (KDIC), where a consensus has been reached that after successfully making two block sales, once in November 2009 and once in April 2010, totaling 16% of WFG, bringing the total amount of shares held by the KDIC down to a 50% level, an appropriate condition has been set to finalize the privatization of WFG.The privatization will be carried out with the three basic principles: maximizing recovery of injected public funds; making an early privatization; and contributing to sound and productive advancement of the financial industry.(1) Method of privatizationIn line with the three basic principles, the sale of WFG shares will be done through two steps of open competitive bidding process by domestic and foreign investors; first, by preliminary bidding; and second, by final bidding.(2) Simultaneous sale of WFG and regional banksBoth the shares of WFG and the shares of regional banks held by WFG (Kyungnam Bank and Kwangju Bank) will be sold separately but up for the bidding at the same time.Although the two regional banks are under WFG, it has been viewed as more effective to sell them separately due to them not having an integrated data processing network with WFG and with low level of synergy effect. Moreover, because their value would be greater when sold separately taking into account their regional focused businesses.However, the bidding will be carried out simultaneously to prevent any delay in the overall privatization process.The sale of regional banks will be for 50% plus ne share or done through a completemerger. And the actual amount of shares of WFG to be sold or whether it will be done through a merger will be determined and finalized with close discussions with the to-be- selected sales advisory firms. (3) Selection of sales advisory firmsConsidering the size and
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Jun 24, 2010

Amendments to the Enforcement Decree of the Mutual Savings Banks

As the Amendments to the Enforcement Decree of the Mutual Savings Banks Act have passed the Cabinet Meeting in June 22, they are expected to be enforced starting from July 2010.A major change is that banks’ equity capital will be calculated based on the BIS definition, and not on the balance sheet definition as previously done.Standards for calculation of a bank’s equity capitalPreviously, a bank’s equity capital was defined as total assets minus total liabilities on the balance sheet. Under the amended enforcement decree, mutual banks are required to follow the BIS definition of equity capital, which consists of Tier 1 capital, Tier 2 capital, and deductible items. Each has to meet the following qualifications:(1) Tier 1 capital: a bank’s core net assets with permanent features (e.g. paid-in-capital, capital surplus)(2) Tier 2 capital: capital equivalent to Tier 1, capable of covering loss(e.g. subordinated bonds, subordinated deposits, cumulative preferred stock)(3) Deductible items: Items that do not actually contribute to the soundness of capital should be excluded from equity capital. (e.g. treasury stock)(4) A bank’s equity capital ratio is to be calculated every six months. In two months after the calculation, the new ratio will be applied for six months.*Details on Tier 1, Tier 2 and deductible items will be specified in supervision regulations.Implementation scheduleThe amended enforcement decree mandates the Supervision Regulations of the Mutual Savings Banks and the Supervision Rules of the Mutual Savings Banks to stipulate details.The amendments are expected to be implemented starting July 1.*Please read the attached file for details.
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Jun 04, 2010

Amendments to the Enforcement Decree of the FSCMA Passed at the Vice Ministerial Meeting

Amendments to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FSCMA) were passed at the vice ministerial meeting on June 3, 2010. Reflecting opinions gathered during the period of legislation notice, the following modifications were made to the first draft that had been previously announced:1. The original draft stipulated that applications for add-on business authorization shall be suspended for one to three years for financial investment institutions penalized with a warning or a higher punitive measure. However, accepting the opinion that the measure may be too harsh considering a warning is a minor penalty, the level will be raised to a suspension of business activities of branches and sales representative offices. The revised version specifies the level of punitive measures that affects authorization of financial investment institutions.2. Modifications will be made after further discussions in regard with the current provision that applies same criteria for disqualification of both non-registered executives and registered executives.3. Given that some modifications were made to the original draft, the Governor of the Financial Supervisory Service (FSS) will continue to exercise the authority mandated by the FSC to penalize employees and executives of financial investment institutions. 4. The limit on bond funds to indirectly reinvest up to 40% of their assets in government bond ETFs will be raised to 100%.5. Executives and employees from foreign multi-financial service providers operating collective investment businesses (i.e. asset management) were prohibited from holding concurrent positions in domestic financial institutions. However, the blanket ban was revised so that only those engaged in collective investment business (both employees and executives) are prohibited from holding concurrent positions in domestic financial institutions.The amendments will go through the cabinet meeting’s approval next week to be enforc
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Jun 03, 2010

