FSSNEWSLETTER. September

Transcription

1 FINANCIAL SUPERVISORY SERVICE Main Office 38 Yeoui-daero, Youngdeungpo-gu, Seoul , Korea Tel Fax Overseas Offices New York 14th Floor, 780 Third Avenue, New York, NY 10017, U.S.A. Tel Fax Washington, DC 1701 K Street N.W., Suite 205, Washington, DC 20006, U.S.A. Tel Fax washington@fss.or.kr London 19th Floor, One Angel Court, London EC2R 7HJ U.K. Tel ~3 Fax london@fss.or.kr Frankfurt Feuerbachstr. 31, Frankfurt am Main, Germany Tel ~3 Fax frankfurt@fss.or.kr Tokyo Yurakucho Denki Bldg., South Kan 1051, 7-1, Yurakucho 1-Chome, Chiyoda-ku, Tokyo, Japan Tel Fax tokyo@fss.or.kr Beijing Room C704, Office Building, Kempinski Hotel Beijing, Lufthansa Center, No. 50, Liangmaqiao Road, Chaoyang District, Beijing, P.R. China Tel , 4534 Fax beijing@fss.or.kr Hong Kong Suite 4110, Jardine House, 1 Connaught Place, Central, Hong Kong Tel , 6202 Fax hongkong@fss.or.kr September Please forward all questions, suggestions, and comments regarding the FSS Newsletter to the International Cooperation Department (Fax: ; fssintl@fss.or.kr), Financial Supervisory Service. FSSNEWSLETTER 03 Governor s Speech at Derivatives Conference 06 Summary of August Press Releases 27 Laws and Regulations 28 News & Events 29 Publications

2 Cover: FSS Governor Kwon speaks on the supervision of derivatives markets in Korea at the 10 th Seoul International Derivatives and Alternative Investments Conference.

3 Governor s Speech at Derivatives Conference On August 28, 2012, Governor Kwon Hyouk-Se gave a congratulatory speech at the 10 th Seoul International Derivatives and Alternative Investments Conference that Financial News hosted in Seoul, Korea. The conference provided an opportunity for participants to discuss ongoing regulatory developments and explore the future growth strategy for the derivatives market. During the speech, Governor Kwon provided an overview of how derivatives are supervised in Korea and emphasized the importance of rigorous risk management in financial firm s long-term business sustainability and growth. The full text of the governor s speech is as follows. Congratulatory Remarks Good morning, ladies and gentlemen, August 28, 2012 Seoul, Korea It is with great pleasure that I join you this morning and deliver my welcoming remark for today s conference, Asia s top forum on derivatives and alternative investments. I would first like to thank Gweon Seong-Cheol, president of Financial News, and his staff for organizing this event and inviting me to speak. I also thank Professor K. Geert Rouwenhorst and other distinguished guests for joining us here in Seoul. As we all know, global markets have been facing significant headwinds because of fiscal distress and sovereign downgrading in the euro-zone. The euro-zone distress of course has come on the heels of the 2008 global financial crisis. Derivatives, specifically OTC derivatives, have been widely blamed as one of the key contributing factors to the 2008 crisis. Since then, there have been wide-ranging discussions on regulating derivatives with the goal of reinforcing market soundness and transparency. So, a derivatives conference under the theme of Innovation and Regulation: The Future of Alternative Investments with renowned market professionals and experts from around the world is certainly a special occasion. FSS Newsletter _3

4 As you know, a consensus emerged out of the 2008 financial crisis that policy makers and regulators must reinforce the oversight of OTC derivatives markets. Under the leadership of the G-20, broad agreements were in fact reached on concrete steps such as creating central counterparties (or CCP) and trade repositories for derivatives trading. There were also agreements on stepping up cross-border cooperation to reduce regulatory arbitrage. As for progress to date, the Basel Committee is spearheading global efforts on CCP implementation. And discussions on facilitating data collection-such as legal entity identifier-are now well under way. There are also more aggressive proposals to restrict highly risky derivatives trading. In the U.S., regulators are looking to implement the so-called Volcker Rule that would, among others, bar banks from engaging in proprietary derivatives trading. And the expectation is that some form of the Volcker Rule will take effect in 2014 for U.S. banks and foreign banks that deal with them. Not surprisingly, there is some concern that tough derivatives regulation will further dampen the already depressed financial industry. Another concern is that strong global regulation will disproportionately affect OTC derivatives markets that are in their infancy. Notwithstanding such concerns, the priority is now on market transparency in order to encourage sound market growth and prevent future crises. And there is a general recognition that a well-regulated, transparent derivatives market will contribute to sustained, long-term growth. For Korea s regulators, the main thrust of derivatives supervision is to help the market advance to the next level. So we will be looking to implement supervisory measures that promote the growth of derivatives market in tandem with the financial industry. The trading of exchange-traded derivatives is said to be the world s highest in terms of volume. But there is a concern that the heavy derivatives trading volume is not justified by the realities of the underlying assets, and what we may well have is a case of the tail wagging the dog. So there is a case to be made that derivatives trading should move in lock step with the market and contribute to its growth by helping to correct price distortions and improving risk management. Trading of derivatives that becomes too detached from the underlying markets or distorts price is not much different from naked speculation. So we see a need to step up our supervision to keep speculation or price distortion out of the derivatives market. We are also looking to enhance our market infrastructure to measure up to the highest global standards and improve market transparency. The proposal on establishing a central counterparty has been delivered to the National Assembly. And progress is being made by the Korea Exchange and the derivatives industry. With respect to trade repositories, I can tell you that regulators are studying it and looking at the best ways to move forward. One key objective of improving market infrastructure is to enhance the overall efficiency of the derivatives market. So we are going to work closely with the industry to make sure we achieve our goal. We also see investor protection as crucial to steady and sound market growth. With prolonged low interest rates, the sale of structured financial products like ELS that offer the potential for high yield is on the rise. 4_ FINANCIAL SUPERVISORY SERVICE

