Green Financing To Be Prompted

The global economy is jumping on a new trend of “green growth”. Though efforts to propel green growth have not turned out to be much lucrative yet, it is allegedly expected to be of great value in terms of global competitiveness in a long run as a CSR activity.  Considering such movement, President Lee Myung Bak declared to make green growth one of the top priorities to practice throughout his tenure years. Along with the government’s low carbon, green growth initiative, it is critical to support green industry with abundant capital. That is, green financing should be spotlighted with more weight and should be regarded as a key issue to gain momentum.  As one year is left before the president leaves blue house, it is meaningful to briefly check how green growth policies have been effective and pave a way to boost green development, especially green financing.

 

Green financing is largely categorized into two areas, individuals and companies, by the object of green financing. For individuals(private capital) participating in green financing activity, they can enjoy several benefits including higher interest rate on deposits, lower interest rate on loan, and fee discounts related to the personal green activities. For instance, in purchasing green products like hybrid vehicles, bikes and products that reduce carbon emission, personal loan is available. Also, bike insurance or insurance fee discounts by environmentally-friendly activities are provided. For companies, the finance products are mainly public loans, public funds such as matching fund of private and public investors, and guarantee. Professionals in industry pointed out corporations prefer low-interest lending most, followed by PF, R&D support, and guarantee by Korea Credit Guarantee Fund or Korea Technology Finance Corporation.

 

 

 

Korea benchmarked the Green Funds Scheme of Netherland in which the governmental support led the participation of private capital and elicited attention to green activities from diverse parties. Netherland started the Green Funds Schemes since 1995 and this plan was pushed forward by four governmental bodies (Ministry of Housing, Spatial Planning and the Environment, Ministry of Finance, Ministry of Agriculture, Nature and Food Quality, and Ministry of Transport, Public Works and Water Management). It is reported that the plan turned out to be successful among green financing programs in EU. Green certification, a channel approved by the government to certify the green technology, business and company, is fundamental in this scheme and in the process of adopting this green certification program in Korea, there are still rooms to revise and improve it.  Specifically, requirements to receive green certificate should be less strict so that more small and middle sized firms can join “green certificate group” and be motivated to develop their technologies and products.

 

Green Funds Scheme

Diverse public policies associated with green financing have been announced and executed so far; yet, private sector has been showing lingering attitude towards this issue because of the risks involved in green industry.

Green-related loan offered by domestic banks is approximately 8.5trillion won but most of it is from public sectors including the Korea Development Bank, the Industrial Bank of Korea, Korea Finance Corporation and the Korea Exim Bank.  Banks prefer public guarantee program since the government guarantees the corresponding loan payment, and most companies in green field are on the introductory stage, which means firms have not commercialized the products or technologies yet. Meanwhile, private financial institutions are not motivated as green financing accompanies a high risk and it is likely to take some time to withdraw the money invested into green industries which are in the beginning stage.

 

 

 

In order to tackle numerous challenges, uncertainty surrounding profits of green financing should be lessened and financial companies should be ensured that green financing could make profits in a short term as well with various green finance products. Moreover, green finance products such as green funds should be developed further and funding through Korea Finance Corporation should be increased to make the green financing policy successful.  In terms of the green project finance which requires lots of capital, oversea support should be considered as well.

 

Corporate growth pattern should be taken into account to design long-term and effective green financing plans. In R&D stage before commercializing products, the company needs to consider a “death valley” where most startups are highly likely to fall down due to fund shortage. Consequently, the funding should be enough for startups to jump over the valley and after the jump-up, they should be able to access easily to the followings: green fund (i.e. green Small and medium enterprises fund), dividend income tax exemption for Green public offering fund, interest income exemption for green long term savings and bond, expansion of green bond portion in constituting the bond pool of liquidating and so on. Small and medium enterprises (SMEs) which have potentials to develop green technologies and products are more exposed to weak funding; the just-in-time(JIT) funding is significantly important. As the companies involved in the green sector step into further stages, funds from private capitals should be available as funds from the governmental side have limitations.

