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The FSB Conference of Financial Reform in Seoul

The importance of FSB conference in Seoul

It is significant that the FSB conference was held in Seoul, because it is the first meeting in the emerging country. Korea dealt with Asian financial crisis in 1997, and managed the global financial crisis in 2008 efficiently. In addition, member states expect that Korea will have the leading role in the financial reform as a chairman country of G20.

Topics come up for discussion by Korea

Korea selected items for an agenda mainly from the perspective of the chair position of G20 and emerging country. As chair position of G20, Korea focused on the agreement of several topics related to the financial regulation among member states. Furthermore, as an emerging country, Korea poses a question regarding the importance of global safety net.

There are several issues suggested by Korea. The global SIFI would be separated from the domestic SIFI, leading to the heavy regulation. In order to increase the participation of emerging states, it is necessary to share the information between the home and host country. In terms of the establishment of IFRS and the dependence on the credit agency, the opinion of emerging states should be included.

The results of the FSB conference

1.      The regulation on the asset of banking industry

After the global financial crisis in 2008, the banking industry would extensively recover. Thus, the liquidity risks should be prepared. At Sep. 12, each country reached to the agreement of calibration and phase-in arrangement in BCBS meeting. The asset regulation will be implemented in 2013, and the degree of regulation will be gradually increased until 2018.

 

2.      The heavy regulation on SIFI

The real economy in the large number of countries is affected by SIFI. This is why the liquidation of the huge SIFI is difficult. Instead of that the public funds will be provided. This might lead to the moral hazard in financial sector. Thus, the resolution would be the higher loss absorption capacity. It should be implemented in global SIFI first. Due to the huge impact on many institutes and even whole country, it is essential for SIFI to have the capacity of liquidation. On top of that, other regulation should concentrate on lower the possibility of failure base on the intensity of SIFI supervision. Peer review council will confirm the consistency and effectiveness in SIFI supervision.  

 

3.      The standardization and transparency of derivatives traded through over-the-counter

The weak regulation on OTC derivative market leads to the severe financial crisis in 2008. The central clearing with standardized derivatives is encouraged. In addition, the regulation on the central counterparties will be increased.

 

4.      The decrease in the dependence on the credit agencies

The FSB approved the principles regarding the decrease in the dependence on credit agencies. Accordingly, legal codes should not be based on the rating given by credit agencies. The credit rating conducted by banks, institutional investors and market participants will be encouraged.

 

5.      FSB outreach program

The FSB encourage the participation of member states and non-member states by setting up the regional groups. This leads to the active implementation of global regulation. The outreach program will be specified with extra discussion.

The summary and expected effect of financial reform in FSB conference

The financial reform will contribute to the recovery of financial system. The regulation on the soundness of banking industry will result in the higher loss absorption capacity with superior financial structure. The heavy supervision on SIFI will lead to decrease the problems of moral hazard caused by too-big-to-fail. The transparency in the OTC derivative market, which is one of the causes of financial crisis, will be improved. Lastly, the real economy will have the positive impact regarding sustainable growth, thanks to the stability in financial system.

Min Gyo Jeong (misomk@naver.com)

Efforts to enhance outside directors system

  After the global financial crisis, the importance of corporate governance in financial companies has been growing bigger and bigger and the issue began to be discussed at the global level. With this global trend, Korean banks’ outside director system was pointed out with a few flaws. So let’s look at the issue in detail.

  Three main problems : Independence, Clubby Boards, Lack of responsibility and expertise

  When it comes to problems of Korean banks’ outside director system, the issues may be summarized as follows. First, outside directors’ independence, second, the so-called “clubby board” problem, third, lack of outside directors’ responsibility and speciality.

  Based on the understanding of improving outside directors’ management, the Korea Federation of Banks (KFB) organized a T/F team to provide best practice guidelines for banks’ corporate governance. The guidelines follow the internationally accepted ‘Comply or Explain’ rule, while they strengthen requirements of outside directors.

  The best practice guidelines (‘guidelines’) are to enhance accountability, transparency and soundness of banks (banks holding companies) management by improving independence and expertise of outside directors in banks and banks holding companies. The guidelines are applied to banks and banks holding companies (except KDB holding companies) and some special banks (only KDB).

  In order to prevent outside directors from forging corruptive relationship with the management, one fifth of outside directors should be replaced every year.(Art 12) It may be desirable for an outside director to serve as a BOD chairman to enhance independence of outside directors; however, in terms of the effective management of the board, it is also desirable for a bank CEO (or CEO of a banking holding company) to chair the board.

  In this regard, when a bank CEO(or CEO of a banking holding company) serves a board chairman, the guidelines recommend that a senior outside director be appointed as a means of holding the management in check. It should be disclosed that a bank CEO serves as a board chairman.

  Also, the guidelines require stricter qualifications for outside directors to prevent conflicts of interest and to enhance expertise of outside directors.

 Overseas cases : OECD, Ireland, Germany, London, the U.S.

  1. OECD – Outside director with cross-dictatorship disclose the fact
  2. Ireland – Cross-dictatorships are forbidden for all directors by law since the financial crirsis
  3. Germany – The board is separated into a management board and a supervisory board. The chairmanship of the two boards shall not be served by a single person at the same time.
  4. London – One of independent non-executive directors is appointed as a senior independent director.
  5. U.S – Sele-evaluation should be conducted annually. 

 Banks (banks holding companies) have to select the BOD chairman every year and principally it doesn’t allow the BOD chairman being concurrently elected as a bank CEO (or CEO of a banking holding company) since a general stockholders meeting in 2010. Moreover, we are expecting flexibility, expertise and transparency with enforcement of outside directors’ terms and qualifications. However, we need to fix our eyes on how it works under the new best practice through markets and media. Thus, we finally look forward to breaking the code of so-called ‘non-executive director’ and getting a title “credible management” by protecting company’s centered powers and abuse like cases of success in the U.S.

by Min Young Kim (min4609@naver.com)

Weekly e-Briefing 5. Korea’s role in the FSB

Korea’s role in the FSB

A special guest for FSC Weekly e-Briefing, Mr. Chin, Dong-Soo, the Chairman of Korea’s Financial Services Commission and the representative of Korea’s Financial Stability Board told Korea has been selected as the host of FSB Plenary Meeting in this October.
Following issues will  be deliberated at the FSB Plenary Meeting in Korea before final decisions are made by the leaders at the G-20 Summit in Seoul;1) Improving Basel committee regulations on capital liquidity 2) Reducing moral hazard of systematically important financial institution 3) Assessing improvement of compensation practices of financial institutions 4) Discussing future plans and schedules and monitoring the progress on the implementing international standards and strengthening financial cooperation.

As the chair of the G-20 Summit as well as a member of the FSB, Korea will make every efforts to play a mojor role in achieving consensus on financial reforms and setting improved international standards. See more from http://fsc.go.kr/eng/index.jsp

Press Release_ Febraury 1st

Domestic Banks’ Preliminary SBL Ratios

Since August 2009, Korea’s financial authorities have been encouraging domestic banks to lower their average SBL (substandard or below loans) target ratio to 1% by end-December 2009. As of end-December 2009, domestic banks’ SBL ratios averaged 0.99% to meet their target ratios, excluding the KRW3.0 trillion in debt obligations that arose in December from the unexpected workout of the Kumho Group affiliates and a number of shipbuilders. CLICK HERE