5 Given the high risk of such instruments, however, financial firms must take the due care to help investors make informed investment decisions. Financial firms must also make an earnest effort to perform their fiduciary duties faithfully and manage customer assets in a sound and prudent manner. So, in respect of investor protection, our priority will be on enforcement of full product disclosure, sale of investment products that match investor sophistication, and other steps needed to further enhance investor protection. Lastly, I would like to highlight our commitment to lending a helping hand to financial firms in assessing and managing risks. We issued best practice guidelines on derivatives-related risks for financial firms, and we will stay closely engaged to help them continually improve risk management. I would like to close my remark this morning by urging financial firms to renew their commitment to risk management for their long-term business sustainability and growth. Recently, we saw several leading global banks that were widely praised for effectively managing risk during the 2008 crisis suffering substantial derivatives-related losses. What this suggests is that there is no easy way to manage risk and that only focused, uncompromising effort will do. I very much hope that today s conference will serve as a valuable forum for some meaningful discussions on the risks of the ever-evolving derivatives market and strategies needed to cope with them. I am sure all of us can look forward to many vigorous and informative discussions today. Thank you. FSS Newsletter _5

6 Summary of August Press Releases Short-term Funding of Brokerage Firms in June 2012 (Aug 1) In order to prevent a crunch in the call money market in the face of domestic and global shocks from posing a systemic risk to the market and push for an improved short-term money market, the Financial Supervisory Service (FSS) implemented a cap on the maximum amount of call money borrowed by brokerage firms effective June 1, 2011 with a one-year grace period. All brokerage firms were on the right track to the phased implementation of the cap as of June From July 2012, brokerage firms are allowed to borrow call money within 25% of their shareholders equity. In June 2012, the average outstanding balance of call money was KRW8.3 trillion, down 40.0% or KRW5.6 trillion from KRW13.9 trillion in May The ratio of call money to shareholders equity of brokerage firms stood at 22.0%, down 19.8 percentage points from 41.8% in May Snapshot of Call Money (In trillions of won) May 2011 (A) Jun (B) Growth (B-A) Category As a percentage As a percentage As a percentage Average Average Average of shareholders of shareholders of shareholders balance balance balance equity equity equity Call moneys % % %p Large companies % % %p Medium companies % % %p Small companies % % %p Note: Large companies (shareholders equity of KRW1 trillion or more); medium companies (shareholders equity of KRW300 billion or more and less than KRW1 trillion); small companies (shareholders equity of less than KRW300 billion); In June 2012, brokerage firms raised short-term funds of KRW20.9 trillion on average, down 5.1% or KRW1.2 trillion from KRW22.1 trillion in May Call money decreased KRW5.6 trillion from May 2011, while repurchase agreement (RP) sales and commercial paper (CP) issuance increased KRW3.0 trillion and KRW1.4 trillion, respectively. The full text of the press releases is available at the FSS English homepage ( 6_ FINANCIAL SUPERVISORY SERVICE

7 Foreign Investments in Domestic Securities in July 2012 (Aug 3) Foreign investors sold a net KRW0.7 trillion of listed Korean shares and invested a net KRW1.4 trillion in listed Korean bonds in July 2012, resulting in an increase of KRW0.7 trillion in net investments net purchases less the value of bonds maturing of listed Korean securities. As of end-july 2012, foreigners held KRW379.9 trillion in listed stocks for 31.6% of total market capitalization and KRW89.6 trillion in listed bonds for 7.2% of total listed bonds, resulting in total holdings of KRW469.5 trillion in listed securities. Foreigners Net Investments and Holdings in Korean Securities (In billions of won, on settlement basis) Net investments in listed securities* 2011 May 2012 Jun Jul Holdings Stocks -9,573-3, , ,893 (31.6%) Bonds 7, ,388 5,914 89,653 (7.2%) Total -2,467-2, , ,546 *Net investment amount: Listed stocks are based on exchange-traded volume while listed bonds are based on exchange-traded and over-the-counter volume; Stock Investments Foreign investors were net sellers of Korean stocks for the fourth straight month on global uncertainties such as worries over global economic slowdown and the rising probability of a full-blown international bailout for Spain. Foreign investors, mostly investment banks, sold a net KRW0.7 trillion of stocks, but net sales slowed by purchases at the month-end. European and the U.S. investors continued to make net sales, but the pace slowed from the previous month. The U.K. and the U.S. were net sellers for the fifth straight month, and Singapore and Luxemburg turned net sellers, reversing large net purchases in June. Meanwhile, Saudi Arabia and Norway were net buyers for the first five months and seven months this year, respectively. As of end-july 2012, foreign investors held KRW379.9 trillion of stocks, up KRW10.3 trillion from a month earlier thanks to the stock price rise. The U.S. held KRW155.5 trillion of stocks, accounting for 40.9% of total foreign stock holdings, followed by the U.K. with KRW36.2 trillion or 9.5% and Luxemburg with KRW25.5 trillion or 6.7%. Foreigners Net Purchases in Stocks (In billions of won, on settlement basis) Purchases Sales Net purchases Holdings (%) , ,370-9, ,455 (30.4) May ,175 28,560-3, ,849 (31.4) Jun ,058 22, ,564 (31.2) Jul ,859 22, ,893 (31.6) , ,726 5,797 Note: KOSPI and KOSDAQ markets combined (excluding ETF, etc); Holdings include all products; FSS Newsletter _7

