1026_Financial Supervisory Service

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Financial SupervisorySystem in Korea

RYU, Min HaeHWANG, Jae Hak

AssociateInternational Cooperation DepartmentFinancial Supervisory Service

October 15, 2009


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AgendaSupervisory Integration in 1999

Financial Services Commission (FSC)

Financial Supervisory Service (FSS)

Structure of FSS

FSS Funding & Expenditure

FSS MissionSupervisory Functions of FSS

Q & A


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Supervisory Integrationin 1999


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Financial Supervisory Structure- Before Integration: Divided & Fragmented

Ministry of Finance and Economy (MOFE) hadcomprehensive authority to supervise thefinancial sector

Bank of Korea (BOK) held responsibility for thebanking sector

Banks, securities firms, insurers, other NBFIseach under different supervisory authorities


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BOK

SecuritiesSupervisory

Board

InsuranceSupervisory

Board

CommercialBanks

MOFEBOK

Officeof Bank

Supervision

Non-BankFinancial

Institutions

InsuranceCompanies

SpecializedBanks

Securities& FuturesCompanies

InvestmentTrust

Companies

Non-Bank

Supervisory Authority


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BankSupervisoryAuthority

MOFE

SecuritiesSupervisoryAuthority

InsuranceSupervisoryAuthority

Non-BankSupervisoryAuthority

FSS

Financial Policy Bureau of MOFE

MOFE

FSS

Financial Services Commission

Financial Supervisory

Commission

FinancialSupervisoryCommission

~ 99 99 ~ 08 08 ~


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Background forSupervisory Integration

Need for reform of the central bank and the financialsupervisory system

Growing convergence of financial services

Blurring of distinctions among financial sectors

Growing importance of financial conglomerates

The Asian financial crisis in late 1997 triggered theintegration


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Creation of

Integrated Supervisory Authority

Act on the Establishment of Financial SupervisoryOrganizations, 1997

Establishment of Financial Supervisory Commission(now Financial Services Commission), 1998

Consolidation of Supervisory Agencies into FinancialSupervisory Service (FSS), 1999


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Financial Supervisory Service

Financial Services Commission

Current Supervisory Structure

Regulated Financial Institutions

FSC formulates financialpolicies and sets financial

rules/regulations

FSS supervises andexamines financial

institutions


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Related Organizations

Bank of Korea (BOK)Issue bank notes and coinsFormulate and implement monetary and credit policy

Acting as banker to the banks Acting as banker to the governmentLender of last resort (Independent from government)

Joint bank examinations with the FSS, information sharing

Korea Deposit Insurance Corporation (KDIC)Protection of small depositors

Joint bank examinations with the FSS, information sharing


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Financial Services Commission(FSC)


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Organization of FSCFinancial Services Commission

Financial PolicyBureau

Financial ServicesBureau

Securities & FuturesCommission

Capital MarketsBureau

Planning & Finance

Regulatory Reform &Legal Affairs

Audit & Inspection

Financial Policy

Financial Restructuring

InternationalCooperation Team

International Finance

Industrial Finance

Financial MarketAnalysis

Bank Capital Markets

Fair Market

Asset Management

Non-Bank

Insurance

Planning & CoordinationBureau


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FSC Composition

Commissioners (9)

Chairman (ministerial level) & Vice Chairman2 Standing Commissioners recommended by FSC Chairman5 Non-standing Commissioners

MOSF Vice Minister FSS Governor KDIC PresidentBOK Deputy Governor

Industry Representative recommended by KCCI Chairman Appointed by President for a 3-year term, renewable once

Meets twice a month


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FSC Functions

Formulate financial policy

Establish/amend financial laws and regulations

Issue business licenses

Create and develop finance center Negotiate between two parties and among the multiple-parties and engage in international cooperation

Enforce anti-money launderingOther matters prescribed by other Acts

(Article 17 of Act on the Establishment, etc of Financial Services Commission)


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SFC Composition

Five commissionersChairman: FSC Vice Chairman1 Standing Commissioner recommended by FSCChairman3 Non-Standing Commissioners recommended byFSC Chairman

