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Oct 10, 2008
- Key Issues on Korean Economy
- This document is prepared with the purpose to explain the following key issues on Korean economy.- External Debt- Foreign exchange reserve- Export- Current Account Balance- Korean Banks- FX Liquidity- Policy Responses 1. External Debt □ (Size) The ratio of external debt to GDP stands at 39% as of late 2007, which is lower than that of major developed economies1) and tolerable given the size of our economy.□ (Nature) Recent growth of external debt in Korea has risen as a counterpart to hedging activities undertaken by shipbuilders and overseas investors.ㅇ This is in stark contrast to massive foreign currency short-term borrowings induced for excessive investment by Korean Chaebols that led to the 1997 financial crisis.ㅇ As of June 2008, $152 billion out of $420 billion external debt are free of repayment burden, making the size of foreign debt with repayment burden reduced to $268 billion.ㅇ In addition, 22% of the total external debt (45% of short-term external debt) belongs to local branches of foreign banks, which makes it unfitting to be regarded as net external debt.ㅇ The IMF expressed that today's foreign debt increase in Korea not as risky as in the past. (08. 6.24, IMF Annual Consultation)1) the ratio of external debt to GDP as end of 2006 : UK(394%), Germany(144%), US(85%), Japan(35%) 2. Foreign exchange reserve□ (Size) Korea holds the 6th largest foreign exchange reserve in the world, which is deemed adequate.ㅇ The size is well beyond the IMF guideline, which is a global reference for the adequate size of FX reserve.2)ㅇ The IMF(Sep.4) and Fitch(July.16), a global credit rating agency, affirmed that Korea's reserve was sufficient.□ (Composition) Korea's reserve is composed of assets with low risk such as deposits, sovereign bonds, federal agency securities and supernational bonds.ㅇ As of September 2008, the total of $240 billion reserve can be cashed in immediately.2) IMF guideline for adequate FX reserve is a total of 3-month current pa
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Oct 09, 2008
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Oct 09, 2008
- News Briefing for Foreign Correspondents
- Soundness of Domestic Banks- Korea’s banking sector is sound in terms of asset strength, capital adequacy, profitability, and other soundness measures. Domestic banks’ ROA and ROE ratios, at 0.88% and 12.53%, respectively, are in line with or better than many banks in the developed countries.- Domestic banks’ average delinquency rate has risen slightly from 0.70% at end- 2007 to 0.87% at end-September, 2008. The average coverage ratio (a measure of reserves against potential loan losses) of 197.1% and BIS capital ratio of 11.36% strongly suggest that domestic banks will be able to easily absorb loan losses.- The Korean won-based liquidity ratio was 107.7% at end-August, while foreign currency-based liquidity ratio was 100.5% at end-September, both higher than the recommended level of 100% and 85%, respectively.- The loan/deposit ratio (including CDs) stood at 103.2% at end-September, slightly lower than 105.4% at end-July. Because of their deposit-like characteristics, CDs are often included in determining the loan/deposit ratio (e.g., the U.S.). The over- the-counter sale of CDs accounts for approximately 80% of the total.- It has been reported that Korean banks are borrowing in dollars and lending in won. This is incorrect because local banks are mostly financing won-denominated loans with deposits, CDs, and won-denominated bond issues.- As of end-June, 2008, foreign currency assets came to US$227.7 billion, which closely matched US$236.2 billion in foreign currency liabilities.Household Mortgages- Bank household mortgage loans outstanding totaled KRW231.8 trillion at end- September.- In 2008, bank mortgage lending rose by roughly KRW1.4 trillion a month.- Mortgage loans are sound, particularly when the low loan-to-value ratio (47.0%) and delinquency rate (0.44%) and the high coverage ratio (311.7%) are taken into account.SME Lending- The growth of bank lending to small- and medium-sized enterprises (SMEs) has slowed somewhat since August. SME loans outstand
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Jan 09, 2008
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Mar 09, 2007
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Dec 18, 2006
- New Measures Proposed to Advance the Bond Market