8 Bond Investments In July 2012, foreigner investors, mainly foreign central banks, made net investments of KRW1.4 trillion due to their preference for safe assets and the relatively high yields compared to other developed markets. Net foreign purchases of Korean bonds declined from a month earlier to KRW2.5 trillion, but remained similar to the average of KRW2.6 trillion from January to May European investors invested a net KRW1.7 trillion in bonds, while the U.S. investors pulled out a net KRW0.4 trillion of bonds. Norway invested a net KRW1.5 trillion in bonds, sharply up from KRW0.8 trillion in the first half of 2012, followed by China and France. On the other hand, the U.K. pulled a net KRW10.5 trillion, reporting a net outflow for the sixth straight month since February Foreigners held KRW89.6 trillion as of end-july 2012, recording an all-time monthly high. The previous high was KRW88.5 trillion at end-may The U.S. held KRW17.3 trillion in Korean bonds as of end-july 2012, accounting for 19.2% of total bonds held by foreigners, followed by Luxemburg with KRW14.3 trillion (15.9%) and China with KRW10.9 trillion (12.2%). Foreigners Net Investments in Bonds (In billions of won, on settlement basis) Net purchases (a) Bonds maturing (b) Net investments (a-b) Holdings ,234 34,128 7,106 83,027 May , ,546 Jun ,074 7, ,345 Jul ,541 1,153 1,388 89, ,450 16,536 5,914 Appendix Net Purchases of Listed Stocks by Country 1 (In billions of won, on settlement basis) Country 2011 May 2012 Jun Jul Saudi Arabia Malaysia Switzerland Norway Sweden Netherlands -1, US 5, Luxemburg -2, Singapore 3, France -2, Cayman Islands -3, ,035 UK -6,292-1, Others -2, Total -9,573-3, , Figures are rounded up to the nearest tenth; 2. Including Labuan, Malaysia; 8_ FINANCIAL SUPERVISORY SERVICE

9 Listed Stock Holdings by Country 1 (In billions of won, on settlement basis) Country End-2010 End-2011 End-Jul Rate of increase/decrease 2 Share US 150, , , UK 43,030 37,865 36, Luxembourg 28,081 23,572 25, Singapore 16,861 17,915 18, Saudi Arabia 12,917 12,922 13, Netherlands 11,790 9,006 13, Ireland 14,548 12,238 13, Canada 9,359 8,525 9, Norway 7,805 7,553 8, Arab Emirates 6,836 6,837 7, Hong Kong 3,449 3,542 6, Japan 7,566 6,093 6, Cayman Islands 9,241 5,152 6, Australia 6,298 6,036 6, China 3,068 4,036 4, Switzerland 4,025 3,402 3, Germany 3,332 3,210 3, Others 47,544 39,483 39, Total 386, , , Figures are rounded up to the nearest tenth; 2. Percent of increase or decrease compared to the end of the previous year; Net Investments of Listed Bonds by Country 1 Country May 2012 net investment Jun net investment Net investments Jul Net purchases (In billions of won, on settlement basis) Bonds maturing 2012 net investment Norway ,485 1,485-2,296 China France Switzerland 618 1, ,728 Taiwan Singapore Luxemburg ,306 Japan Germany UK Malaysia Australia US Others Total ,388 2,541 1,153 5, Figures are rounded up to the nearest tenth; 2. Including Labuan, Malaysia; FSS Newsletter _9

10 Listed Bond Holdings by Country 1 (In billions of won, on settlement basis) Country End-2010 End-2011 End-Jul Rate of increase/decrease 2 Share US 15,211 16,369 17, Luxemburg 11,654 12,971 14, China 6,570 10,230 10, Malaysia 3 4,289 7,991 7, Thailand 14,873 9,761 7, Switzerland 2,191 2,022 3, Singapore 1,834 3,229 3, UK 4,511 3,309 3, Hong Kong 2,099 2,559 2, Kazakhstan - 2,203 2, Norway ,486 1, France 3,947 1,570 1, Germany 457 1,884 1, Cayman Islands , Others 5,797 7,757 8, Total 74,192 83,027 89, Figures are rounded up to the nearest tenth; holdings are different from net investment from inclusion of RP agreements, among others; 2. Percent of increase or decrease compared to the end of the previous year; 3. Including Labuan, Malaysia; Foreigners' Net Investments and Holding by Bond Type (end of period) T-bonds Agency bonds (In billions of own, %, listed won-denominated bonds on settlement basis) MSB 1 Corporate Munis 2 Total % of total End-2011 holdings 60,992 21,497 19, , (%) (73.5) (25.9) (24.1) (0.6) (0.0) (100.0) 2011 net investments 11,427-4,892-5, ,106 End-Jul holdings 60,354 28,526 26, , (%) (67.3) (31.8) (30.1) (0.9) (0.0) (100.0) Jul net investment 2, ,388 Net purchases 2, ,541 Bonds maturing , net investments -1,241 6,921 6, , Monetary Stabilization Bonds; sub-class of agency bonds; 2. Municipal bonds; 10_ FINANCIAL SUPERVISORY SERVICE

11 Monthly Foreigners Stock Purchases and Holdings (In billions of won) Net US UK Luxemburg Ireland Japan China Germany Others purchases Holdings (%) Jan , ,984 (30.3) Feb ,034-1, ,568 (29.8) Mar , ,397 4, ,803 (30.3) Apr , , ,838 (30.9) May , ,843-6, ,427 (29.7) Jun , ,945 (29.5) Jul , , ,671 (29.9) Aug ,041 (29.7) Sept ,927 3, ,841 (29.7) Oct ,989 1, , ,557 (29.8) Nov , , , ,395 (30.5) Dec , ,577 3, ,361 (31.2) 2010 total 14,913-3,120 3,117 2, ,497 22,893 Jan ,984-1, , ,014 (30.8) Feb , ,705-3, ,635 (30.5) Mar , ,451 (30.6) Apr , ,631 4, ,509 (30.8) May ,576-2, ,672-2, ,380 (30.8) Jun ,881 (30.5) Jul ,096 2, ,259 (30.2) Aug , , ,569-5, ,202 (29.8) Sept , ,051 (30.7) Oct , ,869 (30.8) Nov , , ,243 (30.6) Dec ,455 (30.4) 2011 total 5,163-6,292-2,607-1, ,208-1,063-4,446-9,573 Jan ,738 2, ,864 6, ,821 (30.8) Feb ,119 1, , ,249 (30.7) Mar , ,725 (31.3) Apr ,143 (32.0) May , , ,849 (31.4) Jun , ,564 (31.2) Jul ,893 (31.6) 2012 total ,363 5, Net purchases in 2009 include ETF, etc. and net purchases in 2010 exclude ETF, etc.; 2. Holdings include all listed stocks on the KOSPI and KOSDAQ (including ETF); 3. Figures are rounded up to the nearest tenth; FSS Newsletter _11

