Financial Services Commission: "Concrete Plans for Normalization and Resolution Systems of Major Financial Firms to Be Established Within the Year"

Financial Institution Bankruptcy and Insolvency Contingency Scenarios
Pilot Drafting Underway by Major Financial Holding Companies

[Asia Economy Reporter Kim Hyo-jin] Financial authorities have decided to establish concrete implementation plans by the end of this year to introduce a resolution and recovery regime for large financial companies.

On the 18th, the Financial Services Commission announced this plan through the document titled 'Status of Promotion for the Introduction of Resolution and Recovery Plans for Large Financial Companies.'

The resolution and recovery plan system for financial companies is a self-prepared recovery and liquidation scenario designed to prepare for cases when a financial company becomes insolvent or distressed. Discussions began after the 2008 global financial crisis, when systemic important financial institutions (SIFIs) such as AIG and Lehman Brothers experienced distress, causing turmoil in the global financial markets.

The Financial Stability Board (FSB), an international organization related to financial regulation, presented recommendations in 2011 that included resolution and recovery plans and temporary suspension of early termination rights as key components.

The resolution and recovery plan system requires major financial companies to prepare recovery plans annually assuming crisis situations such as liquidity shortages and submit them to the Financial Supervisory Service. The plans are reviewed by the Financial Supervisory Service and approved by the Financial Services Commission.

The Korea Deposit Insurance Corporation must prepare resolution plans in advance to systematically resolve large financial companies in cases where self-recovery is difficult.

The temporary suspension of early termination rights is a system designed to prevent counterparties in derivative transactions from exercising large-scale early termination rights simply because a distressed financial institution has initiated resolution procedures.

Once resolution procedures begin, early termination rights on financial contracts can be suspended for up to two business days to prevent instability in the financial market.

The Financial Services Commission conducted one pilot drafting to review potential issues that may arise during the operation of resolution and recovery plans.

Regarding recovery plans, KB Kookmin Bank, NH Nonghyup Bank, and Woori Bank participated in the pilot drafting, while Shinhan and Hana Financial Group participated in the pilot drafting related to resolution plans.

The second round of pilot drafting is currently underway. This time, Shinhan Bank and Hana Bank are drafting recovery plans, while KB, Nonghyup, and Woori Financial Group are drafting resolution plans.

Recently, an amendment to the 'Act on the Structural Improvement of the Financial Industry (Financial Industry Structural Improvement Act)' containing provisions on resolution and recovery plans and temporary suspension rights has been submitted to the National Assembly and is awaiting review.

This content was produced with the assistance of AI translation services.