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Dec 17, 2010
- Basel III QIS and Its Implications
- The Basel Committee on Banking Supervision (“the Committee”) published the results of its comprehensive quantitative impact study (QIS) on December 16, 2010 to ascertain the impact of the Basel III rules on banks’ capital adequacy, leverage and liquidity ratios. A total of 263 banks from 23 of the 27 Committee member jurisdictions participated in the study.In Korea, 8 banks submitted data for the comprehensive QIS including 5 Group 1 banks (Woori, Shinhan, Hana, KB and IBK) and 3 Group 2 banks (Nonghyup, Daegu and Busan).Capital ratios as of year-end 2009Group 1 banks’ average common equity Tier 1 (CET1) capital ratios under the new regime would have sharply fallen from an average gross CET1 capital ratio of 11.1% to 5.7%.This decline is mainly attributable to the new definition of capital deductions and filters not previously applied at the common equity level of Tier 1 capital. For the Group 1 banks, the reduction in CET1 capital is driven primarily by deductions of goodwill, etc.For larger banks (Group 1 banks), the change in net CET1 capital (with deductions) compared to gross CET1 capital (without deductions) amounts to -41.3%. The reduction in C ET1 capital of Group 1 banks from Korea by deductions amounts to 3.2%.In the meantime, CET 1 capital ratio of domestic banks would remain around 10.3% under the Basel III Framework, exceeding a CET1 target level of 7% (including the capital conservation buffer).Average capital ratios by banking group, in percent CET1 Tier 1 Total Change in CET 1 by deductions Gross Net Current New Current New Group 1 Average* 11.1 5.7 10.5 6.3 14.0 8.4 -41.3 Korean banks 11.3 10.3 11.1 10.4 14.7 13.5 -3.2 Group 2 Average* 10.7 7.8 9.8 8.1 12.8 10.3 -24.7 Korean banks 10.4 9.7 10.7 10.0 15.3 13.4 -1.8 *Average of banks from 23 countries Relative to a 7% CET1 level, the capital shortfall for Group 1 banks in the QIS sample is estimated to be €577 billion (KRW880 trillion) under the Basel III requirements (including the capital
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Nov 22, 2010
- Countermeasures against KOSPI's Sudden Plunge on Nov. 11
- BackgroundThe KOSPI index plunged 48 points in the last ten minutes before the market closed on November 11, the options expiry date of the month, as foreign investors cleared their arbitrage positions by selling off KRW2.4 trillion worth of shares.Out of the sell-off worth KRW 2.4 trillion, it turned out that 97% of sell orders were made through a single trading desk. We, the FSC/FSS and Korea Exchange, are currently investigating whether the massive sell-off through the brokerage involved any alleged act of unfair trading.We are also probing into a local investment company, WiseAsset, who suffered huge losses from options trading on November 11, with particular focus on any illegality of the company’s asset management and its internal risk management system.Fluctuations in stock prices are inherent part of capital markets; however, severe volatility over a short period of time caused by a few market forces could leave individual investors unprotected and undermine investors’ credibility in Korean capital markets. In this respect, we plan to thoroughly investigate causes of the incident and come up with needed measures to make capital markets in Korea more stable.Upon a thorough investigation on whether there was any act of unfair trading involved and whether the financial investment company properly managed its investment risks, any violation of relevant laws and regulations will be dealt with strict sanctions to prevent a recurrence of a similar event.Measures to comeThe FSC/FSS will thoroughly review vulnerabilities of Korea’s capital markets as revealed on Nov. 11 and take prompt actions to bring immediately needed reforms to the current market system and practices. Depending on the results of the investigations, we will come up with follow-up measures for the longer term. A. Immediate actions1. Strengthening brokerage firms’ settlement risk managementBrokerage firms are exposed to the so-called settlement risk because they are the first to take respons
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Nov 10, 2010
- Proposed amendments to the Enforcement Decree of the Banking Act Approved by Cabinet