12 Monthly Foreigners Net Bond Investments and Holdings (In billions of won) Net investment Net purchases Bonds maturing Holdings (%) Jan ,325 5,444 56,405 (5.5) Feb ,416 5,748 4,332 58,091 (5.6) Mar ,171 6,265 3,094 61,815 (5.8) Apr ,232 7,514 4,282 65,665 (6.1) May ,490 7,949 4,459 69,446 (6.4) Jun ,676 7,450 68,524 (6.3) Jul ,945 7,631 3,686 72,648 (6.7) Aug ,559 6,555 3,996 74,671 (6.8) Sept ,155 3,273 74,623 (6.7) Oct ,336 6,179 1,843 79,024 (7.1) Nov ,074 2,572 1,498 80,110 (7.2) Dec ,302-2,448 2,854 74,192 (6.6) 2010 total 16,910 63,121 46,211 Jan ,426 73,940 (6.6) Feb ,452 2,197 74,185 (6.6) Mar ,964 1,968 75,319 (6.6) Apr ,131 2,816 1,685 76,177 (6.6) May ,615 4,477 1,862 78,783 (6.8) Jun ,165 8,519 6,354 81,081 (7.0) Jul ,903 4,613 1,710 84,224 (7.2) Aug ,848 3,714 84,674 (7.2) Sept ,362 2,364 85,075 (7.2) Oct ,594 5,367 3,773 86,675 (7.3) Nov ,680 (7.2) Dec ,906 2,501 6,407 83,027 (6.9) 2011 total 7,106 41,234 34,128 Jan ,644 2,700 1,056 84,633 (7.0) Feb ,769 4,087 2,318 86,430 (7.1) Mar ,844 3,002 1,158 88,507 (7.2) Apr ,043 1,466 2,509 87,551 (7.1) May , ,546 (7.1) Jun ,074 7,392 88,345 (7.1) Jul ,388 2,541 1,153 89,653 (7.2) 2012 total 5,914 22,450 16,536 Note: Figures are rounded up to the nearest tenth; 12_ FINANCIAL SUPERVISORY SERVICE

13 Monthly Net Bond Investments by Country (In billions of won) US UK Luxemburg Thailand China Japan Germany France Jan , Feb Mar , Apr May , Jun , Jul Aug , , Sept , Oct , Nov , Dec , total 6,225 1,323 6,623-1,870 4, , Jan Feb Mar Apr May Jun , Jul , Aug , , ,069 Sept Oct Nov Dec , ,182-1, total 1,153-2,183 1,318-5,114 3, ,427-2,663 Jan Feb Mar Apr May Jun Jul total ,306-2, Note: Figures are rounded up to the nearest tenth; FSS Newsletter _13

14 FSS Spot-checks HSBC Seoul and StanChart for Money Laundering (Aug 9) Two London-based global banks, HSBC and Standard Chartered, were recently accused of money laundering in Mexico and the U.S. HSBC Mexico paid a $27.5 million fine last month for failing to report suspicious transactions related to drug money laundering. HSBC Bank USA is under investigation over allegations that the bank was used to launder suspicious money from Mexico and Iran, according to a BBC report. Standard Chartered New York was accused of having schemed with Iranian clients to skirt US financial sanctions against their country and ordered to appear before the New York State Department of Financial Services on August 15 to explain these allegations, according to a Guardian report. Prompted by such developments, the FSS are planning to conduct checks on HSBC s Seoul branch and Standard Chartered operations in Korea. It will look into their businesses related to money laundering comprehensively to see if they reported suspicious transactions and if they verified their customers before such transactions. Foreign Currency Funding and Liquidity of Domestic Banks in July 2012 (Aug 13) The foreign-currency funding conditions of domestic banks remained favorable in July 2012, affected by the Fed s indication of further action and the ECB s commitment to preserve the euro. As of end-july 2012, the CDS premium on Korea s five-year treasury bonds was 117bp, down 6bp from 123bp a month earlier. The spread on domestic bank borrowings also fell from a month earlier. The spread on domestic banks short-term borrowings stood at 14.8bp, down 10.8bp from 25.6bp a month earlier. The spread on five-year borrowings stood at 204bp, down 16bp from 220bp a month earlier. However, the spread on one-year borrowings rose 13bp from a month earlier, as bond issuance by state-owned banks with favorable credit ratings decreased. But it was still lower than this year s average of 117bp. CDS Premium & Spread on Foreign Currency Borrowings Mar. Apr. May Jun. Jul. MoM CHG CDS premium Spread on short-term borrowings Spread on long-term borrowings 3 (1-yr) Spread on long-term borrowings 3 (5-yr) CDS premium on 5-year Korean treasury bonds, end of period (Source: International Financial Center); 2. Short-term borrowings with maturities ranging from 2 days to 1 year of 16 domestic banks, excluding Citibank Korea and Standard Chartered Korea; 3. Long-term borrowings of more than one year maturity including interbank loans and bond issuance for 10 domestic banks, excluding Citibank Korea, Standard Chartered Korea and regional banks; (In bp) 14_ FINANCIAL SUPERVISORY SERVICE

