Press Releases - Financial Services Commission

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Jun 30, 2011

Guidelines on Covered Bond Issuance

BACKGROUNDThe FSC/FSS set up guidelines on the issuance of covered bonds by banks, as one of follow-up measures to implement the Comprehensive Measures on Household Debt. The guidelines are intended to provide a framework for covered bond issuances, diversifying banks’ financing instruments and encouraging banks to offer more long-term and fixed-rate mortgage loans instead of short-term and floating-rate ones.KEY CONTENTS1. Definition of Covered BondsCovered bonds are a type of bonds backed by a cover pool of assets that the issuer provides as collateral. In the event of default, investors are guaranteed dual recourse to both the pool and the issuer.**The issuer is responsible for repaying the covered bonds and should offer investors a preferential claim to the cover pool.2. Requirements for Issuance of Covered Bonds(Issuers) Covered bond issuers must be banks with the BIS ratio over 10% (as of the end of the previous fiscal year) or securitization entities created by such banks.(Issuance volume/maturity) An issuer is not permitted to issue covered bonds in excess of 4% of the issuer’s total liability. Maturities of covered bonds range from one year to 30 years.3. Requirements for Cover Assets(Cover assets) A cover pool should be composed of mortgage loans that meet certain criteria* and mortgage-backed securities (MBS) issued by the Korea Housing Finance Corporation (KHFC). An issuer must maintain at least 5% of the total value of outstanding issuance as excess collateral.*prime mortgage loans; mortgages of more than 120% of the value of their property; loan-to-value (LTV) ratio of less than 70%; late payments of less than 60 days, etc.(Evaluation of asset eligibility) An issuer must evaluate eligibility of cover assets on a quarterly basis and provide investors with results of the evaluations. Disqualified assets in the pool should be replaced by qualified assets.(Long-term mortgage loans with fixed rates) An issuer must ensure that the cover pool is not compo
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May 27, 2011

Additional Measures to Improve the Soundness of ELW Market

BACKGROUNDAs Korea’s ELW market has rapidly grown in a short period of time, problems such as overheated investment and soaring investment losses have surfaced; therefore, the FSC introduced some measures (e.g., introduction of mandatory investor orientation course, stricter assessment of LP performance and preventive measures against potential unfair trading practices) in November 2010 to create a sound market environment for ELW trading.Since the implementation of the measures above mentioned, the trading values of ELWs declined somewhat as shown below:* KRW 1.7 trillion (Aug 2010) → KRW 1.9 trillion (Sep 2010) → KRW 2.0 trillion (Oct. 2010) → KRW 1.6 trillion (Nov. 2010) → KRW 1.4 trillion (Dec 2010) → KRW 1.3 trillion (Mar 2011)* Daily average number of suspicious trading: 0.84 cases (Oct 1, 2011 ~ Dec 10, 2010) → 0.13 cases (Dec 13, 2010 ~ Feb 28, 2011)However, despite these measures, as a result of some securities companies giving a preferential treatment to scalpers (the prosecutor pointed out that some scalpers bribed the securities companies so that they could have access to dedicated lines to route their orders faster than others), concerns about the soundness of ELW market have resurfaced. Against this backdrop, and we plan to adopt the following measures.PLANS TO IMPROVE CURRENT PRACTICES RELATED TO ELW MARKET AND ORDER ROUTING SPEED◈ Basic deposit requirement will be introduced as an entry barrier to ELW market investment and existing market practices will be revised to help investors easily compare ELW prices.◈ In regard with speed of order routing, brokerages will be allowed to provide only a reasonable range of service to make sure all investors can have a stable and equal access to trading system.I. SOUNDER MARKET ENVIRONMENT FOR ELWS1. Stronger Protection for Investors A. Basic Deposit RequirementIn most of derivatives trading, investors are required to make basic deposits in addition to margins.* However, for ELWs and buying opti
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Apr 06, 2011

