Press Releases - Financial Services Commission

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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 26, 2010

Measures to Support SMEs Hit by International Sanctions against Iran

In order to support local small-and medium-sized enterprises (SMEs) that suffered losses fromtheir business with Iran due to reinforced international sanctions against Iran, the Korean government has planned measures to support them.1. Providing policy funds for SMEsGovernment funds such as the SME Business Promotion Fund (SBP Fund) and a fast-track lending program will be utilized to support local SMEs trading with Iran.(1) For SMEs with large exposure to Iran, the government will provide emergency loans and defer repayment of principal for outstanding loans.In particular, for those who have a greater chance of recovery from the loss incurred by international sanctions against Iran, the government will offer emergency loans at a 3.7~5.4% interest rate for three years, up to KRW 500 million for one company. Companies who are undergoing corporate restructuring conducted by financial institutions or whose incurred loss exceeds KRW 100 million are qualified for emergency loans.For companies who experienced losses from their trade with Iran, the government will grant a one-and-half-year grace period for their existing debts while leaving their maturity period (5~8 years) unchanged.(2) For SMEs temporarily under liquidity crunch, the government will provide liquidity through a fast-track lending program. If companies trading with Iran apply for the fast-track lending, they will be granted special guarantees by the Korea Credit Guarantee Fund (KODIT) and the Korea Technology Finance Corporation (KTFC) on a preferential basis.**The KODIT and the KTFC will provide 65%~75% guarantees for newly extended loans, up to KRW one billion.The banking sector will also provide liquidity for SMEs by extending new loans or rolling over existing debts. The Korea Trade Insurance Corporation (KTIC) will also launch a liquidity support program for SMEs.(1) To ease liquidity constraints for SMEs, the KTIC is to speed up its review process to provide compensation as soon as possible when expo
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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 30, 2010

Privatization Plan for Woori Financial Group

The Public Funds Oversight Committee has held the 22nd Meeting today to finalize its plans to sell the remaining shares of Woori Financial Group (WFG) held by the Korea Deposit Insurance Corporation (KDIC), where a consensus has been reached that after successfully making two block sales, once in November 2009 and once in April 2010, totaling 16% of WFG, bringing the total amount of shares held by the KDIC down to a 50% level, an appropriate condition has been set to finalize the privatization of WFG.The privatization will be carried out with the three basic principles: maximizing recovery of injected public funds; making an early privatization; and contributing to sound and productive advancement of the financial industry.(1) Method of privatizationIn line with the three basic principles, the sale of WFG shares will be done through two steps of open competitive bidding process by domestic and foreign investors; first, by preliminary bidding; and second, by final bidding.(2) Simultaneous sale of WFG and regional banksBoth the shares of WFG and the shares of regional banks held by WFG (Kyungnam Bank and Kwangju Bank) will be sold separately but up for the bidding at the same time.Although the two regional banks are under WFG, it has been viewed as more effective to sell them separately due to them not having an integrated data processing network with WFG and with low level of synergy effect. Moreover, because their value would be greater when sold separately taking into account their regional focused businesses.However, the bidding will be carried out simultaneously to prevent any delay in the overall privatization process.The sale of regional banks will be for 50% plus ne share or done through a completemerger. And the actual amount of shares of WFG to be sold or whether it will be done through a merger will be determined and finalized with close discussions with the to-be- selected sales advisory firms. (3) Selection of sales advisory firmsConsidering the size and
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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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Jul 21, 2010