 

The US and UK governments are currently pursuing the establishment of a green-oriented investment firm. And there is a domestic move to bring the issue –the foundation of a financial company specialized in the green sector- to the table. While some experts argue that it is too early to decide, others insist that the earlier the establishment of a green bank which can provide a one-stop service about green financing, the better we are prepared for green investment. Rather than building up a new green bank, strengthening the role of Korea Finance Corporation might better fit into our situation where public sector is playing a vital role. Direct support from the government via R&D projects as well as credit guarantee by KIBO and KODIT should induce the private bank’s participation in a long run.    

Financial institutions should take the initiative to control the risk of green industry by, for instance, putting a limitation on loan to environment-unfriendly business. A few banks in developed countries already took the actions. ABN AMRO Bank N.V., a Dutch state-owned bank, has been applying a social and ethical risk filtering system to sensitive business related to the environment. Japan Bank for International Cooperation also applied a standardized environmental frame when analyzing PF investment. UBS, a Swiss global financial services company, introduced “Environmental management capability assessment” first and took the lead in adding signatures to Carbon Disclosure Project. Although domestic banks have joined the rally, they seem to be at the starting point. Thus, Financial Services Commission is trying to put more emphasis on green-field analysis when evaluating banks on the basis of CAMMELS(Capital, Asset, Management, Earning, Liquidity, Sensitivity to market risk) so that the banks would be urged to improve green financing. Hopefully, with these attempts taken, Korea would be able to assimilate this brightly prospective green financing and successfully go “GREEN”.

By Lee, Ki Yeon

(kiyeon.m.lee@gmail.com)

A Strong ban on Kimchi Bond Issuance for domestic use

    Excessive foreign capital outflow has had a significantly negative impact on South Korean market. Reflecting on the 1997-1998 Asian financial crises and the 2008 global financial crisis, the government has put more emphasis on preventing inordinate amount of foreign capital flow from coming into domestic market. Unexpected external shocks including global crisis followed by an abrupt withdrawal of foreign currency created instability and volatility in Foreign Exchange and Rate markets.

    In order to restrain foreign loans from growing rapidly, the Bank of Korea announced that financial firms are banned to buy foreign currency-denominated bonds so called “Kimchi bonds” issued for local use. With the word, “Kimchi” which refers to Korean side-dish, and “bond” combined, Kimchi bonds are foreign currency-denominated bonds sold by foreign and domestic companies in Korea. The bonds were originally for companies that need foreign currency within the country. Since raising foreign capital is handy with Kimchi bonds, the bonds are allegedly a useful tool for firms to invest overseas and make a payment for imported goods.

    More and more companies, however, tend to invest in Kimchi bonds with the intention to swap proceeds into Won, the currency of South Korea. Although they are apparently of no relationship with U.S., having no reason to hold dollars, they are likely to issue Kimchi bonds to raise funds at a cheaper price. Since foreign loans feature lower interest rates than domestic loans, companies can easily take advantages through the swap market. With banks acting as counterparts, a surge of short-term overseas debt would result in a stronger won as the amount of dollar on sale is increasing. Also the chances are that foreign capital inflows could withdraw quickly from the peninsula at times of external shocks, making Korean currency, won more susceptible to external blow. According to an online news provider, about two thirds of $6 billion in Kimchi bonds issued this year were issued only for local use on April. Local and foreign banks’ branches borrowed short-term debts from overseas to purchase Kimchi bonds or to hedge foreign exchange forward positions. Abuse of Kimchi bonds can distort the overall financial market nationwide.

    Consequently, financial authorities including Bank of Korea, Financial Services Commission, Ministry of Strategy and Finance, and Financial Supervisory Service, requested firms to refrain from enjoying private placements of bonds for domestic use. Tightened rule on handling Kimchi bonds delineates that banks can only provide loans in foreign capital if borrowers need funds for overseas use. So starting from July 25th, purpose of investment in Kimchi bonds written in securities-related document, should be screened thoroughly in advance whenever domestic financial firms buy the bonds, according to BOK. In addition, limits have been imposed on the amount of foreign-exchange forwards positions that local banks can carry relative to their capital.

    As an effort to minimize the destabilizing impacts of rapid foreign capital flows in and out of national markets, newly released regulation which curtails the abuse of Kimchi bonds has come into effect. After the policy being declared, the number of Kimchi bonds issued has dramatically declined in the past few months.