- BackgroundPrior to the enforcement of the amended Banking Act*, proposed amendments to the Enforcement Decree of the Banking Act have been approved at the cabinet meeting on November 9. The proposed amendments are to be enforced starting November 18, 2010 after the President’s approval and announcement.* The amended Banking Act, announced on May 17, 2010, is scheduled to be enforced starting November 18, 2010.Key Amendments to the Banking Act Key Contents of the amended Enforcement DecreeA. Banks’ overseas expansionIn principle, banks seeking overseas expansion are allowed to submit a report to the authorities afterwards, except for only those who fall into one of the following categories prescribed by the amended Enforcement Decree.① (bank soundness) a bank’s BIS ratio or its CAMELS rating falls short of required criteria.② (investment method) a bank plans to make investment in or pursue an MA with a below- investment-grade local corporation.③ (business scope) a bank wants to engage in business activities other than banking, concurrently-run, and subsidiary business.④ (investment destination) a bank plans to expand into a below-investment-grade country or a country that has no diplomatic tie with KoreaFurther details are stipulated by the Regulation on Supervision of Banking Business**a bank’s BIS ratio is less than 10%, or its CAMELS rating is below 3; credit ratings of local subsidiaries are below B+; and sovereign ratings of the host country are below B+ etc.B. Disqualifications of outside directorsMost of disqualifying conditions for outside directors set by Best Practice Guidelines on Corporate Governance in Banks (announced in Jan. 2010) were prescribed in the Regulation on Supervision of Banking Business previously and are now to be directly regulated under the amended Banking Act. Details such as definitions of a “corporation which has a special business relationship with a bank”* and a “person who cannot carry out his/her duty faithfu
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Nov 01, 2010
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Sep 02, 2010
- Stimulation Plan for Long-term KTB Futures Trade Approved by FSC
- To promote trading of long-term KTB futures, the KRX amended its Derivatives Market Business Regulation and the Financial Services Commission (FSC) approved the amended Regulation on September 1, 2010.As the follow-up of the plan for promoting long-term KTB futures that was devised jointly by the Financial Services Commission, Ministry of Strategy and Finance and KRX, the latest amendment streamlined the regulations related to KTB futures.The key amendments are 1) the harmonization of regulations governing KTB futures to ensure the balanced growth of short-term and long-term KTB futures, 2) stabilization of market operation and 3) reinforcement of market making function in the Derivatives Market.1. Harmonization of regulations governing individual KTB futuresBy minimizing the differences in the regulations applied to short-term and long-term KTB futures, it has been attempted to make easy the trade linking the short-term and long-term KTB futures contracts and enhance the accessibility of KTB futures.(1) To ensure the settlement expediency of 10-year KTB Futures, the plan is made to change the final settlement method from physical delivery to cash settlement. Accordingly, like the case of 3-year KTB Futures, the final settlement price of 10- year KTB Futures will be calculated on the basis of yield of basket bonds for final settlement and present value model for underlying bond and the final settlement day will be changed to T+1 day, i.e., the day after the last trading day, from the existing T+2 day. (2) By considering the recent market interest rate, the coupon rate of underlying bonds of 3-year and 5-year KTB Futures would be lowered to 5% per year from 8% per year in order to enhance the hedge effectiveness.(3) The plan is made to increase the trading unit of 10-year KTB Futures to KRW 100 million at par value from KRW 50 million at par value and lower the quotation unit to 0.01 from current 0.02. However, the tick value of KRW 10,000 will be kept unchanged.(4)
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Aug 02, 2010
- Plans to Enhance the Short-term Financing Market
- Current Status-quo of the Short-term Financing MarketBy short-term financing, we mean wholesale financing among financial institutions by trading or issuing under 1- year maturity products such as Calls, RPs, CPs, and CDs.An analysis of current situation by individual market sectors① (Call Market) Daily average volume of KRW 33 trillion*, which takes up about 50% of the short term financing market.* Reduced down to KRW 11 trillion level, but recently resumed to the pre-crisis level.(’08.9: KRW 29 trillion, ’09.3: KRW 11.5 trillion, ’09.12: KRW 30.2 trillion, ’10.6: KRW 33.1 trillion)② (RP) Trading volume (outstanding balance base) has been consistently growing.(’07: KRW 65 trillion, ’08: KRW 69 trillion, ’09: KRW 72 trillion). Most of the transactions (87%) are large client based.