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)

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)

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)

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)

Option expiration shock, Nov 11, 2010 and follow-up measures and system implementations

On November 11, 2010, option expiration shock occurred in South Korea due to unfair trading and risk management status of financial investment companies in relation to the selloff, which sparked the stock market plunge. On the next day, Korea Exchange (KRX) and the Financial Supervisory Service (FSS) organized an investigation team to carry out unbiased and reasonable investigations. According to the investigation result, it turns out that financial investment companies violated prohibition on market manipulation through the link between spot and futures and neglected the management and supervision of internal control system against market manipulation. As the investigation team figured out the market manipulative transaction, the regulators set a long term plan to reform and stabilize the current market system. Here are some measures and guidelines under consideration by regulators for November 11, 2010.

Strict settlement risk management

1) Tightening the margin rule

The regulator will consider evaluating the settlement risk of a qualified institutional investor and determine the grade to impose margin requirements on the investor prior to trading when it fails to meet certain grade requirements. Currently, qualified institutional investors are allowed to deposit margins on a post facto basis.

2) Setting a daily order limit for each qualified institutional investor

The regulator will consider setting a daily order limit for each qualified institutional investor based on total margin amount.

Reform of trading system

1) Implementing the random end rule for single price trading

If the gap between the expected matching price at 14:50 (currently at 14:55) and the tentative market price (closing price) is 5% or more, the deadline for submitting quotations will be extended within 5 minutes to prevent sharp price movements. Industrialized countries such as Germany, the UK and France already introduced such a rule to mitigate steep fluctuations in matching prices.

Sound derivative markets

1) Setting derivative position limits

The regulator will consider setting limits for the maximum positions that may be taken for derivatives including option contracts through a thorough analysis of global practices. Currently, the regulation only sets forth how many contracts a speculative investor may hold for futures (5,000 contracts for an individual investor and 7,500 contracts for an institutional investor) in Korea, but US and Hong Kong implemented position limits for both futures and option contracts.

2) Reporting large holdings

The regulator will consider a reporting duty for large holdings of derivatives. Currently, holders of commodity derivatives (based on gold and pork) are required to report on large holdings and change in holdings above certain volume. In the US and Hong Kong, reporting for large holdings of option contracts is mandatory.

These are system implementations and the investigations conducted in a thorough and comprehensive manner without delay by regulators. The task project team consisting of experts, relevant institutions and the industry will discuss system reforms currently under consideration to ensure sound derivatives market. So people expect these measures to strengthen settlement risk management, reform the trading system and make sound derivative markets in Korea.

Sunshine Loan: A Bright Opportunity for Low Income Earners

 

Sunshine Loan: A bright opportunity for low income earners

 

          The global financial crisis has left many governments around the world with fiscal debt and also severely hit households, particularly  low income earners with growing debt burden. Some of the financial institutions focused more on speculative investments such as project financing and equity investment so far rather than risking by dealing with low income earners. As a result, low income families in Korea heavily rely on private money lenders paying as high interest rate as 44%. On the other hand, the banks started raising interest rate on loans and mortgages due to fears of growing debt.

          The Financial Services Commission (FSC) along with financial institutions*, launched the Sunshine Loan program, which literally means ‘finance like warm sunshine to low income households’.

* The National Credit Union Federation of Korea, the National Agricultural Cooperative Federation, the National Federation of Fisheries Cooperative, the Korean Federation of Community Credit Cooperatives, and mutual savings banks.

A press briefing on the Sunshine Loan by the vice chairman of the FSC, Kwon Hyouk-Se

          On July 20th, there was a press briefing on the Sunshine Loan by the vice chairman of the FSC, Kwon Hyouk-Se. The FSC’s goal was to provide the low-income households with a financial service that can ease their high interest burden from private lending companies and to maximize the number of eligible people to take advantage of the government’s financial services.

          About 10 trillion Korean Won (KRW) will be extended over next 5 years through this program. It is expected to reduce the interest payment burden by 6 trillion KRW over the next 10 years. Interest rates will be differentiated between financial institutions but will be between 10% to 13%. This is significantly low rate considering people with bad credit rating can only get loans from private money lenders with +40% interest.

The differences between the Sunshine Loan and the Smile Microcredit Bank

          People might wonder how the newly-launched Sunshine program differs from the Smile microcredit loan program the FSC already launched last year. The Smile microcredit program is a non-profit loan offered by the Smile microcredit financial foundations . On the other hand, the Sunshine loan is the loan that can be productized by financial institutions following specific guidelines. The purposes loans are quite different between the programs and interest rate would be different as well. Moreover, the eligibility for an individual to get the Sunshine loan is much easier and requires less conditions compared to the Smile microcredit loan. It is expected to provide financial services to much wider range of people. The differences between the Sunshine Loan and the Smile Microcredit Bank.

          In the long term, approximately 17 million people would be potential beneficiaries from the Sunshine loans assuming that the Sunshine loans can cover all those who cannot get microcredit loans or any other loans. The Sunshine Loan can be a bright opportunity for low income households.