Principles and Plans for Authorization of Financial Investment Businesses

Amendments to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FSCMA) were passed at the vice ministerial meeting on June 3, 2010.Reflecting opinions gathered during the period of legislation notice, the following modifications were made to the first draft that had been previously announced:1. The original draft stipulated that applications for add-on business authorization shall be suspended for one to three years for financial investment institutions penalized with a warning or a higher punitive measure.However, accepting the opinion that the measure may be too harsh considering a warning is a minor penalty, the level will be raised to a suspension of business activities of branches and sales representative offices. The revised version specifies the level of punitive measures that affects authorization of financial investment institutions. 2. Modifications will be made after further discussions in regard with the current provision that applies same criteria for disqualification of both non-registered executives and registered executives.3. Given that some modifications were made to the original draft, the Governor of the Financial Supervisory Service (FSS) will continue to exercise the authority mandated by the FSC to penalize employees and executives of financial investment institutions. 4. The limit on bond funds to indirectly reinvest up to 40% of their assets in government bond ETFs will be raised to 100%.5. Executives and employees from foreign multi-financial service providers operating collective investment businesses (i.e. asset management) were prohibited from holding concurrent positions in domestic financial institutions. However, the blanket ban was revised so that only those engaged in collective investment business (both employees and executives) are prohibited from holding concurrent positions in domestic financial institutions.The amendments will go through the cabinet meeting’s approval next week to be enforce
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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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Apr 20, 2010

Impacts of the Goldman Sachs Case on Financial Markets

1. Impacts on domestic and overseas financial marketsIn the wake of the civil action by the U.S. Securities and Exchange Commission (SEC) against Goldman Sachs on April 16, stock markets in the U.S. and Europe fell, and prices of the U.S. Treasury bonds and dollars rose.Domestic markets were also affected by the Goldman Sachs case to a limited extent. The KOSPI dropped by 30bps.Foreign investors sold in the market, and the U.S dollar against the Korean won rose.As of end-2009, domestic financial institutions hold the outstanding securities of USD 350 million issued by Goldman Sachs. That accounts for only 1.8% of foreign securities held by domestic financial institutions (USD 19.04 billion) and does not include a synthetic CDO related to the case.2. ImplicationsThe Goldman Sachs case is expected to bring only a limited impact on Korean financial markets considering the fact that Korean financial institutions hold no CDO at issue and only a small amount of other securities issued by Goldman Sachs. Also, under Korea’s Asset-Backed Securitization Act, it is virtually impossible for special purpose companies (SPCs) to issue synthetic CDOs, similar to the controversial product in question; therefore, it is unlikely that domestic financial institutions wouldexpose investors to similar risks.3. Policy responsesThe FSC will closely monitor any possibility that similar lawsuits would be filed worldwide and domestic financial companies might be involved. At the same time, the FSC will continue to improve investor protection systems such as prior reviews* for OTC derivatives. Currently, amendments to the FSCMA enforcement decree are underway to enforce the prior review system for OTC derivatives in June 2010, and the Korea Financial Investment Association(KOFIA) is formulating rules of prior reviews.*Prior reviews of OTC derivatives, introduced by the amended FSCMA in March 2010, are conducted by a review committee of the KOFIA. Products subject to a prior review include OTC
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Jan 28, 2010