15 The rollover rate of short-term borrowings was 124.7% and the rollover rate of long-term borrowings was 168.1%, both recording net borrowings. This means domestic banks face little difficulty in funding in foreign currencies despite the European debt crisis. For the first seven months of this year, banks recorded a net borrowing. The rollover rate of long-term borrowings in the January to July 2012 period stood at 151.2%. Rollover Rate of Domestic Banks' Borrowings (%) Mar. Apr. May Jun. Jul. Short-term borrowings Long-term borrowings Short-term borrowings with maturities ranging from 2 days to 1 year of 16 domestic banks, excluding Citibank Korea and Standard Chartered Korea; 2. Long-term borrowings of more than one year maturity including interbank loans and bond issuance for 12 domestic banks, excluding regional banks; As of end-july 2012, domestic banks foreign-currency soundness, measured by the 3-month foreign-currency liquidity ratio and the 7-day and 1-month maturity mismatch ratios, all far exceeded their recommended levels. FX Soundness Ratio (end of period) p Compared with May 2012 Jun Jul guidelines FX liquidity ratio ( 85%) month mismatch ratio ( -10%) day mismatch ratio ( -3%) (%, %p) Note: The criteria for calculation of FX soundness ratio were tightened by applying different liquidity weightings to foreign-currency assets starting from July 1, 2010; Domestic Banks SBLs at end-june 2012 (Aug 16) The ratio of banks loans classified as substandard or below (SBLs) to the total outstanding loans was 1.49% at the end of June 2012, down 0.02 percentage points from 1.51% at the end of March During the same period, SBLs decreased KRW0.1 trillion from KRW20.9 trillion to KRW20.8 trillion. Corporate loans classified as SBLs totaled KRW17.1 trillion, accounting for a lion s share of 82.2%, followed by household loans of KRW3.4 trillion (16.5%) and credit card loans of KRW0.3 trillion (1.3%). New SBLs increased KRW1.5 trillion from KRW5.4 trillion in the first quarter to KRW6.9 trillion in the second quarter. However, KRW7.0 trillion SBLs were cleaned up in the second quarter, compared with KRW3.3 trillion in the first quarter. As a result, the SBL ratio slightly fell in the second quarter. Domestic Banks' SBLs (end of period) (%, in trillions of won) Jun Dec Mar Jun Sept Dec Mar Jun p SBL (Real estate PF loan) (4.3) (6.4) (6.6) (4.2) (4.0) (2.4) (2.6) (3.0) SBL Ratio FSS Newsletter _15

16 SBL ratios fell 0.06 percentage points to 1.84% for corporate loans and 0.04 percentage points to 2.31% for SME loans. Excluding real estate PF loans, the SBL ratio for corporate loans was 1.56%. The SBL ratio for real estate PF loans rose 2.13 percentage points from 9.09% to 11.22%. SBL ratios rose 0.05 percentage points to 0.76% for household loans, 0.03 percentage points to 0.67% for mortgage loans, and 0.05 percentage points to 1.61% for credit card receivables. SBL Ratios by Sector (End of period) (%) Jun. Dec. Mar. Jun. Sept. Dec. Mar. Jun p Corporate loans (SME loans) [Real estate PF] Household loans (Mortgages) Credit card debts New SBLs & Disposition New SBLs totaled KRW6.9 trillion in the second quarter of 2012, up KRW1.5 trillion from KRW5.4 trillion in the first quarter of Corporate loans accounted for a lion s share of new SBLs with KRW5.4 trillion, or 78.4%. Household loans and credit card debts newly classified as SBLs totaled KRW1.3 trillion (18.8%) and KRW0.2 trillion (2.8%), respectively. Domestic Banks New SBLs (end of period) (In trillions of won) Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total Q1 Q2 p Total New SBLs Corporate (SME) Household (Mortgages) Credit cards SBLs totaling KRW7.0 trillion were cleaned up in the second quarter of 2012, up KRW3.7 trillion from KRW3.3 trillion in the previous quarter. Of the KRW7.0 trillion SBLs cleaned up, loan write-offs made up KRW2.4 trillion, loan sales KRW2.2 trillion, collateral sales and loan collection KRW1.5 trillion, loans reclassified above substandard KRW0.7 trillion, and others KRW0.1 trillion. 16_ FINANCIAL SUPERVISORY SERVICE

17 Disposition of Domestic Banks SBLs (end of period) (In trillions of won) Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total Q1 Q2 p Total Total Write-offs Loan sales Securitization Collateral sales Reclassification Others Contributions to Retirement Pensions as of end-june 2012 (Aug 20) Retirement plan contributions and subscribers have increased since the introduction of pension plans in December 2005 to help employees to plan for a comfortable life after retirement. That was mainly attributed to government incentives including a ban on new subscription to retirement insurance and trust and a gradual reduction of deduction limits for retirement contributions. Total contributions to retirement pension plans as of end-june 2012 totaled KRW53.9 trillion, up KRW4.0 trillion from KRW49.9 trillion at end-december As most large companies had completed the shift from lump sum severance payments to pension plans, the pace of growth in total contributions slowed down from 25.5% in the first six months of 2011 to 8.1% in the corresponding period of The ratio of participants in retirement plans to total employees was 38.9%, indicating that about four employees out of ten subscribed to retirement plans. Retirement Plan Contributions and Subscription Ratio Contributions (In trillions of won) Subscription Contributions 27.4% 15.7% KRW53.9 trillion 38.9% Subscription ratio (%) Jun Contributions by Sector Contributions to plans of banks totaled KRW26.7 trillion, followed by life insurers (KRW13.2 trillion), brokerage houses (KRW9.9 trillion) and property & casualty insurers (KRW4.0 trillion). Banks took up 49.4% of the market, slightly up 0.8 percentage points from end-december 2011, thanks to their nationwide branch operations and sales force. FSS Newsletter _17

