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K-IFRS is taking root

When Korea accepted IMF bail-out package in 1997 to overcome severe financial crisis, Korea carried out a large scale of intense restructuring. As a part of reforming, Korea Generally Accepted Accounting Principles (K-GAAP) was made out to enhance accounting creditability. K-GAAP, however, was not enough to coincide with international standard, so Korean companies used to be derided with backwardness of accounting standards. As a result, Korea International Financial Reporting Standards (K-IFRS) was phased in from 2009, and the year 2011 was the first year for listed companies and financial companies to write the financial reports in accordance with K-IFRS, as a mandatory requirement.

Accordingly, Financial Supervisory Services (FSS) conducted to examine 2011 financial reports. Total 1,600 financial reports which consist of 655 listed on Korean Composite Stock Price Index (KOSPI) and 945 listed on Korea Securities Dealers Automated Quotation (KOSDAQ) were examined with 121 items.

The result of assessment is meant to be satisfactory. The major incompleteness which can affect users to misunderstand accounting information is not found. Compared to the first quarterly report in 2011 when the major incompleteness was found in 111 reports, this result deserves to be admirable. As a matter of fact, average number of errors per company committed was found only 4.5. The number of financial reports without any errors was as many as 288. The following table is a summary of the examination result.

Section

Market

Volume of Capital (Billion KRW)

KOSPI

KOSDAQ

Less than 100

100-500

500-2000

Over 2000

Average error/company

3.8

5.0

5.0

4.3

4.1

3.1

Total No. of company

655

945

671

646

183

100

According to the table, the smaller sized companies tend to make more errors than the bigger sized companies. Therefore, FSS will keep giving advices and instruction for those imperfect companies continuously. To modify the found errors, FSS is noticing privately for the companies to encourage modifying their own record.

Furthermore, there is an increasing trend that even not listed companies voluntarily make financial reports in conformity with K-IFRS voluntarily. Generally, adopting K-IFRS from 2011 is mandatory only for the listed companies and financial companies. However, despite of needlessness, 1,142 unlisted companies wrote their financial reports with using K-IFRS in 2011, and additional 261 companies are prospected to adopt K-IFRS in 2012. The major reasons for such trends to adopt K-IFRS voluntarily, notwithstanding the high converting cost, are the accordance of accounting standard between the holding company and the subsidiary company, preparation for the list, enhancing of accounting transparency and improvement of company image.

Korean financial authorities have made endeavours to achieve the competitiveness of accounting system. These endeavours are resulting in the improvement of accounting creditability of Korean companies. Also, it is positive sign for many unlisted companies to adopt K-IFRS spontaneously. At this rate, it is matter of time for IFRS to become established in Korea.

Chaehack Suh (chaeahck.suh@gmail.com)

Seoul hosts a major international pension conference in 2013


In 28-30 October 2013, Seoul will host the annual general meeting of the International Organisation of Pension Supervisors (IOPS) and the OECD/IOPS Global Forum on Private Pensions. The decision was made at the meeting of the IOPS Executive and Technical Committees, held in 5-6 June 2012.

For those who are not well upon the IOPS, the IOPS is a Paris-based international body of private pension supervisors with membership of 66 countries. The Organisation was established in July 2004, following the dissolution of the International Network of Pension Regulators (INPRS), for the need of more formal and independent organization. This international pension organisation’s major goal is to improve the supervision of private pension systems, and its specific aims are; 1) setting the international standards on pension supervision, 2) promoting cooperation and exchanges of relevant pension bodies, 3) providing a forum for private pension policy dialogue and information exchange, 4) working with relevant international bodies, e.g. improving statistical collection and analysis, and 5) distributing, communicating, and collecting such information.

Since its inception, the IOPS has been working closely with OECD with regards to private pension systems. The two organizations have annually held the joint Global Forum on Private Pensions since 2005. As for this year’s Forum, it is scheduled to be held in 23-24 October in Santiago, Chile under the theme of “Making Funded Pensions Work.”

Against the backdrop of growing pension market in Korea, and increasing challenges to private pensions around the world – for which the OECD recommended countries to seek later retirement and extend the coverage of private pensions (Pensions Outlook, June 2012) – the Financial Service Commission is looking forward to promote international exchanges of private pension issues and experiences, and contribute to improvement of pensions system by hosting the IOPS conferences in Seoul.

Expanding Financial Capability of Young Entrepreneurs and Start-up Businesses

 Since the end of 2011, the Financial Services Commission (FSC) has been monitoring the performances of small and medium enterprises (SME), and supply and demand of funds available for them. The purpose of monitoring was to avoid economic shock which is likely aftermath of European financial crisis.