    The governmental action is an attempt to improve transparency and reduce volatility in Foreign Exchange market since 2008 financial crisis. In regard to this attempt, some people can argue that some companies might fear it will become harder to raise funds at any time they want to make overseas expenditure. Yet, there are many other channels available to raise funds, such as by using banking loans, corporate bonds, or taking on longer-term loans to reduce vulnerability in industry. Therefore, controlling Kimchi bonds issuance as a preventative measure against ‘blindly profit-pursuing’ companies would have an insignificant influence on a majority of market players.

By Ki Yeon Lee

(kiyeon.m.lee@gmail.com)

Government-civilian joint Committee for improving Accounting Service Industry was launched

The government launched a government-civilian joint committee to tackle issues related to accounting industry. As more and more domestic institutions are subject to the International Accounting standards, prompt and solid actions are required to cope with nation-wide and global changes. Last year, G20 Summit participants agreed on the importance of new standards for accounting consolidation. Newly released standards are believed to eliminate differences of accounting standards from each country. Demands for reorganizing external audit functions are increasing as well so that accounting users can be provided with timely information. In tandem with the trend, domestic accounting industry sees open markets, especially developed countries, approaching as Korea-US Free Trade Agreement (FTA) and Korea-EU FTA are going into effect soon.

 

As a consequence, Financial Services Commission launched a special committee called Committee for improving Accounting Service Industry in an attempt to boosting accounting transparency and strengthening competitiveness of accounting industry and the first conference was held on May 13th.. The Committee involves officials and business people from academic and business field and other related authorities. It plans to not only seek for optimal solutions to make accounting industry be a core part in financial sector but prepare for measures to advance domestic accounting industry followed by the flow of open market situation.

 

As the Committee put an emphasis on three factors, system, industry, and human resources, three task forces were made up in pursuit of reforming accounting supervisory system, raising competitiveness of accounting firms, and cultivating professionals. Accompanying the respective task force will be advisory council composed of experts in accounting industry and accounting users. The outcomes from each task force will be sorted out and organized by a general committee.

 

Nongovernmental delegates in particular claimed that financial authority should pay constant attention to overall examination of accounting system and open-door market. Je-Yoon Shin, a Vice Chairman of the Financial Services Commission said while in the past, upgrading accounting system were executed by the government and service providers, current effort to reform infrastructure of accounting industry should be led by nonofficial field, customers in a market-friendly way. In this regard, he encouraged active participations of professionals in private sector.

 

 

 

 

 

 

Je-Yoon Shin, a Vice Chairman of the Financial Services Commission

 

 

The following steps after the first meeting are as follows. The Committee including officials and business people will be run by the end of July and in August, plans for advancement on the accounting service industry will be announced. In addition, short-term policies would be released through a consensus of interested parties followed by the start of regulation amendment.

 

With the current trend of accounting system changes, new guidance has just issued on making accounting industry as an independently high-value added business. Additional improvements are also considered on the accounting infrastructure including sound investing culture, education, training system, and even the Certified Public Accountant (CPA) exam in order to foster practical talents. Positive results are expected to come out from this move.

 

Kiyeon Lee

(kiyeon.m.lee@gmail.com)

IPO boom to be expected in the Korean Stock Market

Along with the global economic recovery, the Initial Public Offering (IPO) market in South Korea has been expected to boom this year. Although recently uncertainties emerge in stock market due to the Middle East turmoil, leading some companies to postpone their IPO plans, the IPO market is still forecasted to be heated with over 5 trillion won. Companies usually do not tend to pursue IPO in February as they settle accounts. Yet, last February this year, things were different. Six companies including Hi-mart made a request for preliminary screening to be listed.

 

An official from the Korea Exchange (KRX) said that whereas current stock market situation temporarily makes firms waver in pushing toward the IPO, the number of firms which asked for prior screening reflects the rosy future of the IPO market. He emphasized that once global stock markets recover, more companies would kick off for the IPO than last year. Last year, unexpected listings by Samsung Life Insurance (4.89 trillion won) and Korea Life Insurance (1.79 trillion won) led 10 trillion won record. The IPO market seems to keep this momentum and the market size is likely to more than double that of last year.