18 Retirement Plan Contributions by Financial Sector Dec (%) Jun (%) Growth (%) Banks Life insurers P&C insurers 24,254.4 (48.6) 26,684.5 (49.4) 2,430.1 (0.8) 12,782.4 (25.6) 13,202.8 (24.5) (-1.1) 3,891.9 (7.8) 4,084.3 (7.6) (-0.2) Brokerage firms 8,974.9 (18.0) 9,948.1 (18.4) (0.4) (In billions of won, %, %p) Korea Workers Compensation & Welfare Service 13.1 (0.0) 32.1 (0.1) 19.0 (0.1) Employers with Retirement Pension Plans As of end-june 2012, 167,460 employers introduced retirement plans, accounting for 11.0% of total 1,519,850 employers nationwide. As much as 77.9% of large companies employing 500 or more introduced retirement plans, while little SMEs introduced pension plans, leaving their employees retirement security not ensured. Asset Management Companies Operating Results for Q1 FY2012 (Aug 22) Combined net income of all 82 asset management companies for the first quarter ended June 30, 2012 totaled KRW119.8 billion. That was up 20% or KRW20.3 billion from KRW99.5 billion a year earlier, but mainly resulted from a KRW51.8 trillion increase in nonoperating income which showed a hefty rise from KRW0.9 billion to KRW52.7 billion during the same period. Operating income fell 21% or KRW28.2 billion from KRW132.6 billion to KRW104.4 billion, due to a drop in management fees from a reduction in the fund value. As many as 48 of 82 asset management companies was profitable with a combined net income of KRW134.2 billion, while 34 companies posted net losses of KRW14.4 billion, compared with 31 companies unprofitable a year earlier. Assets under Management As of end-june 2012, net asset value (NAV) of funds managed by all the asset management companies totaled KRW293.6 trillion, down 1.8% or KRW5.5 trillion from KRW299.1 trillion a year earlier. Stock funds decreased KRW15.5 trillion due to falling stock prices, but money market funds increased KRW12.3 trillion, contributing to the modest drop in total funds NAV. Profitability Operating revenues of asset management companies for the first quarter of 2012 totaled KRW361.1 billion, down 12.0% or KRW49.0 billion from KRW410.1 billion a year earlier. A KRW36.8 billion drop in management fees and a KRW9.5 billion gain on valuation and sale of investment securities mainly contributed to a drop in operating revenues. Operating expenses totaled KRW256.7 billion, down 7.5% or KRW20.8 billion from KRW277.5 billion a year ago, mainly as a result of a KRW8.6 billion drop in sales and administrative costs and a KRW13.4 billion drop in fee expenses. 18_ FINANCIAL SUPERVISORY SERVICE

19 Combined net income totaled KRW119.8 billion, up 20.4% or KRW20.3 billion from KRW99.5 billion a year earlier. Much of the increase resulted from a sharp rise in non-operating revenues, including gains on disposal of tangible fixed assets (KRW57.7 billion for Mirae Asset from sale of company building). Profitability of Asset Management Companies 1Q FY2011 (A) (Apr Jun. 2011) 1Q FY2012 (B) (Apr Jun. 2012) Growth (B-A) (In billions of won, %) % growth Operating revenues Operating expenses Net income Financial Soundness As of end-june 2012, the average net capital ratio (NCR) of all asset management companies was 517.8%, up 57.7 percentage points from 460.1% a year earlier. Wise Asset Management was the only company with NCR below 150%. The delinquency ratios of asset management companies averaged 15.1% as of end- June 2012, down 7.0 percentage points from 22.1% a year earlier. Direct Corporate Financing in July 2012 (Aug 23) Direct corporate financing through stock and bond issues in July 2012 totaled KRW trillion, up 9.5% or KRW1.031 trillion from KRW trillion a month earlier. Stock issues increased KRW45.3 billion from KRW169.6 billion to KRW214.9 billion, and bond issues went up KRW985.2 billion from KRW trillion to KRW trillion during the same period. Corporate financing through stock and bond issues in the first seven months of 2012 totaled KRW trillion, down 5.0% from KRW trillion in the same period last year. Corporate Financing through Public Offering (In billions of won) Jan.-Jul Jan.-Jul YoY change (%) Jun.2012 Jul.2012 MoM change (%) IPOs 4, , , Rights issues 6, , , Subtotal (stocks) 10, , , , Non-financial bonds 45, , , , , , Financial bonds 26, , , , , , ABS 11, , , , , Bank debentures 29, , , , , , Subtotal (bonds) 112, , , , , , Total 123, , , , , , FSS Newsletter _19

20 Equity Financing In July 2012, stocks issued totaled KRW214.9 billion, up 26.7% or KRW45.3 billion from KRW169.6 billion a month earlier. There were seven IPOs in July 2012 totaling KRW110.1 billion, up 146.3% or KRW65.4 billion from one IPO that raised KRW44.7 billion a month earlier. There were five rights issues in July 2012, totaling KRW104.8 billion, down 16.1% or KRW20.1 billion from six rights issues of KRW124.9 billion a month earlier. Stocks issued declined 83.9% or KRW5.897 trillion from KRW7.029 trillion in the first seven months of 2011 to KRW1.132 trillion in the corresponding period of In the first seven months of the previous year, there were massive rights issues including a KRW1.3 trillion rights issue by Hana Financial Group in February 2011, a KRW1.1 trillion rights issue by Shinhan Financial Group in April 2011 and a KRW600.0 billion rights issue by OCI in May However, stock issues declined this year due to the weak stock market. Debt Financing Bond issues by non-financial companies increased in their efforts to preemptively increase liquidity taking advantage of favorable conditions such as the central bank s benchmark rate cut from 3.25% to 3.00% on July 12. Corporate bonds issued in July 2012 totaled KRW trillion, up 9.2% or KRW985.2 billion from KRW trillion a month earlier. In July 2012, non-financial companies raised KRW6.419 trillion in bond issues, up 41.2% from KRW4.545 trillion a month earlier. Non-financial corporate bonds were mostly issued by heavy industry companies. Hyundai Heavy Industries issued KRW700.0 billion of bonds and Daewoo Shipbuilding and Marine Engineering issued KRW500.0 billion of bonds. Financial companies raised KRW2.768 trillion in bond issues in July 2012, down 7.6% from KRW2.996 trillion a month earlier. The amount of asset-backed securities issued totaled KRW556.0 billion in July 2012, down 66.3% from KRW1.650 trillion a month earlier. This was attributed to the base effect resulting from massive ABS issuance in the previous month. Banks issued KRW1.950 trillion of debentures in July 2012, up 28.5% from KRW1.517 trillion a month earlier. Non-financial bonds issued by large companies totaled KRW6.419 trillion, accounting for 100.0% of all corporate bonds that were issued in July There was no bond issuance by small-and-medium-sized companies. Straight bonds issued totaled KRW6.409 trillion, accounting for 99.8% of all non-financial bonds issued in July Hybrid securities (CB or BW) of KRW10.0 billion accounted for 0.2% of the total non-financial bond issues. Corporate bonds with an A or higher credit rating totaled KRW5.944 trillion, representing 92.6% of all newly-issued non-financial corporate bonds in July Bonds with a BBB rating totaled KRW345.0 billion, and bonds with a BB or lower rating totaled KRW130.0 billion. 20_ FINANCIAL SUPERVISORY SERVICE