Appointed by President for a 3-year term,renewable once

Meets twice a month


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SFC Functions

Oversight of securities and futures markets

Accounting standards and audit review

Pre-deliberation of capital market-relatedmatters for full deliberation by the FSC


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Financial Supervisory Service(FSS)


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Structure of FSS


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FSS Offices and Staff

Main Office: Seoul

Domestic: 4 Regional and 3 District offices

Overseas: 8 Representative OfficesNew York, Washington, Tokyo, Hong Kong, Beijing,London, Frankfurt, Paris

Staff Size: approximately 1,600


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Executive Board

14 Executive OfficersGovernor General Auditor First Senior Deputy Governor 2 Senior Deputy Governors8 Deputy Governors

Chief Accountant

3-year term, renewable once


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FSS Organization

22 departments and 16 offices under 10 divisions

Strategic PlanningManagement Support and Consumer ProtectionSupervision CoordinationBank SupervisionNon-Bank SupervisionInsurance Supervision

Financial Investment SupervisionCorporate Disclosure SupervisionCapital Market Investigation

Accounting Review


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Strategic

PlanningDivision

Mgmt Support& Consumer

ProtectionDivision

Senior DeputyGovernor

Planning &Coordination

Dept.

Macroprudential Analysis Dept.

General AffairsDepartment

HumanResources

DevelopmentOffice

SecretaryOffice

Consumer Protection

Center

DisputeSettlement

Dept.

SupervisionCoordinationDepartment

Legal AffairsOffice Financial

Risk SystemOffice

Financial RiskExamination

Support Dept.

Governor General Auditor

(Internal AuditOffice)

FirstSenior Deputy

Governor

IT StrategyOffice

SecurityPlanning

OfficeInternationalCooperation

Dept.

Enforcement

ReviewOffice

Senior DeputyGovernor

ResearchOffice

Bank

SupervisionDivision

Non-Bank

SupervisionDivision

Insurance

SupervisionDivision

Capital Market

InvestigationDivision

Accounting

ReviewDivision

Bank Dept. 1 Mutual SavingsBank Dept.Life Insurance

Department

FinancialInvestmentDepartment

Capital MarketInvestigation

Dept. 1

AccountingReview Dept. 1

Bank Dept. 3

LoanBusiness

Office

Insurance Actuary and

PensionOffice

Corporate Accounting

System Office

CooperativeFinance Dept. Non-lifeInsurance

Department

Capital MarketDepartment

Capital MarketInvestigation

Dept. 2

AccountingReview Dept. 2

Asset

ManagementDepartment

ForeignExchange

Affairs Office

Micro-loanSupportOffice

InsuranceInvestigation

OfficePublic AffairsOffice

Supervision

CoordinationDivision

FinancialInvestmentSupervision

Division

Bank Dept. 2

CorporateDisclosure

SupervisionDivision

CorporateDisclosure Dept.

CorporateDisclosure

System Office


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Financial Institutions underFSS Supervision (2,938 as of May 2009)

Banks(54) : 13 Commercial Banks (7 Nationwide, 6 Regional) 5 Specialized Banks (KDB, EXIM, IBK, NACF, NFFC) 36 Foreign Bank Branches

Mutual Savings Banks : 106

Credit-Specialized Finance Companies : 53 (5 Credit Card Companies,23 Leasing Companies, etc.)

Credit union and cooperatives : 2,397

Securities-Related Companies : 62 Securities Companies, 65 AssetManagement Companies etc.