Results of the 9th Public Funds Oversight Committee Meeting

The Public Funds Oversight Committee, co-chaired by Mr. Sang Ki Min and the FSC Chairman Dong-Soo Chin, held the 9th meeting on January 27, 2010. Reported by the Korea Depository Insurance Corporation (KDIC) and the Korea Asset Management Corporation (KAMCO), the committee has decided on the criteria to select advisory firms and the method of sale of minority stakes in Woori Finance Holdings Company.Key Outcomes1. The committee decided to sell minority shares of Woori Finance Holdings in a block sale. The committee also approved the criteria to select advisory firms which will arrange the sale. Two domestic companies and two foreign companies will be selected in order to attract both foreign and domestic investors and further develop the securities sector in Korea.Details such as the size or the timing of sales will be determined by the committee after further deliberations.2. As decided at the meeting, the KAMCO and other creditors, who own a 68.2% stake in Daewoo International Corp., will sell 50% plus one share through open bids. Twenty-four percent of Kyobo Life Insurance shares, owned by Daewoo International, will be also put for sale.3. The committee also approved a plan for partially securitizing the project financing loans bought from financial companies through the Corporate Restructuring Funds (CRF) on September 2009. Specific plans are to initiate a transfer of project financing loans of KRW 59.4 billion to a special purpose company within February. The SPC will be co-funded by the CRF itself within KAMCO and other financial companies. The SPC will issue senior bonds of KRW 9.3 billion of which the CRF will take over. The rest will be issued as subordinated bonds of which financial companies will purchase.* Please refer to the attached PDF for details.
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Dec 30, 2009

Impact of Kumho Asiana Group’s Restructuring and Future Actions

SummaryKumho Asiana Group and its main creditor Korea Development Bank (KDB) announced a set of measures Wednesday (December 30, 2009) to restructure the business group’s major subsidiaries. The following is the summary of the measures agreed and settled between the Kumho Asiana Group and its creditors.- Kumho Industrial and Kumho Tires will be placed under creditor-led joint management based on the Corporate Restructuring Promotion Act- Kumho Petrochemical and Asiana Airlines will make rigorous self-rescue efforts to normalize their business- As much as 50% plus one share of Daewoo Engineering and Construction will be sold to KDB-led private equity fund- Kumho Life Insurance will be sold to a private equity fund which will be jointly established by KDB and Consus Asset ManagementThe restructuring of Kumho Asiana Group’s subsidiaries will be made through rigorous self-rescue efforts with an aim for a swift turnaround of management, which include a sale of subsidiaries and, under the responsibility of major shareholders, the provision of stock and assets for collateral to creditors.Impact of the restructuringThe direct impact of the restructuring of Kumho Asiana’s two subsidiaries, Kumho Industrial and Kumho Tires is expected to be not great on the soundness of financial companies and markets.The amount of credit extended by financial companies to Kumho Asiana Group totals KRW15.7 trillion involving KRW10.1 trillion in loans, KRW1.2 trillion in corporate bonds, CP and other securities, and KRW4.4 trillion in payment guarantees and others. Put back options of KRW2.6 trillion to be exercised by financial companies and the PF guaranteesof KRW2.7 trillion are not included in this total credit. The total lending that financial companies have directly extended to the two Kumho Asiana subsidiaries under restructuring is KRW3.0 trillion including KRW2.3 trillion by banks. When the total of put back options and PF guarantees are included, the total credit amounts to KRW
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Dec 16, 2009