 

Market experts expect Korea`s securities market to see 30~40 new listings, while KOSDAQ awaits 80~90 new listings. Three to four trillion won are expected to flow into the securities market and 1.5 trillion won to the KOSDAQ market, which possibly create a total IPO market of more than five trillion won. Potential entrants to the IPO markets in 2011 are as follows. Mirae Asset Life Insurance will push forward to be listed, tracking the string of rallies by life insurance companies last year. The Korea Aerospace Industries (KAI), Hi-Mart, GS Retail are also considering IPOs. The Incheon International Airport Corporation and POSCO E&C, which failed to go into the IPO market last year, are preparing for the second chance.  

 If big-name companies such as Samsung SDS, Hyundai Group, LG Group, and the STX Group, and their subsidiaries join the IPO movement, it would significantly increase the size of IPO market, further exceeding the current estimates. In fact, the Financial Services Commission (FSC) added 50 new growth companies and new energy companies to the list, which will further fuel into Korea`s IPO movement. Moreover, a few more listings are expected to be done through M&A deals by special-purpose acquisition companies (SPACs).

We could see a similar trend in neighboring IPO markets in Hong Kong and Shanghai, as global brands such as Prada and Samsonite and China`s gigantic life insurance companies prepare to kick off their IPO. This heated trend has made financial authorities speed up drafting specific guidelines so that monitoring institutions can properly handle firms accused of overpricing and control drastic price fluctuation. Detailed plans will be out soon.

Kiyeon Lee

(kiyeon.m.lee@gmail.com)

Financial Consumer Protection Act To Be Pushed Forward

Establishing financial infrastructure to protect consumers and make them investment-savvy has been pointed out as a vital thing-to-do for years. Improving consumer financial protection is believed to result in bolstering competitiveness of our financial industry. On January 12th, the Financial Services Commission announced that they would propel the plan to launch a new law this year regarding consumer financial protection.

Many cases in the past such as KIKO(Knock-in, Knock-out) have raised the awareness of importance on consumer protection. Along with this trend, advanced countries are proposing new systems in an attempt to strengthen their consumer financial protection. For instance, in the summer of 2010 the United States authorized the creation of a Consumer Financial Protection Bureau to safeguard consumer interests in many financial markets. A professional in the industry said that Bureau, an independent institute within Federal Reserve System, does also have broad latitude to undertake research related to consumer finance and financial literacy.

South Korea plans to put a system on par with developed countries such as the United States and the United Kingdom. Under the current regulations of each financial sector, the needs to protect consumers’ financial rights are hard to be satisfied. Different policies are applied in similar financial products and even sales regulations don’t exist in a few financial sectors. When it comes to Cash Management Account (CMA), for example, several sales regulations including Product Guidance and customized recommendation of products based on customer’s situation are imposed, while regarding similar products such regulations are not forced upon. That is, our financial system and services still lack in providing sufficient advice and information on financial products, which poses a lot of risks.

With surging concerns about consumers’ financial decision making, the plan aims to merge scattered but related systems –sales regulations, dispute mediation, financial education, etc- into a single comprehensive law with intent to secure coherent execution of protecting consumers. Experts argue that if regulation is to be beneficial, it must be tailored to specific products or sales activities not to the individual financial areas, and must be accompanied by research to measure the effectiveness of regulatory interventions. “Same regulations on the same function” system should be created considering consumers’ perspective.

To be specific, regardless of sectors, common sales regulations would be applied to similar kinds of financial products. The regulations are as follows: obligation to offer explanations on products, obligation to recommend suitable products based on the understanding of customers, control on promotion activities, ban on concluding binding contract and so forth. Yet, due to varying risks and characteristics of each financial product, details would differ from one another. For investment, products explanation on riskiness; for savings, explanation on interest rates and cancellation fee; and for securing products, information on insurance fee and reason to limit payment could be stressed more.

Furthermore, stricter policies would be carried out when financial institutions violate sales regulations. Existent laws lack rules on penalty and the amount of fee is judged to be relatively small. So once the consumer financial protection law passes, the government will be able to levy larger fee on a financial body that breaks the law. Also more efficient coordination measures would be devised in case consumers suffer damage in financial markets and become engaged in legal disputes. Lastly, the FSC is putting an effort to install informing systems, which help empower consumers with instructions they need to make financial decisions that are best for them and their families. Financial education system is expected to be settled in legislation in a long run.