③ (CD) Dropped to KRW 79 trillion level due to the curb on Loan-to-Deposit Ratio regulation, while market trading volume has gone down to KRW 4.5 trillion daily average.Source: Bank of KoreaProblems Detected in the Short-Term Financing MarketThe overriding problem in the short-term financing market is that it is too much concentrated on the Call market which causes distortions to the market function and may entail latent systemic risk.- The convenience of Call transactions using credit based lending with high liquidity and low interest rate triggered the growing dependency of the Call market by financial institutions.- Composition of the short term financing market (as of May ’10): Call (50.5%), RP (16%), CP (17.2%), CD (16.4%) - The Call market’s function has been misled as ‘funding sources’ for the secondary financial institutions’ (e.g. securities houses and mutual savings banks) operating capital and in turn used to invest in high yielding short term KTBs.- In particular, excessive ‘call money’ by securities houses could become a source of potential systemic risk when hit by a sudden credit crunch.- The over-usage of the Call market also led to the unde
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Jul 28, 2010
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Jul 27, 2010
- Stimulation Plan for Long-term KTB Futures Trade
- The Ministry of Strategy and Finance, Financial Services Commission and Korea Exchange (“KRX”) have jointly prepared the plan to stimulate trading of long-term Korea Treasury Bond (“KTB”) Futures.Recently, an opportunity to promote the trading of long-term KTBs has been presented as a result of growing issuance amount and trading volume of long-term KTBs. As the need to stimulate the 10-year KTB Futures trading volume grew, the task force made of representatives of research community, public sector and private sector was created in January 2010 to prepare the plan for promotion of long-term KTB Futures trade.The causes for poor trading of long-term KTB Futures may be examined in terms of cash market, market making and trading regulations.First, although the annual issuance amount of short-term and long-term KTBs is balanced , the trading condition in the secondary market is dominated by the short-term KTBs. For example, as of the end of June 2010, the outstanding amount of KTBs with maturity longer than 10-year is 46% of total outstanding amount of KTBs, but the trading volume of KTBs with maturity longer than 10-year is mere 13% of total trading volume of KTBs.Second, the market making for 10-year KTB Futures is rather inadequate and the primary dealers (“the PDs”) who account for over 53% of trading volume of 10-year KTBs do not actively participate in trading or market making of 10-year KTB Futures.Last, the physical delivery, which is the method used for final settlement of 10-year KTB Futures, acts as constraint in trading long-term KTB Futures. The investors are not familiar with the physical delivery settlement and as trading of long-term KTBs in the cash market is not brisk, the investors felt burdened in securing the deliverable KTBs for the final settlement by physical delivery.As the favorable condition has been created to stimulate the trading of long-term KTB Futures, it is expected that trading of long-term KTBs in the cash market would thr
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Jun 14, 2010
- 2ND Round of Strengthened Regualtion on Financial Institutions' FX Soundness
- BackgroundSince the government implemented the new rules to strengthen regulations on financial institutions’ FX soundness in January 2010, FX liquidity ratio has risen, the management of FX derivatives trade has been strengthened, and the overall FX soundness of banks has improved. However, the regulation to limit banks’ FX liquidity ratio has been applied to only domestic banks, not to local branches of foreign banks; therefore, foreign banks are still exposed to risks of mismatch between long-term assets in the Korean won and short-term borrowings in foreign currency.