- The Financial Supervisory Commission announced a set of proposals aimed at advancing the bond market on December 14. The new proposals are the work of a joint public-private task force created in February this year to recommend improvement in four key areas—corporate bond underwriting, market liquidity, trading of repurchase agreements, and disclosure—and help raise the transparency and efficiency of the bond market.1 The legal and regulatory amendments needed for the changes proposed by the task force are expected to be completed by June, 2007.Bond Market TrendSince the financial crisis, the bond market has shown a steady growth with the total issue amount and the trading volume increasing more than two-fold and five-fold, respectively, since 1998. Recently, however, corporate debt-financing has been declining amid falling capital demand for corporate investment and investors showing preference for cash accumulation.Corporate Bond Underwriting by Securities CompaniesAs a result of weak capital demand and the growth of privately placed issues, the market for corporate bond underwriting has been shrinking, putting a downward pressure on profits securities firms generate from underwriting.Securities firms authorized to underwrite bond issues numbered 45, 31 of which took part in an actual bond underwriting. Fees generated from underwriting averaged KRW3 billion for each securities firm in 2005.Because local securities firms compete more on underwriting fees than on funding ability, risk analysis, raising interest among investors, and other critical underwriting capabilities, they have thus far failed to build the kinds of reputation that investors generally expect. Local securities firms are also continually exposed to legal risks for inadequate attention to investor protection, e.g., poorly administered due diligence and faulty prospectus.Task Force ProposalAs a way to discourage unhealthy competition and improve the overall caliber of corporate bond underwriting
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Oct 13, 2005
- Amended Regulation on Indirect Investment Asset Management Business to Take Effect on October 7, 2005
- The FSC/FSS amended Regulation on Indirect Investment Asset Management Business and the accompanying enforcement rules on September 30. The amended regulations, which take effect October 7, are intended to strengthen prudential oversight of asset management companies (AMCs) and ease restrictions on asset management activities. The following is a summary of the amended regulations.Prudential Oversight of AMCsAmended Investment Risk Weights on Net-Asset Basis(To take effect after six months from October 7, 2005)The risk weight for mark-to-market funds for the purpose of regulatory capital is to be differentiated according to the funds’ asset holdings in order to lower capital burden on AMCs with large funds. Prior to the amendment, 0.1% was uniformly applied as risk weight to all mark-to-market funds. Below is a table of amended new risk weights to be applied to mark-to-market funds on net-asset basis.The risk weight for book -value funds is to remain unchanged at the current uniform level of 0.2%. The same risk weight is to be applied to private equity funds managed by AMCs. For AMCs with outside directors and an audit committee in place, 10% of the risk amount determined is to be additionally deducted. In determining risk amount, borrowed funds for investment purposes are to be included in the net asset amount.Amended Management Status Evaluation(To take effect after six months from October 7, 2005)For assessment of capital adequacy of AMCs, the ratio of capital impaired is to be newly added to the quantitative capital assessment criteria so that undercapitalized AMCs do not receive a quantitative rating higher than the third (fair) grade. The effective capital adequacy ratio, which had varies little among AMCs, was eliminated from the quantitative capital assessment criteria.Prompt Corrective Action for AMCsWhere an AMC subject to prompt corrective action (PCA) satisfies the mandatory soundness standards with capital restoration or other necessary measures, the b
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Sep 12, 2005
- Direct Corporate Financing Decreases in August
- Data compiled by the FSS showed that stocks and bonds issued by domestic companies in August totaled KRW3.74 trillion, marking a decrease of 30.9% from a month earlier. The decrease in direct corporate financing was due to the seasonal effect of low demand for corporate financing. Stocks and bonds issued fell 46.4% to KRW290.6 billion and 29.1% to KRW3.45 trillion from a month earlier, respectively.Equity FinancingStocks issued fell 46.4% in August due to temporary adjustments in the stock market. There were two IPOs during August totaling KRW16.8 billion, compared with 14 IPOs of KRW215.4 billion in July. The amount of seasoned equity offerings (SEOs) in August fell 16.3% from a month earlier to KRW273.8 billion.Debt FinancingCorporate