Blocking 'Poor' Transmission... Proactive Restructuring and Enhanced Financial Sector Response

Financial Services Commission to Report to the President on the 30th

Financial Services Commission Chairman Kim Ju-hyun is speaking at the Real Estate Ministers' Meeting held at the Government Seoul Office in Jongno-gu, Seoul, on the 10th. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Yu Je-hoon] Financial authorities will mobilize more than 40 trillion won in market stabilization program resources this year to maintain the financial market stability trend. In addition, to prevent the transmission of corporate insolvency to the financial sector, they will proactively undertake restructuring of insolvent companies, expand the financial sector's loss absorption capacity through the 'Special Loan Loss Reserve Accumulation Right,' and establish a safety net through the 'Financial Stability Account.'

On the 30th, the Financial Services Commission announced the 2023 major business promotion plan containing these details during the presidential work report held at the Blue House State Guest House in Jongno-gu, Seoul.

Mobilizing 40 Trillion Won in Support Capacity... Expanding P-CBO to Non-Investment Grade Bonds

First, the Financial Services Commission believes that the instability in the financial market caused by the sharp rise in the base interest rate last year has been partially resolved. The commission explained that this was the result of the large-scale market stabilization program of '50 trillion won + α' operated last year and close policy coordination with related agencies such as the Ministry of Economy and Finance, the Bank of Korea, and the Financial Supervisory Service.

To continue the financial stability trend this year, the Financial Services Commission plans to utilize approximately 40 trillion won of currently available market stabilization program resources. Looking at the detailed programs, the support limit for the Bond Market Stabilization Fund is 6.1 trillion won, and the corporate bond and commercial paper (CP) purchase program of the Industrial Bank of Korea and Korea Development Bank amounts to 7.6 trillion won.

Chairman Kim said, "We will continue to actively execute the market stabilization program to firmly establish stability in the corporate bond and short-term funding markets," adding, "If market instability increases, we will consider expanding the scope and scale of the Bond Market Stabilization Fund and the corporate bond and CP purchase programs."

In this regard, the support target of the Korea Credit Guarantee Fund's Primary Collateralized Bond Obligation (P-CBO, 5 trillion won) will be expanded to include non-investment grade bonds. Since the investment-grade bond market is stabilizing, the intention is to extend this to non-investment grade bonds and low-credit companies. For credit specialized financial companies, the P-CBO support target will be expanded from A- grade to BBB- grade, and the limit for large corporate affiliates will be increased from 400 billion won to 500 billion won. The Financial Services Commission plans to start accepting applications this month and resume P-CBO issuance within the first quarter.

Additionally, the authorities plan to operate various financial regulations flexibly depending on the situation. For example, the loan-to-deposit ratio regulation scheduled to be implemented in April and the liquidity coverage ratio (LCR) regulation for banks deferred until June. They also plan to closely respond to instability factors caused by rapid fund movements such as bond market tightening and deposit competition among financial institutions following the Legoland incident last year. This includes flexibly adjusting the issuance timing of high-quality bonds such as bank bonds and public bonds and preventing rapid fund outflows from retirement pensions.

Preventing Transmission of Insolvency from Corporates to Financial Sector

Furthermore, to prevent the impact of corporate insolvency caused by rapid interest rate hikes from spreading to the financial sector, proactive restructuring will be initiated. The Financial Services Commission will establish a corporate restructuring innovation fund of about 1 trillion won this year and change the operating entity from Korea Growth Finance to Korea Asset Management Corporation (KAMCO). KAMCO plans to enhance the effectiveness of corporate normalization support by strengthening the linkage between the corporate restructuring innovation fund, new loans to rehabilitated companies, and asset purchase followed by re-lease.

The continuous restructuring system, including the Corporate Restructuring Promotion Act (CRPA), will also be thoroughly reviewed. While promoting the extension of the CRPA's sunset clause (October), which includes the workout procedure for rapid corporate debt adjustment, the scope of credit risk assessment will be expanded to allow workouts for small companies (with credit exposure of 1 billion won or more). In addition, preemptive insolvency responses will be pursued through detailed credit risk assessments reflecting industry-specific characteristics and periodic evaluations of high-risk industries.

The financial sector's response capacity will also be expanded. The Financial Services Commission will introduce the 'Special Loan Loss Reserve Accumulation Right' in the bank supervision regulations to enhance the financial sector's loss absorption capacity. Since the current supervisory regulations on loan loss provisions and reserves are insufficient to prepare for emergencies, the introduction of this right aims to provide a legal basis for additional reserve requirements.

Preparations are also underway for the early activation of the Financial Stability Account. This system installs the Financial Stability Account within the Deposit Insurance Fund to provide liquidity and capital expansion support to financial companies facing temporary difficulties due to sudden financial market changes. The Depositor Protection Act containing these provisions is currently pending in the National Assembly's Political Affairs Committee as a government bill.

Chairman Kim stated, "Although we have extensive experience overcoming crises, this crisis is of a different nature from past ones, so we plan to pursue flexible and creative policy responses tailored to market conditions without being bound by past frameworks," adding, "Through close cooperation not only with related ministries but also with the financial industry, we will mobilize all available resources and capabilities in the financial sector to respond to the crisis."

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