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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)

2012 Financial Policy Agenda

In 2011, it is considered that overall world financial market had been depressed. Still US financial market could not overcome the global economy crisis and even worth the world’s powerful economy groups such as EU and Japan had hard time during the year 2011. In the case of EU, serious financial problems of PIGS countries(Portugal, Ireland, Greece and Spain) and other EU countries have caused world financial market more un-stable and fluctuated. Japan which has strong economy had been in the middle of sequential disasters called Earthquake and Tsunami. It made the manufacturing industry based country not be able to produce and this also has provoked worldwide depression.

In this stagnated market, Korean financial market has been affected from the depression and Korean authorities consequently struggled for overcoming un-stable market situation. However thanks to those efforts and global economic cooperation, Korean financial market is considered to be more stronger than before the crisis.

But considering that the series of depressions is ongoing situation currently, it is possible that the market that seems stable right now can be worse on 2012 and many Korean press has pointed out several factors such as growing number of low-income households and SME suffered from financial problems that could make the market be in the trouble.

To fix and support the current Korean economy situation, Financial Services Commission(FSC) has established 2012 financial policy agenda for Korean financial market on 6th of January, 2012. The FSC set three main financial policy goals with six Key objectives for 2012 as follows:

Reinvigorate entrepreneurship and business growth
1) Create a financial services environment for the growth of start-up companies and SMEs

2) Develop financial services for sustainable growth

Let benefits of financial services trickle down to low-income households
1) Support expansion of microfinance programs for low-income households

2) Promote social contribution of financial institutions and stronger protection for financial consumers

Better prepared for crises
1) Take preemptive actions to secure market stability

2) Make Korea’s financial system further advanced

Source. FSC

 

In this article, Policy goals ‘ Reinvigorate entrepreneurship and business growth’ and ‘ Let benefits of financial services trickle down to low-income households’ would be specifically covered.

 

 

Create a financial services environment for the growth of start-up companies and SMEs

 

In Korea, it is considered that establishing and managing new enterprises and SMEs are too risk-taking activities. This happens due to application of financial companies’ strict criteria such as Joint loan guarantees’ in offering loan service to them. The market custom to new enterprises and SMEs leads sequent social problems and the most serious problem is the youth un-employment. The youth mostly graduated University moves to get a job from conglomerates which is stable instead of choosing SMEs or Starting up their new business because nobody wants to take that much risk.

 

To better this situation, the FSC would like to support the growth of start-up companies and SMEs by suggesting and adapting following policies.

 

Support start-up businesses: Financial support plus drop burdens

 

The biggest burden for people who are willing to staring up new business is the practice called ‘Joint loan guarantees’. The commission will abolish this practice for individually starting-up business. For other types of starting-up companies, the authority will apply the practice in different way for making people feel less burden from joint loan guarantees. Along with partial abolishment of joint loan guarantees, financial supports will be followed. Policy finance institution will increase their financial support for the start-ups to KRW 21.7 trillion. For more, loan limitation for young entrepreneurs of KODIT(Korea Credit Guarantee Fund) and KIBO will be raised from the current KRW 50 million to KRW 300 million.

 

To make the start-ups that has problem recovered, the commission will erase corporate default-related information of the start-ups that enter work-out program.

 

Changing financial infrastructure for SMEs

 

To make financial companies offer loan service to SMEs more than current, the commission will give immunity for financial companies as they loan SMEs but the loan itself is dishonored. Along with private financial companies’ loans, policy financial companies such as KoFC, KDB and IBK will provide new services that combine loans and investments.

 

To broaden SMEs capital line, the commission will establish new stock market which specially deals with SMEs’ stock for professional investors. And revision of regulation on KOSDAQ will be followed to lead healthy SMEs to be easily on list of KOSDAQ.

Financial services for sustainable development

 

To achieve sustainable development of Korean economy, the commission will promote market participants to introduce newly growth industry through financial aids. For example, KoFC will create additional funds which is equivalent to KRW 600 billion for nurturing new growth industry. And the institute is going to release the limitation on on-lending service for new growth industry. Among the new growth industry, the commission has focused on green industry so that financial support is expected to be operated in 2012.

 

The authority is concerning about the growth rate of the old population. It is common that Korean who were born during baby-boom(1955-1964) are not well prepared for their future declining year of life. This is serious problem since the societies’ capacity for supporting them financially is not enough so that most of them is expected to be at very low-income class in decades. Recognizing this phenomenon, the commission is willing to support them.

 

To fix this circumstance, firstly, as they are investing on funds, it will be recommended for them to choose the funds which are managed with long-term vision and more diversified way thorough granting tax benefits on those products. For more, the maximum amount of money that pension subscribers are permitted to withdraw on frequent basis will be raised from 30% to 50%. For making stabilized and beneficial insurance products for the retires, the FSC will set the frame to develop and enhance pension insurance market so that it is expected that the elderly would be able to find out the products which is fit on their health conditions and age-related risks.

