Financial Services Commission has launched a Task force to follow up with G20 agreement

The Financial Services Commission (FSC) had launched a Task Force (T/F) for taking follow-up measures to implement details of agreement reached at the G20 Seoul Summit. The T/F is composed of the Bank of Korea (BOK), Financial Supervisory Service (FSS), Korea Deposit Insurance Corporation (KDIC) and academic experts. Its mission is to lay groundwork to implement what had been agreed at the Seoul summit and deliberate counter measures on financial issues world widely debated which would be discussed at next G20 Summits.

The T/F is mainly focused on the following three topics: (1) policies on dealing with Systemically Important Financial Institution (SIFI); (2) introducing Basel III banking service and liquidity regulation; and (3) building infrastructure for OTC derivatives market.

1) Regulating SIFI

At the G20 Seoul summit, it had been deliberated how to strengthen SIFIs’ ability to absorb financial loss and impact by imposing capital surcharge or contingent capital on SIFIs. In addition, the G20 leaders agreed that each government is allowed to employ their own reinforced policies to control SIFI.

Seoul would do examine additional and reinforced regulations on soundness of SIFI in line with Basel III and international movement on the issue. Improving clearing measures could also be included into important issues. legal factors that can be barrier on international cooperation on clearing procedures might be reformed by the task force.

2) Introducing Basel III regulation

G20 summit agreement says that G20 should approve and fully fulfill the new regulations on banking service (Basel III) till 2018. The authorities strictly ought to reinforce capital adequacy ratio than before. In the past, the banks just had to make capital adequacy ratio above 8%. however, under the new system, the banks should consider 2 more factors such as Tier I capital  ratio and common shares capital ratio. Regulation on leverage and liquidity would be also introduced into the market.

<Table 1. Comparison Basel II to Basel III>

Basel II (Past) Basel III (officially certified by G20 Seoul Summit)
 

Capital adequacy ratio ≥ 8%

Capital adequacy ratio ≥ 8% (10.5%)*
Common shares capital ratio ≥ 4.5% (7%)*
Tier I capital ≥ 6% (8.5%)*
* capital conservation buffer  (2.5%) included

Source. Financial Services Commission (FSC)

 

Regarding to the G20 agreement, reforming regulation on banking service to introduce Basel III is considered by the taskforce. And to introduce contingent capital into market, the authorities are going to take into account movement of discussions on contingent capital in the world and examining change of the law to adapt it as well. To minimize negative impact from the new regulation, they are going to analyze how the new regulation would affect financial market.

3) Improving OTC derivatives market

G20 had agreed upon making over the counter derivatives standardized and all these financial products exchanged at central counterparty (CCP). In the discussion, It is recommended to report all over the counter derivatives to transaction information depository.

Korean financial authorities would push ahead with reforming the Financial Investment Service and Capital Markets Act. After settlement of legal ground, procedure to build infrastructure for CCP are going to be started. Infrastructure such as transaction information management system can be built by supplementing existing systems (derivative information system and FX network).

Future plan

The T/F will establish three divisions under the team until the end of January. In this phase, task force is able to draw the scheme for legislating importantly discussed issues. Furthermore, the team is going to set detail action plans to achieve legislation of issues especially regulating SIFI, introducing Basel III and CCP to June of 2011. Other issues except above three would be settled considering more discussions among countries. Task force has a plan to promote and finish legislation till the end of 2011 if there are not serious events or problems which will affect on above important issues.

In addition to legislation, the T/F would prepare to set governmental position on internationally crucial and important financial issues that would be deliberated especially in G20 France Summit.


Kyoungmin Kim

(k.kim@live.nl)

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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)

Impact of the sinking of Cheonan warship on Korean economy: Teleconference with global investors and foreign press

                                                                          <PhotographedYonhap News>

 

10o’clock in the morning, on May 27, in a hectic conference room of Financial Services Commission (FSC) building in Yeouido, Seoul, a worried Hongkong investor’s question filled the room through the speakerphone “Korean stock market is experiencing foreign capital outflows since North Korea became an alleged suspect in sinking of Cheonan warship by the experts and investigators, what do you expect of the future situation?

Kwon Hyouk-se, Vice Chairman of the FSC carefully answered “It is true that recently, the foreign capital outflowed from the stock market, however, the increased investment in Korean bond market clearly shows that geopolitical factors on Korea’s financial market have limited effect. The chance of massive capital outflow like we experienced in 2008 to be repeated is very slim.”

 

The FSC, the Financial Supervisory Service (FSS), the Ministry of Foreign Affairs and Trade (MOFAT), and the Bank of Korea (BoK) for the first time ever held a joint teleconference for foreign investors and press in order to explain the circumstances of Korean economy after the sinking of Cheonan warship.

An investor from Singapore asked “What will be the effect from sinking of Cheonan warship on Korea’s credit rating in the future?” Lee Jang-Yung, Senior Deputy Governor of FSS, replied “Moody’s recently raised the rating for Korea, however S&P still rates Korea at 2 levels lower than before the crisis. Considering it is at the same grade with Israel, it should be adjusted.” In fact right after the announcement of findings on Cheonan incident, Korea’s Credit Default Swap (CDS) premium rose to 172bp which is a much overestimated value. It is higher than those of other countries with similar credit rating (Czech, China and Slovakia) and even higher than those with risk of war (Israel and Thailand).

For questions about effects of the risk on economic fundamentals like investment and consumption, Vice Chairman Kwon confidently commented “It would be limited to short-term effect considering past cases.”

Questions about the outlook for power succession in North Korea and the possibility of military collision followed, Wi Sung-Lac, Special Representative of Korean Peninsula Peace Committee from MOFAT, replied “It is not easy to answer because we do not know the internal affairs of unstable North Korea politics however, we heard from our sources that certain procedures are taking place in order to succeed Kim Jong-Il’s power to his son. Considering unique North Korean system and their government structure, even after the succession, we expect there will not be a drastic change.” Mr. Wi also added “After the incident, the government has been trying to tighten up the securities with United States to restrain North Korean military actions, and we are confident in keeping a stable balance. Although we consider this incident as one of the most serious military threats over the years, we have managed more intense situations properly for decades with the help of international support. Military responses are not any consideration for Korea and we will be focusing on building up an international consensus to oppress North Korea from taking further provocations.”

An anonymous investor asked “What is the role of BoK in case of foreign currency liquidity deterioration?” Ahn Byung-chan, BoK’s International Department Director General, answered “recent sharp rise of exchange rate was a result of series of events solely from Southern Europe’s financial crisis to Cheonan incident, we consider options of approaching exchange rate volatility through smoothing operation which will help keeping exchange rate at limited changes.” He also added further details can not be disclosed at this time.

Vice Chairman Kwon referred to ‘Lex Column’ from May 25th on Financial Times and commented “This clearly shows the situation, current weakness of exchange rate for Korean won will support the performance of Samsung Electronics and Hyundai Motors who heavily reply on exports.” Almost 200 foreign reporters and investors around the globe took part in this teleconference meeting. Lee Jung-ho, foreign spokesperson for FSC, said “Given the fact that thirty or forty people usually attend regular teleconference meetings, this (joint) teleconference drew very high attention.” He continued “So many questions were asked that we had no choice but to limit questions by regions and investors.” Experts evaluated this teleconference was a very successful one and it was done in timely manner to give good clarification for foreign media rather than the usual short domestic press oriented briefings.