KRX introduces new auction-based Block Trading Service

On 21st July 2010, Korea Exchange’s proposal on new ‘Auction-based Block Trading Service (hereinafter “A-Blox”)’ for its Securities markets (KOSPI Market Kosdaq Market) has been approved by Financial Services Commission. Key functions of this new service will be anonymous liquidity pool and VWAP transaction mechanism which are designed to accommodate large lot trading demands in the market. After having system implementation and market notification period, the new rules on ‘A-Blox’ will become effective as of 29th November 2010.BackgroundsIn today’s highly institutionalized market environment, demands for trading large-lot sizes have been growing consistently. And most of these trades tend to favor OTC transaction or exchange block trading facilities to avoid greater market impact and higher transaction cost. Also, by taking into account of continuous growth of dark-pools in most advanced markets and by listening to the voices of our customers, KRX sought necessity of more efficient block-trading service to meet the large-lot trading demand. Under this background, ‘A-Blox’ was designed to supplement current ‘K-Blox’ which is conventional concept of block-trading facility.‘A-Blox’ Trading MechanismAlthough trades will be conducted on a same platform, ‘A-Blox’ orders will be kept in separate pool from existing Auction and Block-Trading (K-Blox) pool. Thus ‘A-Blox’ orders will only be matched amongst each other without quotes being displayed to the public. Orders will be matched on continuous auction basis under the time priority principle and trades will be settled at the day’s Volume Weighted Average Price (VWAP). Please find below the details of A-Blox functions.CommentsChang-ho Lee, president of KOSPI Market Division, comments that “we’ve had numerous consultations with market participants and experts to meet the customers’ needs in designing the new auction based Block Trading.” He also added that “this service will
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Jul 20, 2010

"Sunshine Loans" for Low-Income Households

1. BackgroundIn the wake of global financial crisis, low-income households have become more in need of loans; however, loans for them have become less available as financial institutions for low- income households have been more concentrated on equity investment and project financing. As a result, low-income households have been increasingly relying on private lenders and credit business providers, thus facing the burden of paying higher interests.Moreover, as the Bank of Korea (BOK) recently raised the base interest rate, if it leads to arise in market interest rates, low-income household would bear higher burden of inter st payment.(1) Starting from the end of July, approximately KRW 10 trillion will be extended over the next five years through the “Sunshine Loan” program by financial institutions* for low- income households.*The National Agricultural Cooperative Federation, the National Federation of Fisheries Cooperatives, the National Credit Union Federation of Korea, the Korean Federation of Community Credit Cooperatives, and mutual savings banks(2) The loans will be extended to individuals whose credit rating ranges from level 6 to level 10 or small business owners whose annual income is less than KRW 20 million.(3) Interest rates will be set by each financial institution but with a ceiling* in place.*As of July 20, the interest rate ceiling is 10.6% for financial cooperatives, 13.1 % for mutual savings banks. The ceiling may be adjusted depending on changes in funding costs of one-year maturity term deposits.(4) The Sunshine loan program aims to help low-income households start up business (up to KRW 50 million), provide operating capital for business (up to KRW 20 million), or support urgently needed living expenses (up to KRW 10 million).(5) Assuming that each individual makes a KRW 10 million loan, one million people are expected to benefit from the Sunshine loan program over the next five years. The Sunshine loan program will reduce the low-income ho
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Jul 01, 2010

Amendments to the Insurance Business Act

Amendments to the Insurance Business Act were passed at the National Assembly June 29, 2010 to strengthen insurance consumer protection.1. Strengthening insurance consumer protection(1) Insurers are subject to a stricter obligation to inform consumers of their insurance products. Selling their insurance policies, insurers have to provide prior information on their policies such as contract terms and conditions in which benefit payments are denied and receive consumers’ written consent. In violation of the obligation, an insurance company has to pay a fine of up to 20% of premium payments, or sales representatives and sales agencies are subject to a 20 million won or less fine.(2) The amended Act adopted a suitability or “Know-Your-Client” principle. Under the principle, insurers have to be well informed of consumers’ income, wealth, and investment purpose and recommend appropriate products that meet consumers’ needs. The principle will be applied first to universal insurance products.(3) In order to protect consumers from false or exaggerated advertisements, the amended Act specifies what should be included or not when advertising insurance products. Advertisements should include prior notices that recommend consumers to read brochures, contract terms and conditions, warning against possible loss of the principal. By omitting or providing insufficient information, advertisements should not mislead consumers to believe that benefit payments are fully guaranteed without any condition. Consumers should be well informed of the maximum amount of benefits, conditions to deny benefit payments, and immunity clauses.(4) For insurance contracts specified in the Presidential Decree (e.g. medical reimbursement insurance), it is an insurer’s obligation to confirm whether a consumer already has the insurance.(5) Insurers have to specify in their brochures conditions in which benefit payments are denied.(6) Policy holders are allowed to confirm, withdraw, and cancel* t
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Jun 25, 2010