 

Expand financial services for low-income households

 

Since 2009, the FSC has introduced and operated three kinds of micro financial service brands such as Smile Microcredit, Sunshine Loan and New Hope Loan. It has greatly supported people who are at the low-income class and have financial problems. In 2012, those micro-loans is planned to be expanded for broaden range of financial supporting to the low-income. Besides that, KHFC will offer lower interest rates and special guarantees for low-income borrowers. Transferring private loans with high interest rate to the products with the low rate for low-income households is planned to be promoted by the commission to lighten their burdens.

 

The authorities’ attempts to protect the low-incomes from financial frauds will be in action. Especially the commission will control and punish excessive or illegal financial institutions’ activities. the FSC want to ensure illegal loan brokerage service fees be returned to borrowers and prevent people from excessive usage of the private loans with extremely high interest rate by regulating private loan service companies’ advertisements. For the successful adaptation of the plan, the FSC will revise the regulations.

 

For people who are already at low-credit class, the commission is going to support them with recovering program. The credit rating recovery program will cover more people in 2012 and some of applicants will not be needed to pay debt restructuring service fees and application fees. In addition, more people who are willing to repay their loans and has faithfully repaid the debts can extend loans at lower interest rates since the commission will allocate KRW 100 billion on the projects.

 

Social contribution of financial institutions and stranger protection for financial consumers.

 

It is recognized that the FSC has been focused more on financial soundness than financial consumer protection due to the global economy crisis since 2008. To change this policy keynote, the commission will legislate the Financial Consumer Protection Act which set six principles on sales of financial products. Most featured articles on the act is regulating incomplete sales of the products. This article rules many types of incomplete(or sometimes illegal) sales and one of them is that financial institutions’ insufficient information offering to consumers. They have not informed fully on transaction commissions, risks of the products and haven’t offered information on other alternative products which would be more suitable on the consumer’s financial status. This kind of practice would be banned and required to be changed by the authority to protect financial consumers.

 

Along with the authorities’ effort, the FSC will lead other financial institutions to promote social contributions. The commission will let the institutions allocate more budget on social contribution from KRW 0.9 trillion in 2011 to KRW 1.3 trillion in 2012. And the institutions are expected to credit student loans at lower interest rates by creating funds.

 

Take preemptive actions to secure market stability

 

 

*Keep household debt growth to a manageable level and normalizing bad PF loans

 

Household debt is approaching $1 trillion as of January 2012 and quickly encroaching on consumer spending. Thus, the FSC is struggling to curb household debt growth to a balanced pace by encouraging banks to extend more fixed-rate and installment loans. By the time banks come to secure their long-term funding sources, household debt growth are not expected to skyrocket. An official said that the banks will be required to increase fixed-rate and installment loans upto 30% of their total outstanding loans by the end of 2016.

 

As of real-estate project financing, a second Project Financing Stabilization Bank is considered to be created in case insolvent PF loans should be acquired. Last year, the PFSB was established in order to aid construction sector and mortgage market. The PFS Bank has handled project construction sites which have ability to operate its business through restructuring. In addition, profitable projects with PF loans which KAMCO purchased will be sold to private companies. Roughly 31 projects are currently searching for the private companies to run them and repay the debt. Lastly, banks’ lending practices should put more emphasis on the objective evaluation of business profitability than on loan guarantees.

 

 

 

*Enhance foreign exchange soundness

 

Foreign currency liquidity has been improved as the government has closely monitored liquidity conditions of banks and nonbanking financial institutions. Foreign currency liquidity of domestic banks at the end of last year has grown nearly six times more than that of the first half of last year. This movement should be continued, constantly checking external risk factors and supply/demand in foreign exchange market. And the foreign currency funding ability of policy finance institution whose credit ratings are relatively high will be strengthened to promote financial services for SMEs. Furthermore, foreign currency funding sources will be diversified by, for instance, utilizing the Middle East markets.

 

 

 

*Make financial institutions more resilient against crises and improve soundness in financial sector

 

Internal experts would actively join the international debate on the soundness control over D-SIFI (Domestic Systemically Important Financial Institution) and examine thoroughly how to apply the regulations in domestic market. Moreover, several safely measures will be strengthened. To be specific, banks apply strict standards for loan-loss provisioning and BIS ratio, while preparing for the approaching Basel Ш regulations. Insurance companies apply strict standards for solvency margin ratio. Mutual savings banks apply stricter requirements for loan-loss reserves and BIS ratios. The BIS ratio is to be 6% next year, 7% in 2 years, and 8% in 3 years.

 

 

 

 

 

Make Korea’s financial system further advanced

 

 

 

*Reform capital market system

 

Although FSCMA(Financial Investment Services and Capital Market Act) failed to pass the National Assembly, it was considered as a matter of time. Home-grown Investment Banks and hedge funds would be established to introduce new IB business in Korea and create new revenue sources outside the Korean market. Along with support for IBs, small but strong securities firms will be supported to enjoy competitiveness in specialized niche markets. Capital markets infrastructure such as ATS(Alternative Trading System) , CCP(Central Counterparty) and advanced evaluation system of corporate credit ratings are expected to be introduced. In terms of derivatives markets, soundness and transparency would be promoted by raising initial deposit ratio and protecting more for investors in ELS market. Lastly, in asset management field, license would be granted on the more flexible basis and channels to sell funds will be revised to be more competitive.