Korean Financial Market Update

1. Recent trends in the stock marketThe KOSPI index, which once fell to a low point of 1,923.30 on March 15 after the Japanese earthquake, has rebounded to a record-high of 2130.43 on April 5, renewing the highest point of 2,115.69 prior to the earthquake.The recent recovery in stock prices is mainly attributed to foreigners’ net buying based on their optimism that the Korean economy is relatively stable amid ongoing external uncertainties such as Japan’s earthquake and political turmoil in the Middle East.2. Foreign investors’ movement in Korean stock exchangeForeigners sold KRW 3.5 trillion in February, the biggest net sale by monthly basis since May 2010, but made net buying of KRW 1.2 trillion in March: notably, net buying of KRW 2.8 trillion after the Japanese earthquake.(By country)Starting this year, there has been a continued outflow of European funds (including the U.K), reflecting ongoing uncertainties in the European region. By contrasts inflows of funds from the U.S. and Asian region have been increasing since March.*As of March, the U.S made a net purchase of KRW 1.3 trillion, Singapore of KRW 0.7 trillion, China of KRW 0.2 trillion*Despite our concern of Japanese capital being pulled back, Japanese made a net purchase of KRW 155 billion instead(By fund-type)In February, all foreign investors except for Asian sovereign funds were net sellers. Starting March, however, the U.S. funds began to make net buying in large volume. Net buying by foreign investors was mostly made after Japan’s earthquake, and European investors (excluding European funds) also turned net buyers of Korean stocks.(By investment period)It has turned out more than half of foreign net buying made after the Japanese earthquake was made by short-term investors. (i.e. investment banks)*Short-term: IB with investment turnover ratio over 500%3. Grounds for foreign investors’ net buyingWithout wider spread of risk from the recent Japanese earthquake and the regional conflict in the
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Mar 30, 2011

Monitoring Results of Domestic Banks' Foreign Currency Financing

OverviewThe Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) have been operating an Emergency Financial Situation Room and holding Joint Financial Check-up Meetings as the need arose to monitor the effects of external risk factors such as earthquakes in Japan, unrest in the Middle East and European sovereign risk on domestic financial markets including foreign currency funding and management of domestic banking industry and foreign exchange market*.*Refer to the press release dated 13 March 2011, “Result of Emergency Financial Check-up Meeting in relation to earthquakes in Japan”Foreign currency funding in the wake of earthquakes in JapanAs of March 20, 2011, domestic banks including foreign bank branches operating in Korea raised U$248.8 billion through foreign currency borrowings and deposits, etc. They had U$214.5 billion in foreign currency-denominated assets under management in the forms of foreign currency loans, trade financing and foreign currency securities, etc.Since earthquakes in Japan on 11 March 2011, foreign currency funding*, mostly through foreign currency borrowings, increased by U$1 billion and foreign currency management** increased by U $2.6 billion. The increase of U$1 billion in foreign currency funding since March 11 mostly resulted from domestic banks raising more foreign currency funds.* U$1.8 billion up in foreign currency borrowings, U$800 million down in foreign currency deposits **U$1 billion up in foreign currency loans, U$1 billion up in trade financing, U$600 million up in foreign currency securitiesAn FSS survey of domestic banks and foreign bank branches conducted immediately after the earthquakes broke out in Japan found that there were no signs of capital outflows. Instead, borrowings from headquarters by domestic branches of four Japanese banks increased U$940 million from March 14 to 25 even after the breakout of earthquakes.In addition, funding conditions for domestic banks remained stable af
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Mar 17, 2011

Plan for Strengthened Supervision on MSBs

The FSC has announced its plan for strengthened supervision on savings banks.Key Contents1. To prevent moral hazard of savings banks’ largest shareholdersMany of savings banks’ largest shareholders fall short of funding capability and social credibility and thus many savings banks have been vulnerable to improper practices by their largest shareholders. Therefore, the FSC plans to tighten its regulatory oversight on the biggest shareholders and hold them more accountable for savings banks’ business operations.2. To curb excessive business expansion of savings banks and promote their soundnessWhile savings banks have been engaged in disproportionate investment in high-risk assets and excessive businesses expansion, prudential regulations on them remained loose. In order to promote the soundness of savings banks, the FSC will end preferential treatment in loan caps for some savings banks and strengthen supervision on affiliated savings banks.3. To enhance investor protectionThere have been many claims that investors suffered from lack of transparency in accounting and contracts made based on incomplete information. Therefore, the FSC will better protect investors by strengthening market disciplines and curbing subordinated bond issuance by savings banks.4. To strengthen supervision over the cause of insolvencyThe FSC will closely work with related government agencies to seek civil and criminal charges against savings banks’ largest shareholders and management if they were found responsible for any business failure and misconduct.Details1. To prevent moral hazard of savings banks’ largest shareholders1) When the biggest shareholder is alleged to commit any illegal act, the FSS will be able to launch an investigation into the largest shareholder.- Revision of the Savings Bank Act (to be submitted to the National Assembly for 3Q of 2011)2) The FSC/FSS will ask savings banks’ largest shareholders who have effective control over the management to become registe
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Feb 23, 2011