Owing to the ever-widening set of financial options from an expanding set of firms and sometimes overwhelming amount of information, consumer finance has increasingly become a “do-it-yourself” activity. A growing number of consumers unintentionally came to assume a greater level of responsibility for their financial well-being. The new law which the FSC would bring to the National Assembly during the second half of this year would facilitate consumer financial protection, boosting the soundness of our financial system.

Kiyeon Lee

(kiyeon.m.lee@gmail.com)

Financial Stability Board’s strong outreach in Global Financial resilience is expected

Korea will be the first emerging economy to host the Financial Stability Board meeting on the 20th of October, 2010. In its third plenary meeting in Basel, Switzerland, the board decided to have the fourth event in Seoul before the G20 summit. Since Korea is also the chair country of upcoming G20 forum, a Financial Services Commission official said that Korea will be able to take the lead in reforming the financial framework.

 The Financial Stability Board (FSB) was established in April 2009 as the successor to the Financial Stability Forum (FSF). The FSF was founded in 1999 by the G7 Finance Ministers and Central Bank Governors to promote stability in the international financial system. Yet, among the leaders of G20 countries, there had been a broad consensus on stronger institutional ground with an expanded membership. And this movement resulted in the creation of FSB, an extended form of FSF. In an attempt to strengthen its effectiveness, financial authorities from the G20 nations, international financial institutions and several global standard setting bodies joined the FSB as the new members. The FSB performs the initiative role to develop and implement strong regulatory, supervisory and other policies in pursuit of financial stability. 

 As a member of FSB, Korea, especially the Bank of Korea and Financial Services Commission came to have an even more crucial role. FSC is involved in FSB Steering Committee which provides operational guidance and sets the agenda in general. So FSC has been trying to boost regular meetings among the FSB leaders and to continue active discussions. One of them was the financial reform conference called “Envisioning a New Financial System: An Emerging Market Perspective” which Dong-Soo Chin, the chairman of FSC held on Sep.2 in Seoul. The conference called attention to the increasing impact of emerging markets to the world economy, paving the way for more balanced participation of emerging countries in the global finance sector.

 

 

(Sep.2th Korea-FSB Financial Reform Conference, taken from Herald Media)

In fact, a decade ago, Korea felt the tremendous pain due to 1997 Asian Financial Crisis. In the wake of 1997 crisis, Korea had no choice but to strongly restructure corporate and financial field, dealing with long-neglected structural problems hidden behind rapid growth. Passing a time of economic revitalization and renewal, Korea learned valuable lessons and now, it is positioned as one of the competitive global economies. This unique experience enables Korea to serve as a potential broker that can bridge the gap between the emerging and the advanced markets.

 Sharing Korea’s pre-experience and know-how, particularly on financial regulation reform, perspectives of emerging economies can be brought into the global reform process. Many experts admit that Asia will be the engine of future global economic growth. In order to make the emerging markets less vulnerable to external shocks, global financial safety net is strongly required and in this sense, international standards will help them free from poor financial infrastructure.

 Currently, a lot of critical financial agenda are on the FSB table. For instance, to enhance transparency among market participants, prudent oversight of capital, liquidity, leverage and risk management is necessary. Along with Basel III, which delineates the rate of bank capital buffer, Bank Levy is considered a possible measure to increase banks’ crisis management capability, although the feasibility of the proposal still remains to be seen. Furthermore, efforts to reduce systemic risk generated by interconnectedness among financial institutions worldwide led to global coordination to devise measures that cover broader range of financial markets and instruments. Systemically important financial institutions will be strictly monitored and the size of “shadow banking” such as hedge funds and off-balance sheet entities will be shrunk. New international controlling standards on hedge funds will emerge and Central Counter Parties will be installed for over-the-counter (OTC) derivatives. In addition, more standardized forms of OTC products will be used and regulation on credit rating agencies will be intensified. 

                                                                                               (Picture from the Korea Times)

The FSB will take up a vital role of making these regulatory reform recommendations to the G20 summit. Once a certain regulatory reform is approved and adopted through the Financial Stability Board and G20 forum, those international standards are to be implemented by each country. Throughout this highly critical process, Korea is anticipated to undertake a number of initiatives to assess each regulation across sectors, identify regulatory gaps and examine related issues, and reflect emerging Asian market perspective. Gearing up for the G20 summit, FSB activities are an important step in facilitating G20 reform agenda. Everyone hopes to see successful outcome from the impending FSB meeting in Seoul.