On the basis of the monitoring, in February this year, the FSC designed a policy implementation seeking to expand financial capability of young entrepreneurs and start-up businesses. It is because the FSC now recognizes the significant role of young entrepreneurs whose participation is expected to invigorate the economy as a whole, which ultimately leads to sustainable economic development. However, young generation has been hesitant to start up their own businesses as having been constrained by a lack of financial capabilities along with enormous fear of possible bankruptcies.

Taking these limitations into account, the FSC proposes policies to innovate financial environment which will offer favorable condition for young entrepreneurs planning to start their own businesses. To meet this ends, the National Bank Association will establish a non-profit organization called ‘Loans for Supporting Young Entrepreneurs’, and 0.5 trillion Korean Won will be injected.

 A greater extent of flexibility will be introduced so as to grant more loans to young entrepreneurs. Maximum amount of loan available for an individual will be adjusted from 30 million Korean Won to 50 million Korean Won, for the purpose of easing financial constraints faced by young entrepreneurs. In addition, the loan will be granted regardless of profitability of the business since the purpose of this new scheme is to support for start-up business at their initial phases. With this increased flexibility, young entrepreneurs would find it easier to finance setting-up costs for new businesses.

 The benefits of such innovation will not be limited to young entrepreneurs, but rather be shared multilaterally by various economic participants. Individuals other than entrepreneurs themselves will take advantage over increased employment opportunities derived from improvement in business performances. This implies that expanding financial capability of young entrepreneurs and start-up businesses will generate positive spill-over effects, which is to contribute to expand the economic capacity in Korea.

Su Jee An (pinkcat375@hotmail.com)

2011-2013 Plan Set for the Creation and Development of Financial Hubs

The Financial Services Commission confirmed a basic plan of the creation and development of financial hubs at the 15th regular meeting after deliberation by the Financial Hubs Establishment Committee. The plan suggests fundamental direction of policies on the creation and development of financial hubs for the next three years (2011-2013), aiming at gaining position as a global leader of the financial market. The basic plan 2011-2013 includes the following matters: promotion of financial market, enhancement of competitiveness in financial industry, improvement of financial business infrastructure, and acceleration of creating and developing financial hubs.

 

(1) Promotion of Financial Market

There will be two main points in promoting the financial market: the establishment of Investment Bank and introduction of Hedge Fund. The finance market is going to be restructured after these changes take place. It is expected that the establishment of Investment Bank will reinforce the overall corporate financing capacity by issuing securities and getting involved in mergers and acquisitions. Also, different strategies of Hedge Fund will meet various investment demands in the market and provide a base for more sophisticated finance industry. Moreover, to secure stability and transparency of the capital market, unfair trades are going to be regulated more strictly by the government while disclosure of reliable information will be encouraged.

 

 (2) Enhancement of Financial Industry Competitiveness

The first step to gain more competitiveness in financial industry is to set appropriate plan for each category of businesses. Thus, Korean government has been observing both internal and external changes in financial field and laid out a scheme for each business.

Bank l  More capacity in new financial services including PB and retirement pension

l  Increased risk management skill regarding the global finance market

Financial

Investment

l  Diversification of types of stocks issued through promoting Investment Banks and introducing Hedge Funds
Insurance l  Secure various types of products and sales channels

l  Obligation of public notification or descriptions

Savings Bank l  Consolidate its position as microfinance mediation institution

 At the same time, there will be increased financial services for new industries to support the growth of new businesses. Primary collateral bond obligation (P-CBO) and new types of funds related to newly emerging industries are going to be issued, and venture investment from the private sector will be encouraged.

(3) Improvement of Financial Business Infrastructure

To form more effective financial infrastructure, a set of financial supervisory systems will be amended to correspond with the global standard such as FSB’s regulatory and supervisory policies.

Bank Amendment of laws to promote bank capital liquidity and implement Basel Ⅲ
Insurance Renovation of risk management system by operating RBC
Over-the-counter derivatives Introducing CCP for over-the-counter transaction transparency
Accounting system Efforts for successful settlement of IFRS
Credit Assessment Building own credit assessment system to reduce dependency on external credit ranking
SIFI Supplement of relevant systems for higher loss-absorbing capacity of SIFIs

 In addition, as a plan to improve the structure of financial corporation governance, Act on the Structural Improvement of the Financial Corporations will be enacted to improve the supervisory function and independency of the outside directors and auditing committees. Internal control and risk management capacity are expected to be strengthened as a result.

Consumer Protection Act, another law to be established, is going to regulate imperfect sales or indiscreet sales of similar types of financial instruments. In addition, the introducing differential premium system is under discussion for more efficient operation of deposit insurance.

The government is also looking forward to raise more qualified financial experts through improving the education quality of finance MBA courses and fostering professionalism of the workers in the field.