21 Basel Implementation for Bank Holding Companies (Aug 23) Background In June 2004, the Basel Committee on Banking Supervision recommended that banks and bank holding companies should adopt the Basel II Framework in determining risk-weighted assets (RWA). At the G20 Seoul Summit held in November 2010, supervisors and regulators from each country agreed to apply Basel III with banks and bank holding companies, effective from 2013, in assessing the adequacy of bank capital for BIS ratio. In Korea, banks adopted Basel II from 2008, while bank holding companies are still applied by Basel I. Basel II will also be applied from 2013 to financial holding companies with banks as their subsidiaries. Likewise, financial holding companies which have bank subsidiaries will be also subject to Basel III from 2013 as banks agreed to adopt Basel III from the same year. Meritz Financial Group and Korea Investment Holdings will not be subject to this regulation as they don t have bank subsidiary. Basel II Implementation Basel I sets capital requirements by measuring exposures to credit and market risk, while Basel II introduces operational risk as a separate risk category that is different from market and credit risk. Under Basel II, bank holding companies are allowed to utilize their own internal models in calculating RWA. If they don t have ones, they can use the standardized approach provided by the Basel Committee. As most bank subsidiaries are using supervisor-approved internal models, bank holding companies will be allowed to use internal models of their bank subsidiaries. From 2016, however, bank holding companies can use the internal ratings-based (IRB) approach only when they establish a single IRB model at the group level. Basel II Implementation Status of Bank Subsidiaries Credit Risk Market Risk Operational Risk Standardized approach Citibank Korea, Busan, Daegu, Gwangju, Jeju Citibank Korea, IBK, Busan, Daegu, Gwangju, Jeju, Kyeongnam, Nonghyup Shinhan, SC, Citibank Korea, IBK, Busan, Daegu, Gwangju, Jeju, Kyeongnam, Nonghyup IRB approach Woori, Kyeongnam, Shinhan, Hana, KEB, KB, SC, IBK, Nonghyup Woori, Shinhan, Hana, KEB, KB, SC Woori, Hana, KEB, KB FSS Newsletter _21

22 Basel III Implementation Basel I and Basel II only set 8% total capital requirements. Under Basel III, banks are required to meet the new 4.5% Common Equity Tier 1 capital ratio (CET1) and 6% Tier 1 capital ratio. Basel III also introduces a mandatory capital conservation buffer of 2.5% that can be drawn down in times of stress. Regulatory Capital Ratios under Basel III (%) Basel I, II Basel III BIS total ratio CET 1 ratio Tier 1 ratio BIS total ratio Minimum regulatory capital ratios (a) Capital conservation buffer (b) 0.0 CET 1: 2.5 Total (a+b) Implementation of the minimum CET1 and Tier 1 requirements and a capital conservation buffer will begin in 2013, but the Basel Committee allows the phase-in of such requirements over several years. Therefore, our implementation schedule will be determined by checking the preparedness of bank holding companies in Korea. Hybrid capital instruments and subordinated debts with an incentive to redeem through features such as step-up clauses will not qualify for inclusion in regulatory capital. Non-qualifying capital instruments under Basel III will be phased out by 10 percentage points every year from the capital base for the purpose of calculating the risk-weighted capital ratio. Transition and Implementation Basel II and Basel III will apply at the same time to bank holding companies from Considering time required to move to the new standards, banks are allowed to calculate their minimum capital requirements as set out in Basel I as well as Basel II and III until Starting from 2014, all bank holding companies should follow Basel II and Basel III standards in assessing the capital adequacy. The relevant regulations will be revised from this year regarding the implementation of Basel II and Basel III for bank holding companies. Regulators will instruct bank holding companies to improve internal systems and beef up workforce so that the new capital requirements can be in full implementation from _ FINANCIAL SUPERVISORY SERVICE

23 Domestic Banks BIS Capital Ratios as of end-june 2012 (Aug 27) Overview Preliminary figures show that the BIS capital adequacy ratio of domestic banks under Basel II at the end of June averaged 13.83%, down 0.05 percentage points from 13.88% at the end of the previous quarter. Banks Tier 1 capital ratio averaged 11.02%, down 0.03 percentage points from 11.05% at the end of the previous quarter. Capital increased KRW2.3 trillion due to a KRW2.2 trillion net income and a capital increase of KRW0.8 trillion by Export-Import Bank of Korea, despite a KRW0.9 trillion Reserve for Credit Losses of Nonghyup Bank. However, domestic banks risk-weighted assets increased KRW21.3 trillion, mostly credit risk-weighted assets by KRW21.2 trillion, as some banks increased lending in the second quarter, driving down BIS capital ratios. Domestic Banks BIS Capital Adequacy Ratio and Tier 1 Capital Ratio (end of period) (%, %p) Mar Jun Growth (A) (B) (B-A) Capital adequacy ratio Tier 1 capital ratio /08 09/08 12/08 03/09 06/09 09/09 12/09 03/10 06/10 09/10 12/10 03/11 06/11 09/11 12/11 03/12 06/12 Capital adequacy ratio Tier 1 ratio As of end-june 2012, domestic banks BIS capital ratios were favorable with the capital adequacy ratio at 13.83% and Tier 1 capital ratio at 11.02%. All domestic banks reported capital adequacy ratio of 12% or higher, except Industrial Bank of Korea (11.95%), Export-Import Bank of Korea (11.35%) and Jeonbuk Bank (11.69%). The Tier 1 capital ratio of all domestic banks exceeded 9%, except National Federation of Fisheries Cooperatives (7.13%) and Jeonbuk Bank (7.67%). FSS Newsletter _23