2010 Financial Policy Agenda

The Financial Services Commission, the Fair Trade Commission and the Ministry of Strategy and Finance have jointly made a publicly open presentation of their policy objectives for 2010 to the President, Myung-Bak Lee today at the Korea Chamber of Commerce and Industry.Following the presentations from the three agencies, an open discussion took place on two main issues; job creation through active investments and sufficient support for low-income households.The Chairman, Dong-Soo Chin unveiled the FSC’s 2010 financial policy agenda on revitalizing the economy and improving the competitiveness of Korea’s financial markets.Five Key ObjectivesI. Funding Economic RevitalizationSupply sufficient funds to companies through policy financial institutions and the capital markets and invigorate green finance while strengthening corporate structures through restructuring1. Supply sufficient funds to companies through policy financial institutions- Supply a total of 23 trillion wons for facility investment through the KDB (9.5tn); IBK (8.0tn); KFC (1.35tn); KoDIT and Kibo (3.7tn)- Supply a total of 94 trillion wons to the small and medium enterprises through the IBK (29.0tn); KDB (10.0tn); KFC (2.1tn); KoDIT (36.7tn); Kibo (15.9tn)*The Korea Development Bank (KDB); the Industrial Bank of Korea (IBK); the Korea Finance Corporation (KFC); the Korea Credit Guarantee Fund (KoDIT) and the Korea Technology Finance Corporation (Kibo).In principle, the maturity extensions which were planned to end at the end of the year will be extended throughout the first half of next year while the upgraded guarantee ratio of 95% will be downgraded gradually; 90% in January; and 85% in July 2010. Newly applied guarantees in 2010 will be guaranteed within the range between 50% to 85%, the pre-crisis level.The burden will be alleviated on joint guarantees when venture companies raise capital from institutional investors.2. Supply sufficient funds to companies through the capital markets- Establish
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Nov 19, 2009

Supervision of Financial Institutions FX soundness Strengthened

BackgroundThe soundness of domestic financial institutions’ foreign-exchange management recovered to pre-crisis levels on the strength of the government’s countermeasures and the voluntary efforts of institutions. But insofar as the weak links in their FX management became apparent during the crisis, the need has grown to fine-tune related systems to prevent a crisis relapse even while steps continue to be taken to improve FX soundness. The Financial Stability Board has also proposed to develop measures abating potential risk of systemic instability caused by FX liquidity problems in emerging market economies at the time of crisis.It was in this regard that the government unveiled the ‘Financial Institutions’ FX Soundness Strengthened Supervision’ last September 25 outlining the basic direction of the plan. Nonetheless, this measure is not intended to regulate foreign capital being invested in Korea, but merely an attempt to enhance the soundness of financial institutions.The plan contains two main sections, namely strengthened supervision over the FX soundness of individual financial institutions and strengthened supervision over macro-prudential soundness of FX management.The section on the FX soundness of individual financial institutions outlines six measures to be taken, including 1) fine-tuning the regulation on FX liquidity ratio; 2) establishing new standards in FX liquidity risk management; 3) establishing new standards in FX derivatives; 4) strengthening the long-term resource funding ratio; 5) introducing the regulation on FX asset limits; and 6) encouraging rational FX hedging practices.The component on macro-prudential soundness of FX management includes 1) preemption through strengthened monitoring over FX market; and 2) planning countermeasures during contingencies.To move the plan forward, a joint working team comprised of experts from the FSC/FSS and banks is to subsequently take the lead in formulating detailed guidelines.Financial Instit
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Aug 17, 2009

Facility Investment Fund

In a follow-up measure to the July 2 announcement on ‘Plans to Promote Corporate Investment’ released through the Ministry of Strategy and Finance, specific plans to promote facility investment in the corporate sector have been devised. In accordance with the original plan to inject KRW 5 trillion into establishing a Facility Investment Fund through state-owned Korea Development Bank (KDB) and Industrial Bank of Korea (IBK), an initial investment of KRW 2 trillion will be made.Specific DetailsA total amount of KRW 2 trillion will be injected to the new Fund, whereas KDB will initially contribute KRW 0.6 trillion in addition to KRW 0.8 trillion through the Korea Policy Banking Corporation (KPBC) once it is established in October; the remaining KRW 0.6 trillion investment will be made by IBK.The method of investment will be either direct investment through various channels as issuing preferred shares, common shares, long-term corporate bonds, convertible bonds, as well as direct loans, or indirect investment through private funds and private equity funds (PEF). The funds will be available in multiple currencies (won, dollar, yen, euro, etc.) as required by specific projects, and the ratio of public funds being injected will be maintained around 50% of the total investment while the rest will be met by funds from the private sector.The private funds and PEFs eligible for injection of funds will have to meet certain criteria as total size of investment, track record, fees, and a minimum of 90% of funds required to be invested into facility investment. Further eligibility requirements will be set by KDB, IBK, and the Korea Financial Investment Association (KOFIA). KDB and IBK will jointly invest into these funds up to 40% of the total investment mostly through issuing common shares.The funds from KDB will concentrate on facility investments made to new-growth industries, infrastructure projects, long-term investments with higher than normal risk, and other large-scal
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Jul 06, 2009

