October 15, 2009

Financial Supervisory System in Korea

RYU, Min Hae HWANG, Jae Hak
Associate International Cooperation Department Financial Supervisory Service

Agenda
Supervisory Integration in 1999 Financial Services Commission (FSC) Financial Supervisory Service (FSS)
Structure of FSS FSS Funding & Expenditure FSS Mission Supervisory Functions of FSS

Q&A

Supervisory Integration in 1999

Financial Supervisory Structure

- Before Integration: Divided & Fragmented

Ministry of Finance and Economy (MOFE) had comprehensive authority to supervise the financial sector Bank of Korea (BOK) held responsibility for the banking sector Banks, securities firms, insurers, other NBFIs each under different supervisory authorities

MOFE
BOK BOK
Office of Bank Supervision Securities Supervisory Board Insurance Supervisory Board Non-Bank Supervisory Authority

Commercial Banks

Specialized Banks

Securities & Futures Companies

Investment Trust Companies

Insurance Companies

Non-Bank Financial Institutions

MOFE

MOFE

Financial Policy Bureau of MOFE

Bank Supervisory Authority Financial Supervisory Commission Financial Supervisory Commission Financial Services Commission

Securities Supervisory Authority

Insurance Supervisory Authority

FSS

FSS

Non-Bank Supervisory Authority

~ 99

99 ~ 08

08 ~
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Background for Supervisory Integration

Need for reform of the central bank and the financial supervisory 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 the integration

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Creation of Integrated Supervisory Authority

Act on the Establishment of Financial Supervisory Organizations, 1997

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

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

Current Supervisory Structure

FSC formulates financial policies and sets financial rules/regulations FSS supervises and examines financial institutions

Financial Services Commission

Financial Supervisory Service

Regulated Financial Institutions

Related Organizations
Bank of Korea (BOK)
Issue bank notes and coins Formulate and implement monetary and credit policy Acting as banker to the banks Acting as banker to the government Lender 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)

Organization of FSC
Financial Services Commission
Securities & Futures Commission

Planning & Coordination Bureau

Financial Policy Bureau Financial Policy Financial Market Analysis Industrial Finance Financial Restructuring International Finance International Cooperation Team

Financial Services Bureau

Bank Insurance Non-Bank

Capital Markets Bureau Capital Markets Asset Management Fair Market

Planning & Finance

Regulatory Reform & Legal Affairs Audit & Inspection

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FSC Composition
Commissioners (9) Chairman (ministerial level) & Vice Chairman 2 Standing Commissioners recommended by FSC Chairman 5 Non-standing Commissioners MOSF Vice Minister FSS Governor KDIC President BOK 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 multipleparties and engage in international cooperation Enforce anti-money laundering Other matters prescribed by other Acts
(Article 17 of Act on the Establishment, etc of Financial Services Commission)

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SFC Composition
Five commissioners
Chairman: FSC Vice Chairman 1 Standing Commissioner recommended by FSC Chairman 3 Non-Standing Commissioners recommended by FSC 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-related matters for full deliberation by the FSC

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Financial Supervisory Service (FSS)

Structure of FSS

FSS Offices and Staff

Main Office: Seoul
Domestic: 4 Regional and 3 District offices Overseas: 8 Representative Offices
New York, Washington, Tokyo, Hong Kong, Beijing, London, Frankfurt, Paris

Staff Size: approximately 1,600

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Executive Board
14 Executive Officers
Governor General Auditor First Senior Deputy Governor 2 Senior Deputy Governors 8 Deputy Governors Chief Accountant

3-year term, renewable once

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FSS Organization
22 departments and 16 offices under 10 divisions
Strategic Planning Management Support and Consumer Protection Supervision Coordination Bank Supervision Non-Bank Supervision Insurance Supervision Financial Investment Supervision Corporate Disclosure Supervision Capital Market Investigation Accounting Review
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Governor
General Auditor (Internal Audit Office)

First Senior Deputy Governor

Senior Deputy Governor

Senior Deputy Governor

Strategic Planning Division

Mgmt Support & Consumer Protection Division

Supervision Coordination Division

Bank Supervision Division

Non-Bank Supervision Division

Insurance Supervision Division

Financial Investment Supervision Division Financial Investment Department Capital Market Department Asset Management Department

Corporate Disclosure Supervision Division

Capital Market Investigation Division

Accounting Review Division

Planning & Coordination Dept. Legal Affairs Office Macroprudentia l Analysis Dept. Research Office Public Affairs Office

General Affairs Department IT Strategy Office Human Resources Development Office Secretary Office Security Planning Office Consumer Protection Center Dispute Settlement Dept.