**Please read the attached file for details.Plans1. Regulations on domestic banks will be tightened to raise FX liquidity ratio and Mid-to 1. Regulations on domestic banks will be tightened to raise FX liquidity ratio and Mid-to FX liquidity ratio internally on a daily basis and report to financial authorities on a monthly basis. Securities held to maturity in foreign currency as well as foreign currency borrowings will be included when calculating the ratio of mid-to long-term financing in foreign loan portfolios. The ratio will be raised from 90% to 100%.2. The government will provide guidelines for local branches of foreign banks so that they can manage FX liquidity risk on a voluntary basis. Under the new guidelines, they will be advised to voluntarily manage their FX liquidity risks and acquire safer and longer term FX funding sources. However, some of the standards will be waived if their head office submits a letter of commitment to provide FX liquidity for its branch in Korea at times if needed. Implementing the new guidelines for local branches of foreign banks, a three-month grace period will be given to smooth out the transition. In managing FX liquidity risk, they will be subject to basically similar rules applied to domestic banks such as currency-specific liquidity risk management, diversification of funding source, and contingency funding plans. The guidelines will reflect opinions
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May 19, 2010
- FSC Chairman's Speech - Korea Economic Forum
- Ⅰ. GreetingsGood morning, ladies and gentlemen!I would like to begin with my thanks to Mr. Song Philho, CEO of JoongAng Ilbo, Mr. Lho Cholsoo, publisher of JoongAng Daily, and Mr. Chung Ki-young, president of Samsung Economic Research Institute, for inviting me to speak at today’s forum.I also wish to acknowledge and thank honorable ambassadors, business leaders, and members of the foreign press who are with us today.The global financial crisis, unprecedented in both scale and scope, now appears to have run its course.Troubling new developments in the euro-zone economies, however, remind us that there are still many post-crisis uncertainties we must contend with.So, once again, we must wonder where the euro-zone crisis is headed, and what impact, if any, it may have on Korea’s financial markets and the economy.And it is my hope that today’s forum will shed new light on some of the questions that are on everyone’s mind.This morning, I would like to use my time to outline major financial policy issues we confront and tasks that lie ahead.Ⅱ. Korea’s Financial Policy: Current Issues TasksThere is no question that the global financial crisis forced us to reflect on our past and take stock of what went wrong.The crisis was, in many ways, a heavy blow to our conventional wisdom: namely, a blind faith in market efficiency, innovation and risk-taking.Now, with the benefit of hindsight, the international community is working to introduce wide-ranging financial regulatory reform measures.I believe we must prepare wisely for what lies ahead and maintain our vigilance on changes that are unfolding in the global financial environment.For our part, we are going to formulate financial policies within the context of the new global financial order with a focus on enhancing Korea’s financial capabilities.Addressing Destabilizing FactorsFirst and foremost, we will continue to respond swiftly and preemptively to destabilizing market developments to put out the fire befor
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Jan 11, 2010
- Progress on Improving Banks' Corporate Governance
- The global financial crisis has shed light on the importance of corporate governance in financial institutions. In particular, banks have been the major beneficiaries of government relief programs* such as government guarantee for bank deposits and foreign debts. However, as the OECD and the BCBS noted, banks’ board of directors often neglected their social responsibility by failing in risk management, pursuing short-term profits, and paying out excessive compensation. Against this backdrop, improving corporate governance in financial institutions, particularly in the banking sector, is being actively discussed at the global level. Direct financial regulations may bring about side effects by undermining financial inter-mediation and adding burden to financial consumers. In contrast, improving corporate governance minimizes the side effects and restores the public trust i n financial institutions to ensure that the financial sector can support the real economy and prevent the recurrence of crisis.An overview of global discussions1. OECDThe OECD reports, The Corporate Governance Lessons from the Financial Crisis (Feb. 2009) and The Corporate Governance and the Financial Crisis: Key Findings and Main Messages (June 2009), assert that corporate governance in financial institutions should be improved, citing that the boards of directors, particularly outside directors, involve problems such as the pursuit of short-term oriented profit, the payment of excessive compensation, and the failure of risk management, and also citing that the current system doe s not give shareholders enough power to hold the management in check. To address these weaknesses, the OECD is working with the FSB to publish a set of recommendations on improving corporate governance, Strategic Response to the Financial Crisis.2. U.K.Since the Turner Review point ed out the need to improve corporate governance, Sir David Walker has led an independent review of corporate governance in the UK banking ind