Plans to Finance Green Growth Related Industries

The Korean government plans to promote investment in green growth related industries. The plan is aimed at creating funds fit for the industries and expanding sources of financing as a way to prevent potential bubble in the industries.BackgroundBoth financing in the financial market and by the government are not fit for green growth related industries because 1) projects in the industries have a lot of uncertainties, 2) it will take long to realize return on investment in those projects, and 3) the external benefit is larger than that of other projects.Directions of the planTo attract private investment, the government decided to remove uncertainties: The government will introduce a certification system to approve green technologies and projects, and verify companies involved in green growth related projects as “green enterprises” if they qualify for government’s requirements.The planThe plan is formulated on the basis of the three stages of development.Stage 1: RD and commercializationTo promote RD projects and their commercialization, the government will increase fiscal support from 2.0 trillion won in 2009 to 2.8 trillion in 2013, along with 300 billion won funds set up by the KDB (Korea Development Bank).SMEs doing projects in stage 1 will access fiscal funds exclusive for them, which will be expanded form 60 billion won in 2009 to 1.1 trillion won in 2013.Credit guarantee offered to “green enterprises” and green projects will also be increased almost three folds from 2.8 trillion won in 2009 to 7 trillion won in 2013.Stage 2: Industries maturingTo boost maturing industries, the “green funds” of 500 billion won will be formed by the KDB and National Pension Fund in the last half of this year, along with long-term deposit products and “green bonds” launched by banks to attract private investors. The government will grant tax incentives on capital gains: no tax on dividend up to 30 million won, among others.Stage 3: Industries fully grownTo suppo
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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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May 04, 2009

Notice of Amendments to the KAMCO Act

On April 29, 2009, the National Assembly has approved amendments to be applied to the KAMCO Act’s enforcement decree. Accordingly, from May 4 to May 11, the government will make official announcements of these amendments.The main purpose is to activate the KAMCO’s role of purchasing troubled assets from distressed financial institutions and companies that will undergo restructuring through establishing a pre-announced Restructuring Fund.Therefore the amendments will be made in the following areas:Improvement in Payment Method for Acquiring Troubled Assets;- Allow payments to be made with bonds from the Restructuring Fund.Executive Rights Given to the KAMCO;- Allow the KAMCO to exercise executive actions to manage the buyer/seller companies’ assets.Settlement of Residual Assets for the Restructuring Fund;- The process of returning the Fund’s residual assets back to the government must beclear and straight-forward. The return may be made in kind, if in agreement with the Ministry of Strategy and Finance. When residual assets are to be placed with the national treasury, a full list of assets and a balance sheet of the Restructuring Fund must be completed prior to the event. After the return of residual assets, a statement of accounts must be created.The amendments will be reviewed by the Ministry of Government Legislation and presented to the Cabinet Council meeting, which then will be officially promulgated and take effect within May 2009.* Please refer to the attached PDF for details.
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Apr 09, 2009

Promotion of Government Bond ETFs

As a follow up step to the Financial Investment Services Capital Markets Act launched in February this year, the Financial Services Commission has issued an initiative to promote Exchange Trade Funds, or ETFs, by allowing a broader scope of investment; currently, only equity-linked ETFs are being traded in the Korean market. Under the new initiative, a diversified array of products will be traded as in other advanced markets such as the U.S. and the E.U.: i.e. ETFs linked to bonds, commodities, gold and crude oil ETFs, inverse ETFs, leveraged ETF, etc., trading of which will be based on trading prices or index.For the government bond linked ETFs, the FSC will revise current regulations to adjust the required number of principle assets from minimum 10 items to 3 items.The FSC believes that such market-friendly steps will result in favorable market response particularly among small private investors and foreign investors, encouraging their active partaking in the government bond trading. This is expected to have positive impacts on the market by stimulating the government bond issuance and the overall trading markets.For the successful launch of new ETFs, the FSC will also revise ‘Financial Investment Act’ and ‘IPO Operation Code ’ of the Korea Stock Exchange by May or June this year.* Please refer to the attached PDF for details.
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Mar 31, 2009

