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

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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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