The Financial Supervisory Service Focuses on Financial Stability After COVID-19

[Asia Economy Reporter Song Hwajeong] The Financial Supervisory Service (FSS) has prepared a Korean-style big tech supervision plan to enhance the competitiveness of the financial industry and support innovation. To enable rapid risk response, it will introduce a 'self-audit requirement system' that mandates financial companies to conduct internal audits. Additionally, to strengthen risk management for individual business loans, it will establish a plan to integrate the review and management of household and individual business loans.

On the 14th, the FSS announced the '2022 Financial Supervisory Service Work Plan' containing these details. The FSS set this year's financial supervision goals as 'seamless achievement of financial stability, financial innovation, and financial consumer protection,' and established a work plan based on four core strategies: ▲harmonizing pre- and post-financial supervision ▲supporting preparation for the future of finance and strengthening real economy support functions ▲consumer protection that the public can feel ▲thorough preparation for latent risk factors within the financial system.

Establishment of a Risk-Centered Proactive Supervision System

The FSS plans to strengthen early diagnosis and response capabilities for risk factors and enhance continuous monitoring functions through internal and external communication and system advancement. In the context of increased household and corporate loans and rising asset prices following the COVID-19 pandemic, it will examine various risk factors such as trends in loan receivables and delinquency rates due to future interest rate hikes and asset market adjustments, portfolio risks including asset and liability maturity structures, and potential non-performing loan risks arising from the expansion of metropolitan area operations by local banks focusing on project financing (PF) group loans.

The FSS will continuously monitor and respond promptly to fluctuations in capital inflows and outflows caused by normalization of major countries' monetary policies and instability in China's real estate market, as well as the status of foreign currency liquidity and external exposure. In particular, it plans to elevate the foreign currency liquidity management system of non-bank sectors such as securities and insurance to the level of banks.

The infrastructure for early risk diagnosis will also be expanded. Stress test methodologies, scenario analyses, and models will be advanced, and macroeconomic forecasts and characteristics of individual business sectors will be precisely reflected in the models. To enhance the crisis detection capability of simplified financial industry risk assessment indicators, adjustments to indicators and rating intervals will be pursued.

To strengthen preemptive supervision beyond the current ex-post supervision, a flexible inspection system will be established. The inspection system will be reorganized from comprehensive and sectoral inspections to regular and ad hoc inspections that include periodic detailed diagnostics and pre-risk prevention functions, with inspection scopes differentiated focusing on core and vulnerable areas by company. To enable rapid risk response, the FSS will pilot the self-audit requirement system that allows financial companies to be mandated to conduct internal audits and will work on establishing institutional grounds for this system.

Support for Preparing the Future of Finance and Strengthening Real Economy Support Functions

The FSS plans to actively support financial innovation in response to the big blur era while establishing a systematic supervisory framework to settle sound market order. To this end, it will prepare Korean-style big tech supervision plans to promote competition and innovation due to big tech's entry into finance, achieve financial stability and consumer protection, review supervisory system improvements to enhance synergy within financial holding groups, and consider support measures to improve financial industry competitiveness such as rational adjustment of banks' ancillary and concurrent business scopes.

Additionally, it will review the current status of electronic financial business payment fees and promote the establishment of a fee disclosure system. Continuous monitoring of new types of investments using platforms will be strengthened, and risk factors in consumer protection during online non-face-to-face consultation and sales processes will be analyzed and inspected to induce improvements.

To strengthen the core functions of finance such as real economy support, the FSS plans to enhance banks' fund intermediation capabilities through regulatory improvements including the calculation method of liquidity coverage ratio (LCR) for banks and loan-to-deposit ratio regulations for internet-only banks.

Creating a Consumer-Centered Financial Ecosystem

The FSS aims to create a financial ecosystem harmonizing preemptive protection through the establishment of the Financial Consumer Protection Act and substantive post-protection through damage relief. First, it will prepare supplementary measures for the operation of the six major sales principles under the Financial Consumer Protection Act, including suitability, appropriateness, and explanation obligations, and conduct group evaluations and self-diagnoses every three years following the introduction of consumer protection status evaluations. For issues prone to frequent complaints and disputes, it will establish preemptive handling standards to prevent complaints and ensure rapid complaint processing. The effectiveness of banks' voice phishing prevention systems will be enhanced, and cooperation with the National Police Agency and banks, as well as strengthening of screening systems, will be pursued to expand response capabilities against face-to-face extortion-type voice phishing.

The FSS will also work to alleviate financial polarization through tailored consumer protection by class and financial and crisis management support for vulnerable borrowers. It will continuously promote institutional improvements to minimize consumer inconvenience caused by reductions in bank branches and ATMs, including partnerships with other institutions such as post offices. Furthermore, it plans to induce activation of financial support programs for temporarily distressed businesses such as rapid financial support and pre-workout, and prepare support measures for vulnerable household borrowers affected by rising interest rates.

Stable Management of Household and Corporate Debt and Smooth Transition of COVID-19 Financial Support

The FSS intends to promote stable management of household loans and proactive corporate restructuring in preparation for interest rate hikes and asset market adjustments. To this end, it will steadily expand the application of the debt service ratio (DSR) at the borrower level and encourage financial companies to establish and implement household loan management plans and autonomous management systems, checking compliance with management targets. For low-income and vulnerable groups, sufficient loan limits and incentives will be provided concurrently. By enhancing credit risk assessment functions of creditor banks, it plans to select structurally insolvent companies such as long-surviving marginal firms and induce proactive restructuring.

To ensure an orderly normalization of COVID-19 financial support, the FSS will seek smooth transition measures so that small business borrowers do not face sudden repayment burdens during the normalization process of COVID-19 financial support measures such as maturity extensions and repayment deferrals. It will also closely analyze the business and financial conditions of small businesses and prepare proactive financial burden reduction measures to prevent latent insolvencies from materializing all at once. Alongside this, it will prepare phased normalization plans to avoid abrupt loan contractions during the normalization of liquidity regulations (such as LCR).

The FSS will also strengthen financial companies' crisis response capabilities by encouraging expansion of loss absorption capacity and advancing soundness supervision systems. In preparation for potential deterioration in soundness due to prolonged COVID-19 and the end of repayment deferrals for vulnerable borrowers, it will encourage sufficient provisioning by financial companies, establish supervisory processes related to self-rehabilitation and resolution plans for large bank holding companies and banks, and promote the introduction of consolidated Korean won and foreign currency liquidity regulations for bank holding companies.

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