The Bank Recapitalization Fund - 1st Round Purchase

On March 31, the Bank Recapitalization Fund Oversight Committee announced that the first round of bond purchase was completed. The total amount of purchase completed, both hybrid and subordinated bonds issued by 8 financial institutions, is KRW3.956 trillion out of the total ceiling amount, KRW 12.3 trillion, set for the first round of support- Hybrid Bonds: KRW 3,453 billion- Subordinated Bonds: KWR 503 billionAdditional bonds from applying banks will be purchased according to their access limit. An MoU is to be signed between the government and each participating bank in order toensure each bank’s full commitment to providing active support to the real economic sectors while prescribing against the government’s management intervention.The government will conduct follow up monitoring for all participating banks as to their commitment to supporting the economy, regardless to their actual use of the Fund.Meanwhile, in order to prevent the Fund from being concentrated in one particular industry, the Fund Oversight Committee will set an industry-based quota for the support from the participating banks.To those banks deemed lagging behind their MoU commitment to supporting the real economic sectors, punitive measures will be applied on the next round of bond purchase such as limiting the amount of purchase, lowering their total access limit, and raising applicable interest rates.* Please refer to the attached PDF for details.
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Mar 20, 2009

Bank Recapitalization Fund's Execution Blueprint

The Bank Recapitalization Fund Oversight Committee has unveiled its third blueprint as to the basic guidelines for the first round of purchasing banks’ hybrid bonds and subordinate bonds scheduled at the end of March. The purchasing criteria will be determined based on the current and past interest rates, and the interest spread for those bonds.Also, the government evaluated the progress banks have made based on the Fund’s policy objectives and the progress of subject banks’ implementation of their MOU commitment, prerequisite to the government guarantee on their external debts.As for regional banks, to account for the considerable discrepancy in thier credit ratings as opposed to nation-wide banks, 30bp difference will be assumed.The Korea Exchange Bank has informed the FSC that it would not use its credit line for issuing hybrid bonds but would go ahead as planned with issuing subordinate bonds (KRW 250 billion).The first round of bond purchasing will be implemented at the end of March after receiving banks’ application to sell their bonds during the month.Based on the result of the market survey, it is expected that the first round will total approximately KRW 3.8 trillion for hybrid bonds and KRW 0.5 trillion for subordinate bonds.The fund will be operated via a “matching” method in which the fund amount will be set to match the amount in demand in accordance with the needs in supporting the real economic sectors, corporate restructuring, and foreign currency markets.By monitoring the progress the participating banks have made with their implementation of the MoU, those who have inadequately served their commitment to supporting the real economic sectors and other preconditions to the Fund, several countermeasures could be applied to them such as limiting their access amount and raising applicable interest rates.* Please refer to the attached PDF for details.
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Mar 13, 2009

Preemptive Initiatives to Safeguard the Soundness of Financial Instituitions

1. BackgroundAmid deteriorating financial climate in the global economy, much uncertainty in global financial markets has also escalated. Thus, the Korean economy is likely to suffer a prolonged recession, potentially triggering an economic vicious circle starting with corporate and house-hold loan defaults which may hurt the financial sector’s soundness and weaken their lending and overall financial intermediary functions, consequently exacerbating the overall economic basis.Meanwhile, major economies are in the process of preparing or already implementing preemptive measures to support their financial industries by cleaning up non-performing loans and recapitalizing so as to strengthen its intermediary role of supporting the real economic sectors.Notwithstanding Korea’s economy’s relatively strong position, in order to be better prepared for potential risks in case of further deterioration of global market conditions, the government has decided to take preemptive initiatives to strengthen financial institutions’ intermediary functions and to eliminate any potential sources for systemic risks.To do so, early resolution of NPLs in the financial industry has to be preceded to help ascertain its overall soundness. For this, the government already announced its plan to set up a Restructuring Fund under KAMCO in February. On March 13, the government unveils its additional plan to enhance existing regulations to facilitate the government’s rendering greater support to financial institutions in need of further recapitalization. Improved regulations will also allow for launching a government-guaranteed KAMCO bonds in the total amount of KRW 40 trillion. The bills proposing these initiatives will be submitted to the National Assembly in April.Under these new initiatives, financial institutions’ soundness will greatly improve and their ability to shore up real economic sectors will also be strengthened.For the same purpose, the Bank Recapitalization Fund has alre
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Mar 13, 2009