(4) Acceleration of Creating and Developing Financial Hubs

Business environment will be improved at an accelerating pace to successfully promote Seoul and Busan as major international financial hubs in Northeast Asia. Especially, Yeouido, located in Seoul, is going to the major financial center with an array of important financial institutes standing close together. Based on its reputation as a major marine transport and distribution center in the Northeast Asia, Busan will be developed as a specialized city for marine finance and derivatives. Moreover, the authorities concerned are putting steady effort to attract global financial institutions and to provide assistance to Korean firms that are seeking opportunities for oversea expansion. The Korean government will strengthen cooperation with China, India, East Asia and the Central Asia countries to make it easier for domestic Korean firms to expand into those countries. In detail, the government has been building a database about the financial systems in those countries and is trying to form a regional expert pool to provide advice to help financial companies operate successfully in international market. Job Fairs are planned to be held for more aggressive public relations, and there will be continuous efforts to promote South Korea as an international financial hub to attract as many foreign investors and financial institutions that are unaware of its potential. Improvement of overall business environment such as changes for better taxation and legal services will be followed as well.

By providing a friendlier business environment for both domestic and foreign companies, South Korea is looking forward to successful creation of financial hubs. Setting plans for the development of financial hubs and implementing those plans will ultimately lay the cornerstone for the economic growth of South Korea as a whole, and it would be a great opportunity to let the international society get aware of the nation’s potential to become an Asia’s financial leader.

 

 

 Kim, Yoon-joo (yoonjoo.kim912@gmail.com)

S. Korea’s Financial Market more Health and Soundness

The volatility of domestic financial market has been unstable since this August due to uneasiness around European sovereign debt crisis and its possible contagion to Italy and heightened uncertainty related to the raising of the US government debt ceiling.

However favorable financial soundness and foreign exchange reserve suggest that such impact on Korea’s economy will be limited. Compared with Asian financial crisis in 1997 and global financial crisis in 2008, our ability to manage risks has been improved than ever usual.

Since the global financial crisis in 2008, Financial Services Commission (FSC) and Financial Supervisory Service (FSS) have made various efforts to enhance the soundness in foreign and bank sector.

The government strengthened regulations of foreign exchange soundness in January, 2010 (1st), and in July, 2010 (2nd). FSC made new standards for FX liquidity risk management and tightened regulations to increase mid- to long- term financing in foreign loan portfolios. In addition, the financial institutions are required to meet minimum holdings of safe FX assets requirement.

The government introduced (’10 Oct) and strengthened (’11 Jul) the regulation of forward exchange position. On July, 2011, the ceiling on the FX forward position by local branches of foreign banks was cut to 200 percent of their capital, while the ceiling for domestic banks to 40 percent.

Also financial regulators have adopted so-called ‘Bank Tax’ in August, 2011. The government began imposing a bank levy of 0.2 percent on short-term non-deposit liabilities with a maturity of less than one year. Borrowing with a maturity of one to three years is facing a 0.2 percent tax rate, while the rate for liabilities that mature in three to five years and more than five years is 0.05 percent and 0.02 percent. A bank levy is regarded as a tool to protect a nation’s financial system from excessive capital flows by imposing taxes on debts held by banks.

In order to restrain foreign loans from growing rapidly, the government banned banks and other financial institutions from investing in foreign-currency denominated bonds (‘Kimchi Bonds’) that are used for conversion into local currency. Kimchi bonds are supposed to help companies finance demand for foreign currency such as in contract settlements, an increasing number of firms haven abusing the bonds and using the proceeds to meet local currency needs, raising concerns over exchange-rate risks. This restriction is to help curb foreign currency loans growth which is not essential and urgent.

In addition the government reformed the regulation on bank’s loan to deposit ratio. The planned changes in the regulation are applied to commercial banks in principle having won-denominated loans in excess of KRW 2.0 trillion. The target for banks’ loan to deposit ratio is to be set at 100 percent with a grace period until June, 2012 whereupon banks will be required to maintain a ratio of under 100 percent from July, 2012.

With these governmental actions, our ability to manage risks and soundness in foreign and bank sector have been improved than just before the global financial crisis in 2008.

In foreign sector, total foreign debt to short-term foreign debt ratio has been significantly decreased from 52 percent in September, 2008 to 38 percent in March, 2011.