2010 Credit Risk Evaluations on Large Companies

Evaluation ResultsCreditor banks announced today a total of 65 companies for restructuring after completing their credit risk evaluations on 1,985 companies with outstanding credit lines of more than KRW50.0 billion.Of the 65 companies, 16 were constructors with 9 rated C and 7 rated D; 3 shipbuilders with 1 rated C and 2 rated D; 1 shipping company rated C; and the remaining 45 large companies of which 27 were rated C and 18 rated D.Mainly as a result of the downturn in the construction industry, 16 companies were tapped for restructuring while the number of shipbuilding and shipping companies selected for restructuring fell from 17 last year.The Korean government is giving full consideration to help the restructuring process move forward as fast and effectively as possible while minimizing the weight of restructuring on the companies’ subcontractors.Impact on Financial Company SoundnessThe debt obligations of the 65 companies tapped for restructuring in this latest evaluation was KRW16.7 trillion, including KRW6.8 trillion in constructors PF contingent liabilities. Of the total, KRW11.9 trillion was due to banks, KRW1.5 trillion to savings banks, and KRW700 billion to credit specialized financial companies.Additional reserves for bad debts that financial institutions are expected to set aside for this round of restructuring is around KRW3.0 trillion, but its impact on financial companies’ soundness should be limited given banks’ strong financial position to absorb losses. As of end-March 2010, domestic banks’ BIS ratio was 14.7%, up from 12.31% as of end-2008 and 14.36% as of end-2009.Currently banks’ had KRW2.2 trillion in reserves set aside for bad debts while savings banks had KRW200 billion and other financial institutions KRW600 billion.*Please read the attached file for details.
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Jun 24, 2010

Amendments to the Enforcement Decree of the Mutual Savings Banks

As the Amendments to the Enforcement Decree of the Mutual Savings Banks Act have passed the Cabinet Meeting in June 22, they are expected to be enforced starting from July 2010.A major change is that banks’ equity capital will be calculated based on the BIS definition, and not on the balance sheet definition as previously done.Standards for calculation of a bank’s equity capitalPreviously, a bank’s equity capital was defined as total assets minus total liabilities on the balance sheet. Under the amended enforcement decree, mutual banks are required to follow the BIS definition of equity capital, which consists of Tier 1 capital, Tier 2 capital, and deductible items. Each has to meet the following qualifications:(1) Tier 1 capital: a bank’s core net assets with permanent features (e.g. paid-in-capital, capital surplus)(2) Tier 2 capital: capital equivalent to Tier 1, capable of covering loss(e.g. subordinated bonds, subordinated deposits, cumulative preferred stock)(3) Deductible items: Items that do not actually contribute to the soundness of capital should be excluded from equity capital. (e.g. treasury stock)(4) A bank’s equity capital ratio is to be calculated every six months. In two months after the calculation, the new ratio will be applied for six months.*Details on Tier 1, Tier 2 and deductible items will be specified in supervision regulations.Implementation scheduleThe amended enforcement decree mandates the Supervision Regulations of the Mutual Savings Banks and the Supervision Rules of the Mutual Savings Banks to stipulate details.The amendments are expected to be implemented starting July 1.*Please read the attached file for details.
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Jun 16, 2010

Conference on "The Global Financial Crisis and Microfinance: Challenges and International Cooperation"