Unfair Trading Investigation Results and Penalties

Violation of prohibition on market manipulation through the link between spot and futures by KOSPI200 stocks and derivatives trading on November 11, 2010, a KOSPI200 options’ expiry dateCase OverviewAccording to investigation results, AAA1), who is head of Absolute Strategy Group (ASG)- Asia of Deutsche Bank AG Hong Kong Branch, DDD, who is in charge of ASG - Global of New York Deutsche Bank Securities Inc., etc. conspired with EEE, who is managing director of Global Equity Derivatives (GED) at Deutsche Securities Korea, Deutsche Bank AG’s South Korean securities unit, to manipulate market prices in Korean capital markets.They had constructed speculative derivatives positions in advance through the combination of short synthetic futures and long put options. In order to gain profit from these speculative positions, they sold KRW2.4424 trillion (US$ 2.2 billion) worth of stocks listed in the KOSPI200, which they had purchased through index arbitrage trading and held during the last year (2010), in the last ten minutes before the market closed on Nov. 11, 2010, an expiry date for KOSPI200 options.Due to these massive manipulative orders, KOSPI200 index plunged 2.79% (254.62p → 247.51p) and they gained illegal profits of KRW44.87 billion (US$ 40.5 million) from market manipulation through the link between spot and futures (options) transaction.Investigation Activities and Enforcement ProcessA joint investigation team by the Financial Supervisory Service (FSS) and the Korea Exchange (KRX) was organized to commence an investigation on Nov. 12, 2010, the next day on which the incident occurred.- Investigation team members: five staffs in Special Investigation Team of the FSS, two staffs in Review Team 3 of the KRX- In-depth investigations were carried out for about two months from Nov. 12, 2010 to Jan. 21, 2011 which included interviews with involved persons and collecting evidences at the Deutsche Bank AG Hong Kong Branch, which placed massive orders to sell, and D
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Feb 17, 2011

Actions Taken for Mutual Savings Banks

The Financial Services Commission (FSC) held a provisional meeting today and decided to impose 6-month business suspensions for Busan Savings Bank and Daejeon Savings Bank.Busan Savings Bank is affiliated with four other banks: Busan Central Savings Bank; Busan 2 Savings Bank; Daejeon Savings Bank; and Jeonju Savings Bank.Following the outbreak of the financial crisis in 2008 and subsequent real estate recession, financial health of the five savings banks has deteriorated, and as of end-December 2010, Busan Savings Bank’s BIS ratio has fallen to 5.13% while the outstanding liabilities surpass total assets by KRW 21.6 billion resulting in negative equity. Daejeon Savings Bank’s current BIS ratio is -3.18% and its liabilities surpass its assets by KRW 32.3 billion.Daejeon Savings Bank has experienced continued withdrawals of its deposits since D cember2010 and after judging that it is no longer able to payout anymore deposits, it has submitted a formal request for a business suspension to the FSC on February 16, 2011.The FSS plans to start a full investigation today on the suspended savings banks, and actions will be taken to normalize their operations.According to the Act on the Structural Improvement of the Financial Industry, following actions are to be taken for mutual savings banks that failed to meet the 5% BIS requirement.- Below 5% - Business Improvement Recommendation- Below 3% - Business Improvement Request- Below 1% - Business Improvement OrderAside from the two suspended banks, there are five other savings banks that fall short of the 5% BIS requirement: Bohae Savings Bank; Domin Savings Bank; Woori Savings Bank; Saenuri Savings Bank; and Yes Savings Bank, of which three of them: Woori and Saenuri (state-owned) and Yes (held by KDIC) have no difficulties financially. The other two: Bohae and Domin have submitted their business normalization plans and they are making progress. Out of 104 mutual savings banks in operation, apart from the five affiliated
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Jan 11, 2011

Regulatory Follow-Up Measures For Nov.11 Stock Market Plunge

BackgroundThe Financial Services Commission (FSC) and Financial Supervisory Service (FSS) have developed measures to improve derivatives-related trading system jointly with the Korea Exchange (KRX) and the Korea Financial Investment Association (KOFIA) based on the investigation of risk management status of financial investment companies and a public hearing held on December 20, 2010 after the stock market plunged on an option expiry day, November 11, 2010.The latest regulatory measures are designed to prevent the recurrence of a similar event on expiry dates of futures and options contracts and mitigate risks arising from derivatives investment by institutional investors, seeking to keep capital markets sounder and more efficient.Regulators are thoroughly investigating and inspecting alleged acts of unfair trading and violations of asset management-related laws that caused a market plunge on the option expiry day and will take appropriate actions against any violation of laws.Investigation updates1. Investigation of alleged acts of unfair tradingThe FSS conducted an on-site investigation in Hong Kong in December 2010 and is currently working to determine if any act of violating the Capital Market and Financial Investment Business Act, including market manipulation, was involved.Any violation of laws will be punished according to laws, if found.2. Examination of Wise Asset ManagementRight after the option shock incident, examiners conducted a probe into Wise Asset Management from November 12 to December 3, 2010 to identify the cause of the incident and check the adequacy of derivatives fund operation and internal control system.Regulators will complete the analysis of the inspection results as soon as possible and proceed to impose sanctions against any violation, if found.3. Risk management in the financial investment industryThe FSS examined financial investment companies to check their risk management status and whether they were in compliance with the margin rul
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Dec 20, 2010