BondsExcluding Asset- backed securities (ABS) and financial bonds, corporate debt issues decreased 19.8% to KRW1.40 trillion in August as interest rates in the bond market rose and the amount of maturing bonds decreased KRW618.4 billion from a month earlier. Corporate debt issued for facilities investment and rollovers increased 311.5% and 14.7%, respectively, while corporate debt for operating capital dropped35.6%.Financial BondsFinancial bonds issued in August fell 30.4% to KRW803.0 billion from KRW1,153.0 billion in July due to a rise in bond interest rates. Bonds issued by credit card companies and installment finance companies dropped 34.8% to KRW543.0 billion and 18.8% to KRW260.0 billion, respectively.Asset-Backed SecuritiesAsset-backed securities (ABS) issued by public offering totaled KRW1.24 trillion in August, down 36.6% from July but up 26.1% from the same period last year. The total ABS issuances in August came to KRW2.59 trillion, up 2.0% from July and 19.1% from the same period last year.Direct Financing by Large Companies and SMEsThe amount of debt (excluding ABS and financial bonds) and equity financing by large companies fell 26.5% to KRW1,433.1 billion and that of SMEs also fell 23.9% to KRW259.6 billion from a mon
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Jul 22, 2005
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Jul 14, 2005
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Mar 10, 2005
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Aug 30, 2004
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Jun 09, 2004
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Nov 09, 2000
- Evaluation Results of 6 banks self-rescue plans
- I. Measures to the six banks which submitted the management improvement plans□ Based on the MEC's review results of the plans, proper measures will be taken in accordance with the relevant regulations. □ Self-rescue plans of Chohung Bank and the Korean Exchange Bank were approved with a condition to make some required revisions in accordance with the relevant financial sector restructuring laws and bank supervisory regulations.o While allowing independent management, the MEC required Chohung Bank and the KEB to submit their revised plans which include the committee's recommendations by the 22nd of November, 2000.o If they fail to either submit or implement the revised plans, or if the plans are disapproved by the Governor of the FSS, certain corrective actions will be enforced in accordance with the relevant laws and regulations. MEC's recommendations for Chohung Bank (1) To lower the ratio of loans which are substandard and below down to lower than 6% by the end of June, 2001, and further down to 4% by the end of 2001 through vigorous and prompt settlement of NPLs.(2) To achieve the per capita operational profit before loan loss provisioning of more than 220million won by 2001, through numerous efforts such as expanding profitability and down sizing.* per capita operational profit before loan loss provisioning : (operational profit + loan loss provisioning expenses) / total number of employees MEC's recommendations for Korea Exchange Bank (1) To take complementary measures such as additional sell-off of the shares of KEB Card Co. and issuance of subordinate bonds will be sought in case the capital increase through public subscription (completion of the paying up shares) can't be done by the first half of 2001.(2) To reduce the ratio of loans which are substandard and below down to lower than 6% by the end of June, 2001, and further down to 4% by the end of 2001 through vigorous and prompt settlement of NPLs.(3) To meet the target profitability by 2001, through
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Jul 14, 2000
- Policy Direction for Development and Reform in the Financial Industry
- At the Tripartite Commission meeting on July 12, FSC Chairman Yong-Keun Lee, who is also a special member of Tripartite Commission, reported “Policy Direction for Development and Reform in the Financial Industry.” The policy direction was based on the government’s view on the request of the Korea Financial Industry Union (KFIU) regarding financial reform. The details are as follows; 1. Basic directions for financial policy • The items below will be declared and enacted as an order of the Prime Minister or a decision of the Cabinet Council: i. Remaining unnecessary or excessive legal regulations that restrict the managerial independence of banks will be abrogated in line with ongoing renovations of the regulatory framework in the nearest future.ii. Management transparency and responsible management of banks will be guaranteed through the prohibition of outside interference, special favors and undue pressure, while the board