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
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.