Fitch Ratings' Stress Test

1. Summary of Fitch Ratings’stress test on Korean banksGlobal credit rating agency, Fitch Ratings, announced the results of its stress test on Korean banks on Thursday, March 12th at around 22:00 (Seoul time).A summary of the stress test results is as follows:Under a stress scenario during the period from June 2008 through December 2010, Korean banks would see a decline in capitalization totaling KRW 42 trillion due to credit costs, losses on equity and debt securities holdings and asset growth through the inflation of foreign currency assets given the depreciation of the Korean won in the past year.The banks’ combined equity-to-assets ratio would decline from 6.4 percent in June 2008 to 4.0 percent in December 2010.The KRW 42 trillion reduction in capitalization would require additional capital raisings by the banks, and such capital may have to come from the government. The government’s current KRW 20 trillion Bank Recapitalization Fund may not be sufficient, particularly to the extent it is used to buy subordinated debt and lower quality hybrid debt from the banks.2. Government’s response to the stress test resultsA. The results of the stress test are based on variables and assumptions (e.g. estimated loss rates on bonds and securities), which can be easily altered by future economic events. Therefore, the government finds it inappropriate for Fitch to release such speculative results on Korean banks when this could adversely impact their international credibility and financial soundness.B. Even if the worst possible scenario were to be materialized, in which the expected loss of 42 trillion won were to be taken into account and no new recapitalization were to be assumed, the tangible common equity (TCE) ratio of Korean banks would be 4.0 percent as of the end of 2010, which would be still higher than the current TCE ratios of major leading banks worldwide. The Bank for International Settlements (BIS) ratio would be 8.7 percent, still higher than th
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Feb 25, 2009

Bank Recapitalization Fund Formation and Operation

Amid global economic crisis, banks need to take more aggressive roles in supporting real economic sectors and corporate restructuring in a concerted effort to overcome the financial turmoil without hurting Korea’s economic growth potentials.From this perspective, since the beginning of the second half of last year, the government has been raising the issue of launching the Bank Recapitalization Fund as a way to boost banks’ funding and loss bearing capacities.In its report to the President on the annual work plan, the Financial Services Commission announced its plan to form the Fund so as to enable banks to take upon the leading role in shoring up real economic sectors and the on-going restructuring programs.To maximize the effect of the Fund, the government has encouraged banks to provide their feedback on the plan, and based on the ideas gathered thus far, following detailed plans have been finalized.I. Progress in the formation of the FundIn December 2008, the government announced the plan to set up Bank Recapitalization Fund in the amount of 20 trillion won.On February 15, 2009, banks’ CEOs and the regulators met and ran a joint workshop regarding the plan as to ways of making best use of the Fund in providing liquidity to the real economic sectors and their restructuring. General consensus has been reached that banks will be able access the Fund within their credit limits, and banks are free to decide on how to use the funds.Commercial banks, holding companies as well as Industrial Bank of Korea, NACF, and NFFC can apply for the fund.Some recommended usage:a. In support of real economic sectors: by extending new credit lines or roll-overs to SMEs, funding to credit guarantee schemesb. In support of corporate restructuring programs: new credit extension to or funding for the debt-to-equity swap of companies under workout programs, capital injection to the Corporate Restructuring Fund (KAMCO)c. In support of PFs or NPL write-offsOn February 25, 2009 at the
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