The Financial Services Commission (FSC), the World Bank and the Korea DevelopmentInstitute (KDI) co-hosted an international conference on “the Global Financial Crisis andMicrocredit: Challenges and International Cooperation” on June 15.As the first-ever conference on microfinance jointly hosted by the Korean government and aninternational organization, it was attended by Kwon Hyuk-Se, the Vice Chairman of the FSC,Kim Seung-Yoo, the Chairman of the Smile Microcredit Bank, Tunc Uyanik, the SectorManger of the World Bank, and many distinguished guests. Participants had in-depthdiscussions on the impact of the global financial crisis on microfinance, each country’sresponse to the financial crisis, and initiatives to strengthen international cooperation. FSC’s Vice Chairman Kwon pointed out that the global financial crisis increased the numberof the poor and widened the gap between the rich and the poor, which could lead to a social conflict. Against this backdrop, he emphasized that microfinance serves as a social safety net for those who have no access to conventional financial services and an important means for overcoming the global financial crisis. Smile Microcredit project, the Korean model of microfinance, is led by the private sector withprivate donations and dormant savings as funding sources. In the wake of the global financialcrisis, fiscal conditions of many governments have been deteriorated. Vice Chairman Kwonsaid that under such circumstances, microfinance could be a viable option for each government to tackle economic polarization.The Korean government expects the conference to contribute to expanding microfinancebusinesses such as Smile Microcredit. Korea will bring the issue to the G20 summit meetingto urge that microfinance could play a key role in overcoming financial crises. 1. Diversify funding sources, including individuals’ contributions2. Cut operation costs by renting offices from public institutions as Smile Microcredit Bank’s bran
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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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Jun 04, 2010

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

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

Principles and Plans for Authorization of Financial Investment Businesses

Amendments to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FSCMA) were passed at the vice ministerial meeting on June 3, 2010.Reflecting opinions gathered during the period of legislation notice, the following modifications were made to the first draft that had been previously announced:1. The original draft stipulated that applications for add-on business authorization shall be suspended for one to three years for financial investment institutions penalized with a warning or a higher punitive measure.However, accepting the opinion that the measure may be too harsh considering a warning is a minor penalty, the level will be raised to a suspension of business activities of branches and sales representative offices. The revised version specifies the level of punitive measures that affects authorization of financial investment institutions. 2. Modifications will be made after further discussions in regard with the current provision that applies same criteria for disqualification of both non-registered executives and registered executives.3. Given that some modifications were made to the original draft, the Governor of the Financial Supervisory Service (FSS) will continue to exercise the authority mandated by the FSC to penalize employees and executives of financial investment institutions. 4. The limit on bond funds to indirectly reinvest up to 40% of their assets in government bond ETFs will be raised to 100%.5. Executives and employees from foreign multi-financial service providers operating collective investment businesses (i.e. asset management) were prohibited from holding concurrent positions in domestic financial institutions. However, the blanket ban was revised so that only those engaged in collective investment business (both employees and executives) are prohibited from holding concurrent positions in domestic financial institutions.The amendments will go through the cabinet meeting’s approval next week to be enforce
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May 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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May 10, 2010

Contingency Plans for Southern Europe's Financial Crisis

Despite the EU-IMF rescue package* for Greece, financial markets faltered amid fears that southern European counties’ debt crisis could spread. Stock markets in the U.S. and Europe fell, and the KOSPI Index on May 6 fell 2% as well. The values of the US dollar and the yen against the Korean won surged. The US dollar against the Korean won on May 6 rose by KRW 25.8, and the yield of 3-year government bonds went up by 0.08%p.However, southern Europe’s debt crisis is expected to have only a limited impact on the Korean financial market because the domestic financial institutions’ exposure to the region is insignificant. As of end-2009, Korean financial companies’ exposure to southern European countries – Greece, Spain, Italy, and Portugal – is USD 640 million, just 1.2% of the USD 52.8 billion total external exposure. The total borrowings of Korean banks from those countries are only USD 390 million.As market concerns over southern Europe’s debt crisis and its contagion to Europe as a whole might persist for a while, the FSC plans to strengthen its monitoring on financial markets and European capital flows. To this end, the FSC and the FSS will closely monitor capital inflows and outflows and thoroughly examine domestic banks’ foreign liquidity soundness and external borrowing conditions.The FSC will utilize hot-lines and other communications channels with domestic banks to promptly detect and preemptively address market problems. We will also examine and complement individual banks’ contingency plans to raise their capital.Furthermore, in order to ease concerns in financial markets, the FSC will closely work together with the Ministry of Strategy and Finance (MOSF) and the Bank of Korea (BOK).At a global level, the Financial Stability Board (FSB) is expected to closely monitor the future developments of the Greek rescue package and promote global coordination through sharing information on each country’s fiscal and economic conditions.*Please refer
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Apr 20, 2010