of directors at banks in which the government is the majority shareholder will assume responsibility for all major managerial decisions.iii. Decision-making or enforcement of government policies aimed at stabilizing financial markets will be undertaken through clear and transparent manner and procedures, such as documentation in order to avoid any suspicion or misunderstanding.2. On the continuous promotion of financial reforms• The second stage of financial sector reform and restructuring, which is aimed at enhancing the global competitiveness of domestic financial institutions, will be promoted and based upon the following principles:i. Financial reform will be pursued and promoted based strictly on market principles.ii. The government will actively provide support for financial reform, including the introduction of the financial holding company system, continuing reform of the financial market infrastructure, preferential treatment in granting licenses, and purchases of subordinated bonds (from financial institutions requiring additio
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Jul 07, 2000
- Completion of Asset Clean-up of ITC Trust Funds (With Attachment)
- This press release is to clarify the completion of clean-up efforts regarding trust funds at domestic Investment Trust Companies (ITCs), Investment Trust Management Companies (ITMCs), and merchant banks. With implementation of the mark-to-market evaluation system for bonds, all ITCs, ITMCs and merchant banks are required to reveal bad assets, mainly bad bonds, in trust funds. Furthermore, bad assets must be duly assessed and written off in order to regain investor confidence by enhancing transparency in fund asset management. As a result, all trust funds at ITCs were evaluated and audited by outside experts as of June 30, 2000. According to the results of the evaluation and audit, all of the funds have been completely cleaned of bad assets and their current financial status has been accurately reported.The total amount of bad assets held by ITCs was estimated at 7.1 trillion won as of the end of January 2000. Of this total, it was estimated that 3.1 trillion won was to be written off or assumed as losses. As of the end June 2000, however, potential losses amounted only to 0.9 trillion won as 2.2 trillion won had already been written off. Potential losses refer to bad assets that should be recognized as losses but are not realized through write-offs. In fact, three different methods were utilized to clean up bad assets in ITC trust funds as of the end of June 2000: the write-offs of bad assets from trust accounts, transfer to sales units, i.e. securities companies, in light of burden sharing, and the securitization of bad assets through the issuance of Collateralized Bond Obligations (CBOs). As such, total bad assets were assessed from three different sources. 2.3 trillion won was held in the ITCs’ trust accounts, 0.4 trillion won was recognized as it originated from ITCs although transferred to sales units, and 4.4 trillion won arose from buying back subordinate class CBOs. First, ITCs subsequently wrote-off 1.2 trillion won, or 53.5%, of the 2.3 trillion won held
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Jul 03, 2000
- Commercial Banks Disclose Potential Losses
- On June 30, 2000, Korean commercial banks disclosed potential losses in their assets in accordance with the stricter disclosure rules of the forward looking criteria (FLC). Potential losses refer to losses that would additionally be incurred following the application of the FLC to all borrowers. As of end-March 2000, potential losses amounted to 3.9 trillion won, including those newly accrued through the end of June. In addition, commercial banks will be required to transform into “clean banks” through the swift resolution of impaired assets and reinforcement of capital bases.In this regard, the FSS announced policy measures to enhance the transparency of bank management. Under the new measures, potential losses will be reflected in banks’ income statements within the time framework agreed to with the IMF in order to promote investor confidence and to expedite completion of management normalization efforts at commercial banks. Additional injections of public funds will also be considered if deemed necessary and under the strict condition of more vigorous self-rescue efforts in place.BackgroundThe FSS introduced the FLC as the new standards for asset classification effective from December 31, 1999, in order to fully incorporate a borrowers’ capacity to repay loans. However, investor confidence has not been restored to the targeted level due mainly to market perceptions that banks remain vulnerable to unrevealed potential losses. In fact, impaired assets related to companies currently under workout programs have been given preferential treatment in the course of pursuing corporate sector restructuring. Loans extended to companies under workout programs were classified as either “precautionary” or “substandard” and are required a minimum 2 to 20 percent loan loss provisioning. Also, the FLC was not able to account for potential losses in companies under court receivership and court mediation procedures as well as losses resulting from holding secured CP