Lee, Ki Yeon (kiyeon.m.lee@gmail.com)

Privatization of Woori Finance has just started

On July 30th., a long-awaited plan was finalized to privatize Woori Financial Group, South Korea’s second-biggest financial services provider by assets. The Public Fund Oversight Committee, which oversees public fund management, announced the road map to sell a 57 stake owned by the government in Woori Finance Holdings through a sale or a merger. The deal is expected to close by December 2010.

Background

Currently, the state-run Korea Deposit Insurance Corporation (KDIC) owns a 57-percent stake in Woori Finance, which is valued at 6.84 trillion won or $5.77 billion as of end-June, 2010. In the aftermath of the Asian financial crisis, the government injected public funds worth 12.8 trillion won to bail out Woori Bank and several financial firms that later consolidated into the first financial holding company in Korea in April 2001. In an attempt to recoup public money, the KDIC has gradually sold its stake along with four block sales between September 2004 and April 2010.

The government has emphasized its commitment to privatization of Woori Finance with an aim to redeem taxpayers’ money used to rescue the group from the 1997 financial woe. Considering that about 10 years has passed since the injection of the public funds, the privatization of Woori Finance has been a task that should be promptly headed forward. Several delays in the announcement of the privatization plan have sparked concerns among banks and market participants.

 Clearing those concerns, the privatization plan was finally announced and government officials reaffirmed that the architecture of privatization will be left up to the market.

                (July 30th Press Conference)

Sales Process

Woori Financial Holdings is the 2nd largest financial company by asset with 10 subsidiaries including Woori bank and Woori Investment & Securities. The government has decided to proceed with the sale of two of Woori’s subsidiaries, Kyongnam or Kwangju banks simultaneously with the sale of the holding company. There has not been much synergy between the two subsidiary banks and the holding company since their electronic system has not been fully integrated with the other subsidiaries and each of them has served different clients respectively; therefore, selling the two local banks separately from the holding company is not problematic. It helps to reduce the size of a potential sale, accelerating the privatization.

 Although the government also considered selling Woori Investment & Securities in the same way above, Woori Investment & Securities will be sold along with the financial group in order to maximize the sales value. It is the country’s top brokerage manager responsible for the Initial Public Offerings, M&A advisory, and debt financing, generating considerable synergy effect with the holding company and other subsidiaries. It is highly likely that selling it separately would undermine the overall value of the Woori Group. To reduce the risk, the government determined not to do it. 

 In terms of the sales in general, four ways are on the table: separate sale of stocks, block sale, simple M&A and merging after partial sale. Min Sang-kee, co-chairman of the Public Fund Oversight Committee emphasized that in terms of sales architecture, any type of architectures that potential bidders may propose can be accepted. As Woori’s ownership is to be handed over to the private sector, the government is less likely to intervene in the management of the group. Then, cancellation of MOU with KDIC at an early stage will come true.

 The overall move is expected to encourage a number of domestic and foreign investors to join the competitive bidding, which many believe will help develop Korea’s banking industry. Government officials asserted that there will be no discrimination between foreign and domestic investors as long as they meet basic legal requirements. Based on the Financial Holding Company Act, fair, flexible, and transparent process would attract many potential bidders.

 Three advisory firms – two local firms and one foreign firm – will be selected to manage the sales procedure and shortlist preferred bidders by the end of this year. Among candidates, the final winner will be chosen through a two-round inspection open to Korean and foreign companies.

 In September, a lead manager for the sales will be chosen. A professional in industry claimed that, as this plan unveiled, overseas Investment Bank such as Goldman Sachs, Merrill Lynch, UBS and Deutsche Bank came to have interest in the position as well as domestic companies due to the enormous size of M&A. To get a good score on the “League Tables”, where IBs are classified by the volume of deals they have worked on, many might want to take this lead manager position.

The next step to evaluate bidders and choose a preferred bidder among candidates can be a long way to go.

Conclusion

 For a long time, the Korean government has been the primary investor in Woori Financial through the KDIC. This long-anticipated project is likely to trigger a realignment of the domestic financial sector. The deal would reshape the landscape of the banking industry.

Lee, Ki Yeon   (kiyeon.m.lee@gmail.com)