(Unit: $100 million)

 

2007.12

2008.09 (A)

2011.03 (B)

Variation (B-A)

          Total foreign debt (a)

3,334

3,651

3,819

168

Short-term foreign debt (b)

1,603

1,896

1,467

429

Short-term foreign debt ratio (b/a)

48.1%

51.9%

38.4%

13.5%

Foreign Exchange Reserve

2,622

2,397

2,986

589

Short-term foreign debt/Foreign Exchange reserve

61.1%

79.1%

49.1%

30.0%

Foreign debt in bank sector

1,929

2,195

1,919

276

Domestic banks

1,090

1,221

1,155

66

Short-term debt

546

655

485

170

(Ratio)

(50.1%)

(53.6%)

(42.0%)

(11.6%)

Local branches of foreign banks

839

974

764

210

Short-term debt

794

939

666

273

(Ratio)

(94.5%)

(96.4%)

(87.2%)

(9.2%)

(Data from FSC)

In bank sector, within the loan to deposit ratio, banks have sustained under 100 percent which is the standard regulation. Moreover, BIS ratio has been significantly improved. Within the foreign currency liquidity ratio, it has been in excess of 85 percent which is the guidance.

 

Before the ’08 crisis (2008.08)

2011.06

Variation

Loan to deposit ratio (except for CD)

124.0%

97.8%

26.2%

BIS ratio

11.36%1)

14.34%2)

+2.98%

Tangible common equity ratio

8.50%1)

11.28%2)

+2.78%

Foreign currency liquidity ratio

102.7%3)

100.3%

2.4%

1)       ’08.6,        2) ’11.3,      3)’07.12

 (Data from FSC)

It is considered that current shaky sentiment of South Korea’s financial market came more from significant downside risks to the economic outlook and sovereign risks of other financial markets such as US and Europe than domestic factors. Moreover, domestic financial market has become more resistant to external shocks in various indicators. It reflects efforts made to enhance soundness of the financial market.

Yong-Heui Lee (leeyongheui@gmail.com)

The Current Status of Sunshine Loan Program and Smile Microcredit Program

The disastrous financial crisis that swept the world economy through 2007~2008 had a detrimental effect on household economy,especially on households with low or middle income level. It became increasingly difficult to get a loan from financial firms that tightened up to stabilize their financial status. The walls for loan getting higher day by day, slowdown in consumption was evident.

The Korean government carried out set of measures aimed at alleviating the situation. It introduced various finance programs including Sunshine Loan and Smile Microcredit. This edition is intended to give a comprehensive analysis of the two finance programs Sunshine Loan and Smile Microcredit through two separate articles that explains and analyzes ①the characteristics and current status of the programs and ②the government’s amendment plans for the programs.

Smile Microcredit Logo
Smile Microcredit Logo
Sunshine Loan Logo
Sunshine Loan Logo

The Sunshine Loan program was initiated in July, 2010. The numerical goal of the program was, for five years, to form a 2,000-billion-won guarantee fund jointly – the government with financial firms – and to lend out 1 trillion won to people at the interest rate of 11~14%. Since the beginning of the program to the end of this year’s June, total of 283.1 billion won had been formed as the guarantee fund. The source of the fund includes central government, local governments and financial firms (Nonghyup, Suhyup, Saemaeul Bank, Shinhyup and Savings Banks). A total of 183,144 people were provided with 1700 billion won of loan. Also,
big proportion of the people benefiting from this program is of credit levels 6 and 7 (These people make up 58 percent of the total loan).

The increase in amount of loans taken out is slowing down after a sharp increase in early phase of the program as the evaluation for redemption ability became stricter (October, 2010). The daily average amount of loan was 21.2 billion won between
July, 2010 and September, 2010 while it was 3.6 billion won between October, 2010 and June, 2011. If this trend were to continue, about 1750 billion won will be lent out, meaning that the actual amount of loan will fall behind the annual goal of 2000 billion won. It would be necessary to arrange plans to invigorate loan take-outs and call for collaboration between offices.

Smile Microcredit program is a quite different program. Its goal is to provide people with chances to get a loan for establishing business. For 10 years, 2200 billion won will be raised from donations and dormant deposits to lend out loans with the interest rate of 2~4.5%. Smile Microcredit program is carried out in various places including companies, banks and local foundations. At the end of June, 2011, a total of 1,000 million won had been gathered. Since January, 2010 –the month this program was initiated- until June, 2011, a total of 263.5 billion won had been lent to 28,728 people. Similar to Sunshine Loan program, people of relatively low credit levels were main beneficiaries of this program. 62.5% of the people who took out loan with the help of the program were of credit levels 7 and 8. Having witnessed 148.1 billion won being lent in the first half of the year, it is estimated this year that the actual amount of loan will outrun the annual goal, which is 200 billion won. The default rate is stagnant near the number 2.5 but is expected to increase.

The program has been successful in that people could have widened chances of getting loans. Cases of successful establishment are being reported. Yet, the fact that collective measures between the local community and loan program were not sufficient needs amendment. Also, as the main purpose of the program is to help people establish a concrete economic basis (i.e. business or ventures), there needs to be additional measures – such as business consulting – to facilitate the program in Korean society.

In the next article, there will be detailed accounts of the government’s plans for efficiently operating Sunshine Loan program and Smile Microcredit program.