Financial Services Commission Approves First Self-Normalization Plan of Five Major Financial Holding Companies

[Asia Economy Reporter Song Hwajeong] The Financial Services Commission has approved, for the first time, the self-normalization plans and resolution plans of the five major financial holding companies: Shinhan, KB, Hana, Woori, and NongHyup Financial Group.

On the 23rd, the Financial Services Commission announced that it approved the self-normalization plans submitted by 10 systemically important financial institutions and the resolution plans prepared and submitted by the Korea Deposit Insurance Corporation (KDIC).

During the 2008 global financial crisis, the insolvency of large financial companies spread throughout the financial system and caused a real economy crisis. Based on international discussions led by the Group of Twenty (G20), the Financial Stability Board (FSB) recommended measures in 2011 to address the insolvency of large financial companies. South Korea also pursued the adoption of the FSB's recommendations, leading to the amendment and enforcement of the "Act on the Structural Improvement of the Financial Industry (Financial Industry Structure Improvement Act)."

Considering the functions and scale of financial companies, their interconnectedness with other financial institutions, and their impact on the domestic financial market, the Financial Services Commission selected five major financial holding companies?Shinhan, KB, Hana, Woori, and NongHyup Financial Group?and five major banks?Shinhan, Kookmin, Woori, Hana, and NongHyup Banks?as systemically important financial institutions in July last year. These 10 institutions prepared self-normalization plans and submitted them to the Financial Supervisory Service (FSS) in October last year. The FSS then prepared evaluation reports and submitted them to the Financial Services Commission. The KDIC also prepared resolution plans for these systemically important financial institutions and submitted them to the Financial Services Commission in April. The Financial Services Commission established a review committee to conduct reviews within two months from the date of submission of the self-normalization plans and approved all 10 plans. Issues requiring supplementation or improvement identified during the evaluation and review process were communicated to the relevant institutions. The resolution plans submitted by the KDIC were also approved.

The self-normalization plans, prepared and approved by the boards of directors of each financial institution, outline governance structures including the authority and responsibilities of the board and executives to respond swiftly to management crises. They include criteria for determining crisis situations (trigger indicators and conditions) and self-help measures (self-normalization tools) to restore financial soundness such as capital adequacy. Considering the characteristics of crisis situations and normalization tools, financial companies selected highly effective measures as core self-normalization tools to overcome crises, including ▲ liquidity procurement (bond issuance, deposit raising, etc.) ▲ asset sales (bond sales, disposal of real estate and other held assets) ▲ capital expansion (bond issuance, rights offering, etc.). The plans also include communication strategies to prevent unnecessary confusion among financial markets and consumers during crises. If a management crisis situation described in the self-normalization plan occurs, the financial institution is obligated to take actions according to the plan.

The resolution plans submitted by the KDIC include executable resolution methods and detailed implementation plans (resolution strategies) to maintain financial stability in the event of insolvency, funding plans for the implementation of resolution strategies, measures to maintain operational continuity to ensure the continuous performance of core functions during the resolution process, and depositor protection measures. Regarding resolution methods, among the legally permissible options such as liquidation, bankruptcy, management normalization after financial support, and contract transfer, the plans compare the costs involved in resolution (excluding recoveries from the invested amount) and consider the impact on the stability of the financial system to determine the final resolution strategy. The funds required to implement the selected optimal resolution strategy are generally to be raised by the KDIC itself (using the deposit insurance fund, bond issuance, etc.), and in cases where it is difficult to raise funds from the financial market, borrowing from the government or the Bank of Korea will be pursued.

A Financial Services Commission official stated, "A permanent system to prepare for insolvency of large financial companies is now operational, and it is expected that early response in the event of a crisis will minimize the contagion of financial instability and reduce disruption to the financial system." The official added, "The resolution authority is also expected to reduce costs through prompt and systematic responses based on the resolution plans."

The self-normalization plans and resolution plans are to be prepared, reviewed, and approved annually on a one-year cycle. When the Financial Services Commission newly selects 'systemically important financial institutions' next month, the preparation, evaluation, review, and approval processes will proceed by the first half of next year.

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