Impacts of the Goldman Sachs Case on Financial Markets

1. Impacts on domestic and overseas financial marketsIn the wake of the civil action by the U.S. Securities and Exchange Commission (SEC) against Goldman Sachs on April 16, stock markets in the U.S. and Europe fell, and prices of the U.S. Treasury bonds and dollars rose.Domestic markets were also affected by the Goldman Sachs case to a limited extent. The KOSPI dropped by 30bps.Foreign investors sold in the market, and the U.S dollar against the Korean won rose.As of end-2009, domestic financial institutions hold the outstanding securities of USD 350 million issued by Goldman Sachs. That accounts for only 1.8% of foreign securities held by domestic financial institutions (USD 19.04 billion) and does not include a synthetic CDO related to the case.2. ImplicationsThe Goldman Sachs case is expected to bring only a limited impact on Korean financial markets considering the fact that Korean financial institutions hold no CDO at issue and only a small amount of other securities issued by Goldman Sachs. Also, under Korea’s Asset-Backed Securitization Act, it is virtually impossible for special purpose companies (SPCs) to issue synthetic CDOs, similar to the controversial product in question; therefore, it is unlikely that domestic financial institutions wouldexpose investors to similar risks.3. Policy responsesThe FSC will closely monitor any possibility that similar lawsuits would be filed worldwide and domestic financial companies might be involved. At the same time, the FSC will continue to improve investor protection systems such as prior reviews* for OTC derivatives. Currently, amendments to the FSCMA enforcement decree are underway to enforce the prior review system for OTC derivatives in June 2010, and the Korea Financial Investment Association(KOFIA) is formulating rules of prior reviews.*Prior reviews of OTC derivatives, introduced by the amended FSCMA in March 2010, are conducted by a review committee of the KOFIA. Products subject to a prior review include OTC
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Apr 15, 2010

Amendments to Credit Business Act

Since an annual interest rate ceiling on loans extended by private lending companies was lowered from 66% to 49% in October 2007, there has been a growing need to reflect a downward trend of interest rates. As the market size of private lending business, mostly used by low-income earners, continues to grow*and interest rates on credit loans by these lenders almost reach the ceiling, there is also an urgent need to ease the burden of rising interest rate for low-income earners.In order to further lower the maximum interest rates that private lending companies and financial companies can impose on their loans, the FSC made amendments to the Enforcement Decree of the Act on Registration of Credit Business, etc. and Protection of Finance Users with a 20-day notice from April 15 to May 5.The amendments require private lenders and financial companies to lower their interest rate ceiling by 5 percent points from current 49% to 44% per annum. The new ceiling is applied to loan contracts that will be made or renewed after the amendments take effect.After a 20-day notice, the amendments will go through reviews of the Regulatory Reform Committee and the Ministry of Government Legislation, and a vice ministers’ meeting and a cabinet meeting and take effect right after being announced in July.The FSC plans to cut 5 percent points further within a year, monitoring market developments such as guaranteed lending and market interest rates.*Please refer to the attached PDF for details.
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Apr 07, 2010

Amendments to Financial Investment Regulation

The Financial Services Commission (FSC) made amendments to financial investment regulations to strengthen financial investment companies’ risk management of foreign currency derivative products. Under the amended regulation, starting from April 12, financial investment companies and universal financial companies are required to set and implement their own guidelines on risk management of foreign currency derivative products.As banks do since January 1, financial investment companies and universal financial companies subject to the amended regulation are required to set counter party deal limits and verify counter parties’ risk hedge purpose when they trade foreign currency derivative products with corporate investors.The amendments mandate financial investment companies and universal financial companies engaged in foreign currency services to set and implement their own guidelines on risk management of foreign currency derivative products. The guidelines need to include the followings:1. When trading foreign currency derivative products (currency forwards, currency options, etc) with corporate investors,* financial investment companies are required to verify whether the transaction is for risk hedging.2. Financial investment companies are required to set counter party deal limits,considering the remaining balance of foreign currency derivatives contracts they already had with banks and other financial services companies.*Please refer to the attached PDF for details.
Attachment 1