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Jul 01, 2000
- Clean-up of Bad Assets in Trust Funds of ITCs, ITMCs Completed
- With the implementation of the mark-to-market evaluation system for bonds, ITCs and ITMCs are required to reveal bad assets, mainly bad bonds, in trust funds. Furthermore, the bad assets were required to be fairly evaluated and written off in order to regain investor confidence by enhancing transparency in fund asset management. As a result, all funds at ITCs, ITMCs and merchant banks were evaluated and audited by outside experts as of June 30, 2000. According to the evaluation and audit results, all of the funds have been completely cleaned of bad assets and their financial status have been fairly stated.ITCs and ITMCs transferred bad assets from trust accounts to their own accounts and issued Collateralized Bond Obligations (CBOs), thereby sharing a major portion of the losses stemming from bad assets between IT(M)Cs and fund selling agencies. In addition, ITCs and ITMCs wrote off 1.2 trillion won of bad assets in the funds. According to the evaluation, bad assets in trust accounts totaled 2.3 trillion won and total losses were estimated at 1.2 trillion won, or 53.5 percent. The remaining 1.1 trillion won, which represents 0.8 percent of total assets in trust accounts, is expected to be collected from debtors. Bad assets were written off at ratio set under strict criteria in order to be fully account for. Write-offs were made for both Bankrupted bonds and Quasi-bankrupted Bonds, which are bonds that did not go into bankruptcy yet but were deemed so by the government. Bankrupted Bonds were written off at a ratio of above 50 percent, and Quasi-Bankrupted Bonds at a ratio of above 20 percent. Despite write-offs, fund yields were not affected, remaining at around 8 percent per annum. Funds under the mark-to-market evaluation system recorded higher yields than the funds under the book value evaluation system. In order to enhance transparency in fund management, the results of fund management such as yields on securities, amount of bad assets and write-off ratios will b
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Nov 04, 1999
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Dec 15, 1998
- Strengthening Prudential Supervision & Regulations
- Ⅰ. Introduction1. Since the 1980s, while financial activities have become more complex and diverse at home and abroad under financial liberalization and globalization, uncertainty in financial markets has rapidly increased. Financial institutions became widely exposed to risks such as credit risk on which they had already begun to focus concern, including interest rate risk, foreign exchange risk, market risk and country risk. At the same time, as the volume of financial derivative transactions has sharply increased mainly due to the development of information technology, they have assumed even further risk.2. As we have seen through the example of the Barings case, the stability of the financial industry as a whole has deteriorated due to derivative transactions and their contagion effect. To cope with this instability, financial institutions have taken care to develop various advanced financial commodities, to establish the consolidated risk management system on the basis of market risk, and to employ elaborate risk management techniques, including Value at Risk (VAR).3. As advanced financial supervisory authorities such as the Office of the Comptroller of the Currency in the United States and the Financial Services Authority in the United Kingdom have changed their supervisory policies into "risk-focused supervision", many authorities in other countries are following suit. International organizations such as the Bank for International Settlements (BIS), the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS) are trying to establish and employ international standards related to risk management to secure the soundness of financial institutions. Perhaps the best example is the Core Principles for Effective Banking Supervision of the BIS.4. The need for stronger financial supervision is clear. Although Korean financial institutions have been able to continue to pursue high growth volume-orie
