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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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Dec 14, 2010
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Dec 07, 2010
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Dec 02, 2010
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Dec 02, 2010
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Nov 24, 2010
- Results of Emergency Economic Meeting after North Korea's Artillery Firing
- Vice Minister of Strategy and Finance Yim Jong-yong called for an emergency economic meeting* on Wednesday, November 24, a day after North Korea’s attack on Yeonpyeong Island to discuss the attack s impact on domestic and overseas financial markets and policy responses to future developments.*attendees: Vice Minister of Strategy and Finance (chair), Vice Minister of Knowledge Economy, Vice Chairman of Fair Trade Commission, Vice Chairman of Financial Services Commission, Senior Deputy Governor of BOK, Senior Deputy Governor of Financial Supervisory ServiceMarket reactionsAs the news of North Korea’s artillery firing was first reported at around 2:58 pm, right before the market close at 3:00 pm, it did not have a substantial and immediate impact on the stock market. However, after-hour markets including the futures market rattled, showing growing volatility.Right after the outbreak of the incident, Korea’s CDS spreads and Non-Deliverable Forward (NDF) rates sharply soared, but over time there has been no further rise.Potential impactThe attack’s impact on financial markets and the real economy may vary with future developments of the incident; however, as long as the situation does not escalate further, the impact is expected to remain temporary as it did when faced with similar geopolitical risks.Considering Korea’s solid economic recovery, fiscal soundness, current account surplus, and large foreign exchange reserves, to which foreign investors give high credibility, the Korean economy has sufficient capacity to absorb external shocks.Market observers and credit rating agencies assess that the incident would not significantly affect Korea’s sovereign credit ratings. *Moody’s said that North Korea’s attack would not negatively affect Korea’s sovereign credit rating.*Fitch maintained Korea’s sovereign rating at A + with the “stable” outlook.*SP said that the incident would not undermine foreign investment in Korea and other indices affecting K
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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 11, 2010
- Global Financial Regulatory Reforms
- 1. Background of the G20 discussions on financial regulatory reformsOn November 15, 2008 in the midst of the global financial crisis, the Leaders of the G20 met for the first time in Washington to enhance international cooperation to restore global economic growth and achieve needed reform in the world’s financial systems. In Washington, the Leaders agreed on five principles for reform and the Action Plan to avoid future crises. The forty seven actions set forth in the Action Plan were mostly targeted to strengthen financial markets and regulatory regimes.Subsequently, at the London Summit on April 2, 2009, the Leaders monitored progress of implementation of the Action Plan agreed in Washington and declared eight major reform agenda. In particular, the Leaders gave a mandate to the Financial Stability Board (FSB) to coordinate global efforts on financial regulatory reforms.At the Pittsburgh Summit on September 25, 2009, the Leaders designated the G20 as the premier forum for international economic cooperation, fully endorsed the implementation standards of the compensation practices proposed by the FSB, and discussed main reform agenda 3 including addressing systemically important financial institutions (SIFIs). The Leaders also agreed on a concrete implementation timeline.At the Toronto Summit in June this year, the Leaders pledged to act together to fulfill the commitment within the timelines agreed to at the Washington, London, and Pittsburgh Summits. In particular, the Leaders agreed to accelerate the original timelines and complete discussions on a new bank capital and liquidity framework and policy recommendations to effectively address problems associated with SIFIs by the Seoul Summit.In accordance with the Leaders’ agreement, the FSB, collaborating with international standard setting bodies such as the Basel Committee on Banking Supervision (BCBS), has developed a detailed financial regulatory reform package with concrete implementation timelines, which
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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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Oct 27, 2010
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Oct 18, 2010
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Oct 15, 2010
- FSB Plenary Meeting and BCBS Meeting held in Seoul
- The 6th Plenary Meeting of Financial Stability Board and the 137th Basel Committee on Banking Supervision Meeting will be held at COEX Convention Center in Seoul on October 20 and 19, respectively.The Financial Stability Board (FSB) was created in April 2009 as the successor to the Financial Stability Forum (FSF) by the Group of 20 in its London summit, which includes FSF members and 12 more countries such as Korea and BRICs. It coordinates financial regulatory and supervisory standards at the international level and Korea has participated since its inaugural meeting in June 2009.The Basel Committee on Banking Supervision (BCBS), established by the central bank Governors of the Group of Ten countries in December 1974, was broadened to include more members in 2009. It formulates broad supervisory standards and guidelines in banking supervision. Korea became a member in March 2009.FSB Plenary MeetingThe Plenary Meeting is aimed at discussing and coordinating opinions among member countries so that the task of financial reform assigned by heads of G20 could be completed in the summit held in Seoul.This meeting will bring together about 70 heads of national authorities responsible for financial policy and supervision and central banks from 24 countries and 12 international financial institutions including IMF, WB, OECD, BCBS, IOSCO, and IAIS.They will discuss reducing moral hazard of systematically importance financial institutions (SIFI), strengthening bank capital and liquidity regulation, reforming OTC derivatives market infrastructure, FSB Outreach program and reducing dependence on external credit ratings and other major financial reform agenda.FSB Outreach program is held with non-member financial authorities to provide information on FSB’s major financial reform agenda and encourage the implementation of the agenda as agreed in G20 Toronto summit.BCBS MeetingThe Basel Committee on Banking Supervision will meet to finalize issues related to its regulatory reform
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Oct 05, 2010
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Sep 29, 2010
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Sep 20, 2010
- Notice of Changes to Banking Supervision Regulation
- The FSC has issued a notice of changes made to the Regulation on Supervision of Banking Business in preparation of implementing the amended Banking Act taking effect on November 18 and adopting the K-IFRS in 2011.1. Reporting obligations for banks’ overseas expansionBanks seeking overseas expansion are allowed to submit a report to the authority afterwards, except for only those who fall into one of the following categories. They are still required to submit their expansion plan in advance to the authority for consultation.(1) (Bank soundness) a bank’s BIS ratio is less than 10%, or its CAMELS rating is below 3(2) (Business scope) a bank wants to expand its business beyond its core and non-core businesses(3) (Destination) a bank wants to expand into a country whose sovereign rating is below B+* or does not exist in the first place.*** Nigeria, Argentina, Cambodia, Mozambique, etc.**Iran, Iraq, Laos, Ethiopia, etc.(4) (Overseas subsidiary) an overseas subsidiary’s credit rating is below B+2. Consumer protection(1) When bank customers sign or revise a service contract with a bank, the terms of a contract should be submitted to compliance officers for review and reported to the Fair Trade Commission (FTC).(2) Banks are obliged to ①publicly disclose their contract conditions including interest rates, fees, and transaction terms on their website; ②provide their customers with a written document that stipulates contract terms; and ③ensure their customers fully understand terms of the contract.3. Internal governance rules(1) Banks’ internal rules and policies of governance should be publicly disclosed on their own website and the Korea Federation of Banks website.(2) Internal rules and policies regarding governance should be made public immediately upon their creation or revision. Activities of a bank’s board pursuant to internal rules should be disclosed by the end of the following month after a regular shareholders’ meeting.4. Preparations for the K-IFR
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Sep 15, 2010
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Sep 02, 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)