Supervision Coordination Department Financial Risk System Office Enforcement Review Office Financial Risk Examination Support Dept. International Cooperation Dept.

Bank Dept. 1

Mutual Savings Bank Dept. Loan Business Office Cooperative Finance Dept. Micro-loan Support Office

Life Insurance Department Insurance Actuary and Pension Office Non-life Insurance Department Insurance Investigation Office

Corporate Disclosure Dept. Corporate Disclosure System Office

Capital Market Investigation Dept. 1 Capital Market Investigation Dept. 2

Accounting Review Dept. 1 Corporate Accounting System Office Accounting Review Dept. 2

Foreign Exchange Affairs Office

Bank Dept. 2

Bank Dept. 3

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Financial Institutions under

FSS 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 Asset
Management Companies etc.

Insurance Companies : 52 (22 Life, 30 Non-life)

Others : 149 Exception: Post Office Financial Services, National Pension Fund

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FSS Funding & Expenditure

Sources of Income

(USD206million, 2008) Contributions from financial institutions under FSS supervision (77%) Fees for securities issuance (17%) Contributions from BOK (4%) Other (2%)

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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 within each 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

Prudential Supervision of Financial Companies

Inspection of the affairs and the financial status of financial companies Sanctions of financial companies or their employees Business support to the FSC Other affairs which shall be performed by the FSS under relevant Acts
(Article 37 of Act on the Establishment, etc of Financial Services Commission)

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Supervisory Functions of FSS

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Bank Supervision
1. Entry Regulations
General Requirements Fit & 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 Regulations a. Capital adequacy
BIS ratio: minimum 8%
Incorporates credit risk and market risk

New Basel Accord from 2008

Incorporates operational risk

b. Asset Classification and Provisioning

Loan 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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Bank Supervision (Continued)

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

d. Credit Restrictions
Single borrower: less than 20% of equity Single business group: less than 25% of equity Large credit: less than 500% of equity
(Large credit: extended credit exceeding 10% of equity)

e. Liquidity ratios
Liquid 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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Bank Supervision (Continued)

4. Management Evaluation System : CAMELS, ROCA 5. Prompt Corrective Actions Management Improvement Recommendation
BIS ratio: less than 8% or Capital adequacy or asset quality: less than grade 4

Management Improvement Requirement

BIS 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 Regulation 2. Prudential Regulation
a. b. c. d. e. f. g. h. Capital Adequacy Asset Classification and Provisioning Controls on Credit Concentration and Connected Lending Liquidity Holding of Reserve Requirement Assets Restriction on Acquisition of Real Estate Securities Investment Limit Financial Disclosure

3. Management Evaluation System 4. Prompt Corrective Action 5. On-site Examination & Off-site Surveillance
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Securities and Capital Market Supervision

Merchant Banks Act Banking Act Trust Business Act Futures Trading Act Securities & Exchange Act

Indirect Investment Act

Insurance Business Act

Banking Act

Financial Investment Services & Capital Market Act

Insurance Business Act

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Securities & Capital Market Supervision

- Financial Investment Services & Capital Market Act

Application of different laws for same financial functions Positive System Concurrent engagement restricted Unprotected investor

Regulatory arbitrage and loopholes

Restricting financial investment products development Barrier to raising competitiveness through synergy effect 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 to Functional Regulation Expansion of Business Scope
Strengthened Investor Protection

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Insurance Supervision
1. Entry Regulation
Capital Requirement Business Funds to be Paid by Foreign Insurers Requirements for Permission Maintenance of Manpower and Physical Facilities

2. Prudential Regulation
Solvency Margin (Risk Based Capital) Asset Classification and Provisioning

3. Management Evaluation System 4. 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 Handling Dispute settlement
Request for dispute mediation Examination and discovery Dismissal/mutual agreement or deliberation by the Financial Dispute Settlement Committee

Consumer education
Online consumer protection section on the FSS website Lectures and seminars
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Q&A

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Contact the FSS

Website: english.fss.or.kr

E-mail: fssintl@fss.or.kr
Telephone: +82-2-3145-7906

Fax: +82-2-3145-7899

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