Macro-prudential Stability Levy

BackgroundThe Korean government plans to impose Macro-prudential Stability Levy (“the Levy”) on non-deposit foreign currency liabilities with three motivations.First, the key factor of the past two financial crises in 1997 and 2008 was sudden capital outflows following excessive capital inflows during boom periods. Like many otheremerging and developing countries with a small and open economy, Korea is highly vulnerable to changes in the global economy and sudden capital movements. Of the various capital flows, overseas borrowings are the most volatile, in particular short-term ones. The Korean government, which has reinforced macro-prudential measures toreduce volatility in capital movement within the framework of an open and liberalized economy, now decided to introduce the Levy.Second, the need to curb massive capital inflows in the form of carry trade into Korea is growing as global liquidity has been rapidly increased by Quantitative Easing measures (QE) and the exceptionally low interest rates in advanced countries. A surge of capitalinflows could lead to inflation and asset price bubbles, and a sudden reversal of such inflows could possibly result in a systemic risk.In addition, the Levy will be used as to provide liquidity when necessary to help the Korean economy cope with external shocks.The introduction of the Levy is consistent with the global trend, in particular with the communiqué of the G20 Seoul summit where the leaders have agreed on the need for design and implementation of macro-prudential measures to curb excessive capital flows. Germany, the United Kingdom and France are about to impose the financial levy from January 2011 with the aim of repairing the financial system or procuring resolution fund. Against this backdrop, the Korean government plans to adopt the Levy as a pre-emptive and precautionary measure to stabilize both financial market and economy as a whole.Key characteristics of the Levy1. ImpositionIn order to strengthen macro-pr
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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

KDIC Put Woori Shares Up For Sale

In accordance with the resolution of the Public Funds Oversight Committee, the Korea Deposit Insurance Corporation (KDIC) officially made an announcement on October 30 to initiate the sale process of its stake in Woori Finance Holdings.KDIC’s entire 56.97% stake in Woori and shares of its two local bank units, Kyoungnam Bank and Kwangju Bank, are put up for sale. Whether to sell Kyungnam Bank and Kwangju Bank separately from Woori’s sale will be determined after final bid, reviewing all proposals submitted by bidders.In order to participate in the bidding process, potential buyers would have to acquire at least 4% of Woori’s stake or through a merger. For Kyungnam Bank and Kwangju Bank, bidders would have to bid for 50% plus one share of the banks or a merger.The KDIC will receive Letters of Intent (LOIs) by 5pm on November 26, 2010 and shortlist final bidders by the end of this year.*Please read the attached file for details.
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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

Proposal for Amendments to the Enforcement Decree of the Banking Act

1. BackgroundPrior to the enforcement of the amended Banking Act* (November 18), the FSC has made amendments to the Enforcement Decree of the Banking Act to prescribe enforcement details.*Amendments were made to the Banking Act to (1) improve corporate governance in banks; (2) redefine the scope of banks’ business activities; and (3) strengthen consumer protection.2. Key Contents(1) Disqualifications for outside directorsAny individual who works as a full-time executive or employee of a corporation which has a special business relationship with a bank is unqualified for an outside director of the bank. A “corporation which has a special business relationship with a bank” refers to any corporation which concluded a single contract with the bank, amounting to more than 10% of the total sales revenue.Any individual whose work might involve conflict of interest with a bank shall not serve as an outside director of the bank. A “conflict of interest” may arise when the person serves as an outside director of more than two listed companies, or the person holds more than 1% of stocks issued by the bank.(2) Banks’ subsidiary businessUnder the amended Enforcement Decree, banks are to be allowed to provide investment advisory service given that they already provide similar service such as private banking (PB) service.However, the FSC has decided not to allow banks to offer “wrap account” or customized portfolio management service and short-term financing service. For this matter, further deliberation will be given until a global consensus is reached on relevant issues such as financial consumer protection, and supervisory and regulatory reforms. Moreover, since most banks are under bank holding companies who already provide brokerage and asset management services, there seems to be little need for banks to join in selling “wrap account” products. The FSC sees that not allowing banks to deal with “wrap account” products would not hurt their private banki
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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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