 

 

 

*Enhance governance structures and auditing transparency in financial firms

 

Current regulations on bank ownership including restrictions on non-financial investors’ ownership in banks will be under review for a revision. Compensation practices in financial firms will be required to be more transparent and reasonable as further details will be disclosed further. Independence of non-executive directors and an audit committee is constantly monitored as well. In addition, accounting firms will be restricted in auditing companies they gave consulting service and penalties against negligent auditors will be raised from KRW 500 million to KRW 2 billion.

 

 

 

* Build up electronic financial services

 

While the number of electronic financial transactions has been increased dramatically, infrastructure to support activities is not set yet. In order to reduce costs in issuing and trading securities, the Electronic Securities Act will be enacted to reduce costs in issuing and trading securities, thus boosting transparency in transactions. Paperless transactions which is environmentally-friendly, help to save carbon emissions in a long run as, for instance, one insurance company can save 153 million of A4 paper.

 

 

 

* Pushing forward globalization of Korea’s financial industry

 

The FSC has signed MOUs with overseas financial authorities to strengthen international cooperation in financial supervision and support domestic financial institutions to expand overseas markets. With MOUs with 30 institutions in 18 countries such as the US and Germany, diverse educational programs for capacity building in developing countries are being prepared. The FSC plans to hold IR events to publicly promote financial centers in Seoul and Busan, attracting more international financial companies. The financial authority would participate in CMG(Crisis Management Group) which monitors global SIFI as well.

 

 

 

 

 

Kim, Kyoungmin

 

(k.kim@live.nl)

 

Lee, Kiyeon

 

(kiyeon.m.lee@gmail.com)


Developing E-book for the public, ‘A Smart Finance Navigation’

‘A Smart Finance Navigation’ would be introduced in the near future. The Financial Services Commission announced on May 17 that both the FSC and the Korea Development Institute (KDI) have co-developed ‘A Smart Finance Navigation’.This navigation developed in a form of E-book will inform the public about the general knowledge in finance. The whole contents of finance navigation are categorized by 6 parts: ‘getting services in the finance company, must-know fiscal policies, credit management, loan and redemption, finance investment and pension, financing plans.’

The reason why the FSC made this E-book is because the current status of offering financial textbooks to various people is not enough for them to learn about the practical knowledge in finance and there are also some content limits in each part in the financial textbooks. Therefore, through the Smart Finance Navigation, the FSC expects levels of financial knowledge within the public to be up-graded. The finance navigation will be posted on-line, on the finance related homepage or FSC website, encouraging the public to make use of the financial materials on the website and letting them utilize the existing educational program. By using the finance navigation commentedabove, the FSC will develop an application only for the smartphone. And besides, it will categorize materials thematically, which were sent out on the radio or television so that the citizens can make use of them at any time.

At last the FSC is preparing to release new application to the public sooner or later, which includes ‘moderate savings and consumption, choosing financial products properly, and financial management etc.

 

Haerim Lee(pinkeen@naver.com)

FSC decides to continue monitoring finance market trend

Finance Services Commission(FSC) started to monitor international finance market trend last year and is planning to keep this regime. There is certain reason since the global market is unstable dealing with serious sovereign debt crisis.

SFC clarified in ‘Europe finance crisis status and major risk factor check’ report announced on May 21, current Europe’s financial crisis is related with real market recession, it is tough to resolve in a recent period.

Political conflict betweenGermany and France just let jitters increase over how Europe’s banking system would be affected by an exit ofGreecefrom the eurozone. What’s more serious is the fact that the risk will spread to other countries including Korea.

SFC expected that after the Greek election next month, the new cabinet would turn into easing austerity or request changes of bail-out terms, it seems highly likely to cause conflicts with EU, IMF, and ECB.

The risk factors ofEurope’s financial crisis are the difficulty of recovery because of continuing austerity of nations in the real market and the concern that might fall into double-dip since it is hard to ease the internal imbalance. It is also possible a considerable number of member countries might not comply with the new Fiscal Compact due to increasing unemployment rate and deteriorating fundamentals.

At fiscal prospects, the flow of working on deficit-reduction, slack in business, decrease in tax revenue to the increased deficit and rising interest rate of sovereign-debt leading to an increase in fund-raising expense with Spainas the center are the other risks.

There is another possibility that fiscal crisis will deepen if global credit appraisers lower the eurozone contries’ sovereign-credit rating. Then in will be difficult to force fiscal retrenchment and recent incidents such as change of government in France, publication of zero interest rate bond in Germany weakens the power to go with the new fiscal compact.

Instability of eurozone might cause the ECB’s sharp deleveraging. The damage in global market is inevitable, however, it seems not as serious as the lyman tragedy.

Although Korea’s foreign loan status has been improved as non-european funds fill in the vacancy of european funds, it still needs to be observed carefully to prevent critical situations.

JungHwa Han(g.fire@ymail.com)