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Dec 30, 2009
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Dec 16, 2009
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Dec 09, 2009
- AMCHAM Luncheon Speech
- Ⅰ. Introductory RemarksThank you, Mr. Chairman, for the warm welcome.Members of the American Chamber of Commerce, distinguished guests, and ladies and gentlemen!I am delighted to speak to you today, and I thank Chairman David Ruch and President Amy Jackson for arranging this very special gathering.I am also pleased to meet members of the U.S. business community here in Korea who joined us today.Most of all, as a representative of the Korean government, I thank AMCHAM for its commitment and dedication to advancing economic ties between the U.S. and Korea.I express my confidence that AMCHAM will continue to serve as a vital link that unites us and enhances our partnership.Ladies and gentlemen!I think it's fair to say that this year has truly been a wild ride.Now, the end of 2009 is almost upon us, and a new year is just around the corner.Today, I will use this occasion to look back at the major economic and financial policies put in place this year, and explore the tasks ahead of us.Let me first quickly review some of the recent economic and financial market trends.Ⅱ . Recent Economic and Financial Market TrendsThe global economy fell into a severe recession in 2009 as a result of a financial crisis triggered by the collapse of Lehman Brothers.But this was also a year of renewed optimism as the global economy hit the bottom and started to move into a recovery phase.Fortunately as well, the Korean economy bounced back quite rapidly in the first half of 2009.And this momentum continued into the second half, as the economy grew 3.2% over the previous period in the third quarter.In fact, the OECD recently declared Korea to be the fastest recovering economy among its members and revised upward its growth outlook for Korea.Korea's financial markets also rapidly returned to normal from the first half on the back of more upbeat growth prospect and global financial market stability.Key financial market indicators, including stock prices and CDS spreads, have also returned
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Dec 03, 2009
- UBS Korea CEO/CFO Forum 2009 Luncheon Speech
- Ⅰ. Introductory RemarksGood afternoon, ladies and gentlemen!Let me first thank Mr. Jae-hong Lee and Mr. Young Chang of UBS Korea for having me here today.It is also a great pleasure to see so many distinguished business leaders and investors together in one place.We are now coming to the end of 2009, and winter is almost upon us.It has been a year of both despair and hope.But, fortunately, this time around, we are not going to go through the bitter cold we had to bear at the height of the financial crisis last winter.The global economy has been gradually emerging from the panic of a year ago and there is hope ahead.Yet, new concerns, such as fears of another asset bubble and major economies' swelling fiscal deficits, are clouding the outlook for the world economy.In this context, I shall speak today about how the crisis has affected Korea and what the future tasks are for the Korean government.Ⅱ . Lessons from the Global Financial CrisisNow, many wonder what has been the secret behind Korea's vigorous recovery from the crisis.I would say that one unique contributing factor is our experience with a financial crisis a decade ago.This put Korea’s corporate and financial sectors in strong shape and enhanced the government's ability to manage the crisis.And yet, the latest crisis demonstrated that our past experience did not entirely work in our favor.Let me explain.The origin of the 1997 crisis can be traced to internal distortions and distresses built up during decades of rapid economic growth. In contrast, the latest crisis originated from outside Korea.Unlike the major economies that suffered from massive financial implosions, the Korean economy was on a firm footing with healthy corporate and financial sectors.Despite this, the impact of the crisis on Korea was disproportionately large because of the stigma from the 1997 crisis.Some overseas media and investors oddly took the view that a second financial crisis could occur in Korea.This sparked negative percep
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Nov 19, 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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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
