5 Major Financial Holding Companies and Banks' Self-Normalization Plans in Times of Crisis Revealed

[Asia Economy Reporter Song Hwajeong] The Financial Services Commission has approved the self-recovery plans of 10 important financial institutions. These self-recovery plans include self-help measures to restore soundness in preparation for management crisis situations.

The Financial Services Commission recently approved the self-recovery plans submitted by 10 financially systemically important institutions, including the five major financial holding companies?Shinhan, KB, Hana, Woori, and NongHyup?and the five major banks?Shinhan, Kookmin, Woori, Hana, and NongHyup Bank.

The self-recovery plans, prepared by each financial institution and approved by their boards of directors, present governance structures such as the authority and responsibilities of the board and executives to respond swiftly to management crises. They also include criteria for judging crisis situations (trigger indicators and conditions) and self-help measures (self-recovery tools) to restore financial soundness such as capital adequacy. Additionally, communication strategies to prevent unnecessary confusion in financial markets and among financial consumers during crisis situations are included.

Regarding trigger indicators and conditions, these financial institutions monitor capital adequacy and liquidity ratios to recognize crisis situations, maintaining buffers above regulatory ratios (total capital ratio of 11.5% or higher, consolidated liquidity coverage ratio of 85% or higher, etc.) to determine whether there are signs of crisis or an actual crisis situation.

Moreover, these financial institutions analyze whether the plans operate effectively by assuming various crisis scenarios where the execution of the self-recovery plans is expected. They considered scenarios where trigger indicators worsen beyond the crisis activation conditions (capital ratio, liquidity ratio), such as large borrower defaults, IT system paralysis, and chain defaults of high-risk industry loans due to real economic downturns (considering GDP growth rate, stock index fluctuations, etc.).

Financial companies selected highly effective self-recovery tools as core measures to overcome crisis situations, considering the characteristics of each crisis and recovery tool. These include ▲ liquidity procurement (bond issuance, deposit raising, etc.), ▲ asset sales (bond sales, sales of real estate and other held assets), and ▲ capital expansion (bond issuance, rights offering, etc.).

If a management crisis situation described in the self-recovery plan occurs, the respective financial institution is obligated to take actions according to the plan.

In 2011, the Financial Stability Board (FSB) recommended measures to respond to 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 Act)." Accordingly, in July last year, the Financial Services Commission designated the five major financial holding companies?Shinhan, KB, Hana, Woori, and NongHyup?and the five major banks?Shinhan, Kookmin, Woori, Hana, and NongHyup Bank?as financially systemically important institutions, considering their functions, scale, interconnectedness with other financial institutions, and impact on the domestic financial market. These 10 companies prepared self-recovery plans and submitted them to the Financial Supervisory Service in October last year. The Financial Supervisory Service then prepared evaluation reports and submitted them to the Financial Services Commission.

Self-recovery plans and resolution plans are prepared, reviewed, and approved annually on a one-year cycle. When the Financial Services Commission newly designates "financially systemically important institutions" next month, the preparation, evaluation, review, and approval procedures will proceed by the first half of next year.

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