Insurance Companies : 52 (22 Life, 30 Non-life)Others : 149Exception: Post Office Financial Services, National Pension Fund


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FSS Funding & Expenditure


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Basis for FSS Contribution

Allocation among different financial sectors Examiners allocated to the sector (60%)Operating revenue (40%)

Allocation among individual financial institutions withineach sector:

Banks and NBFIs: liabilities

Securities companies: liabilities (60%), operating revenue (40%)Insurance companies: liabilities (70%), premium income (30%)


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FSS Expenditure

General Expenses (97.4%)

Wages and Administrative Expenses (91.9%)

Provisions for Post-retirement Benefits (8.1%)

Other Expenses (2.6%)


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FSS Mission


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SupervisoryFunctions of FSS


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Bank Supervision

1. Entry RegulationsGeneral RequirementsFit & Proper Test

Ownership Restrictions(4%, 10%)2. Restrictions on Large Shareholders

Credit Ceiling for Large Shareholders Acquisition of Shares Issued by Large Shareholders

Improper Influence by Large Shareholders


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Bank Supervision (Continued)

3. Prudential Regulationsa. Capital adequacy

BIS ratio: minimum 8%Incorporates credit risk and market risk

New Basel Accord from 2008Incorporates operational risk

b. Asset Classification and ProvisioningLoan portfolio review

: Creditworthiness, Overdue period, Default

Classification into 5 categories: Normal, Precautionary, Substandard, Doubtful, Loss

Minimum loan loss provisioning by category


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c. Foreign exchange exposureCeiling on open positions: 20% of equity

d. Credit Restrictions

Single borrower: less than 20% of equitySingle business group: less than 25% of equity

Large credit: less than 500% of equity(Large credit: extended credit exceeding 10% of equity)

e. Liquidity ratiosLiquid assets to liquid liabilities: more than 100%

For foreign currency : more than 85%Liquidity: remaining maturity of less than 3 months


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4. Management Evaluation System : CAMELS, ROCA5. Prompt Corrective Actions

Management Improvement RecommendationBIS ratio: less than 8% or Capital adequacy or asset quality: less than grade 4

Management Improvement RequirementBIS ratio: less than 6% or Composite CAMELS rating: less than grade 4

Management Improvement Order BIS ratio: less than 2% or Falls into the category of distressed bank

6. On-Site Examination and Off-Site Surveillance


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Non-Bank Supervision

1. Entry Regulation2. Prudential Regulation

a. Capital Adequacyb. Asset Classification and Provisioningc. Controls on Credit Concentration and Connected Lendingd. Liquiditye. Holding of Reserve Requirement Assetsf. Restriction on Acquisition of Real Estateg. Securities Investment Limith. Financial Disclosure

3. Management Evaluation System4. Prompt Corrective Action5. On-site Examination & Off-site Surveillance


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Securities and Capital MarketSupervision

Financial Investment Services& Capital Market Act

Banking Act

Insurance Business Act

InsuranceBusiness Act

IndirectInvestment

Act

Securities & Exchange Act

Merchant Banks Act

Banking Act Trust Business Act

Futures Trading Act


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Securities & Capital Market Supervision- Financial Investment Services & Capital Market Act

Application of differentlaws for same financial

functions

Regulatory arbitrage and loopholes

Positive System Restricting financial investmentproducts development

Concurrent engagementrestricted

Barrier to raising competitivenessthrough synergy effect

Unprotected investor Undermining investor confidence


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Securities & Capital Market Supervision- Financial Investment Services & Capital Market Act

Financial Investment Services& Capital Market Act

Adoption of Comprehensive

(Negative)System

Shift toFunctionalRegulation

Expansion of Business

Scope

StrengthenedInvestor

Protection


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Insurance Supervision

1. Entry RegulationCapital RequirementBusiness Funds to be Paid by Foreign Insurers

Requirements for PermissionMaintenance of Manpower and Physical Facilities

2. Prudential RegulationSolvency Margin (Risk Based Capital)

Asset Classification and Provisioning3. Management Evaluation System4. Prompt Corrective Action (Based on Solvency Ratio)5. On-site Examination & Off-site Surveillance


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Investigation of Unfair Trading

Insider trading

Price manipulation and other fraud


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Consumer Protection

Consumer Complaint HandlingDispute settlement

Request for dispute mediationExamination and discoveryDismissal/mutual agreement or deliberation by theFinancial Dispute Settlement Committee

Consumer educationOnline consumer protection section on the FSSwebsiteLectures and seminars


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Q & A


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1026_Financial Supervisory Service

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