24 Domestic Banks Loan Delinquency Rate at end-july 2012 (Preliminary) (Aug 30) Bank Loans Outstanding Domestic bank loans outstanding totaled KRW1,090.9 trillion at the end of July 2012, up 0.12% or KRW1.3 trillion from a month earlier. Corporate loans rose KRW2.9 trillion to KRW612.3 trillion from a month earlier. Corporate loans outstanding to large corporations increased KRW2.6 trillion to KRW153.5 trillion and loans outstanding to small-and- medium-sized companies (SMEs) also rose KRW0.4 trillion to KRW458.8 trillion during the same period. Considering the reclassification of some SMEs as large corporations, corporate loans to SMEs increased KRW2.3 trillion. Household loans rose KRW0.7 trillion to KRW455.4 trillion and mortgage loans also rose KRW0.4 trillion to KRW308.5 trillion. Growth in Bank Loans 1 by Sector (In trillions of won) Jan.-Jul Outstanding at End-Jul. Jan.-Jul. Q1 Q2 Jul Corporate loans Large companies SMEs Household loans Mortgages Public loans or others Total , Figures denote won-denominated loans in bank accounts and trust lending; 2. Figures become KRW21.1 trillion if loans to SMEs reclassified as large corporations are included; 3. Figures become KRW2.3 trillion if loans to SMEs reclassified as large corporations are included; 24_ FINANCIAL SUPERVISORY SERVICE

25 Delinquency Rate on Won-denominated Loans As of end-july 2012, the preliminary delinquency rate on domestic banks won-denominated loans where payments on the principal are one or more days past due was 1.36%, up 0.27 percentage points from 1.09% a month earlier. The rate rose more sharply than in July 2009 (a 0.13 percentage point rise) and July 2011 (a 0.16 percentage point rise), but slowed from July 2010 (a 0.28 percentage point rise). Bank loans newly classified as delinquent increased KRW1.8 trillion from a month ago to KRW4.1 trillion in July, and delinquent loans cleaned up declined KRW4.2 trillion to KRW1.1 trillion for the same period. Won-denominated Loan Delinquency Rate since Nov Loan delinquency rate (%) /08 01/09 03/09 05/09 07/09 09/09 11/09 01/10 03/10 05/10 07/10 09/10 11/10 01/11 03/11 05/11 07/11 09/11 11/11 01/12 03/12 05/12 07/12 As of end-july 2012, the delinquency rate on corporate loans was 1.73%, up 0.41 percentage points from 1.32% a month earlier. This was because construction and shipbuilding industries and real estate PF loans witnessed a rise in new delinquencies due to sluggish corporate earnings and the lack of liquidity amid economic slowdown. The delinquency rate on loans to large corporations in July 2012 was 1.63%, up 0.83 percentage points from 0.80% a month earlier. The delinquency rate on loans to SMEs rose 0.27 percentage points from 1.49% to 1.76%. Excluding real estate PF loans, the SME loan delinquency rate rose 0.22 percentage points to 1.43% in July from 1.21% a month earlier. FSS Newsletter _25

26 The delinquency rate on household loans at end-july 2012 was 0.93%, up 0.10 percentage points from 0.83% a month ago. The delinquency rate on mortgage loans was 0.83%, up 0.09 percentage points from 0.74% a month ago. The delinquency rate for balloon payment mortgages rose 0.09 percentage points from 1.63% a month earlier to 1.72% in July Excluding balloon mortgages, the mortgage delinquency rate was 0.39%. The delinquency rate on household loans excluding mortgages rose 0.11 percentage points from 1.02% to 1.13%. Bank Loan Delinquency Rate by Loan Type (end of period) (%) Jul. Dec. Jul. Dec. Jun. Jul. Sept. Nov. Dec. Mar. May Jun. Jul. p Corporate loans Large companies SMEs Household loans Mortgage loans (Balloon mortgages) Unsecured loans Total loans Note: Figures denote won-denominated loans in bank accounts and trust lending; figures denote delinquencies of one day or more in the principal portion of loans; 26_ FINANCIAL SUPERVISORY SERVICE

27 Laws and Regulations Rules Changes Proposed for Retirement Pension The FSC proposed several amendments to the Regulation on Retirement Pension as a follow-up to the newly amended Employee Retirement Benefit Security Act that took effect in July. Under the newly proposed rules, which are set to take effect in October, up to 40% of member assets in a defined benefit plan or an individual retirement pension (IRP) plan may be invested in equity funds or hybrid funds with equity components. To prevent employers from signing up exclusively with affiliated corporate pension service providers and encourage greater individual choices for employees, the amended rules require corporate pension service providers to make a quarterly disclosure on the proportion of businesses from the affiliated companies. In a measure designed to improve regulatory compliance of corporate pension service providers, the newly proposed rules require the service providers to reject member orders that violate the applicable retirement plan investment limits. FSS Newsletter _27

28 News & Events Seminar on Localization Strategy and Policy Support for Domestic Financial Companies Operating in Overseas Markets On August 30, Financial Hub Korea hosted a seminar on Localization Strategy and Policy Support for Domestic Financial Companies Operating in Overseas Markets. First Senior Deputy Governor Choi Soo-Hyun delivered the opening speech in which he emphasized the importance of long-term investment and competitive strategies that fit local circumstances. The seminar, held as part of a research project commissioned by Financial Hub Korea to Korea Institute of Finance (KIF), was attended by more than 70 participants from domestic financial companies and other relevant organizations who listened to the key findings of the study and participated in a panel discussion. The key findings of the study covered topics such as major barriers for financial companies to localize in overseas markets, case studies, effective localization strategies, and policy support from the financial regulators. Governor Meets with CEOs of Credit Card Companies Governor Kwon Hyouk-Se met with the CEOs of credit card companies and the president of the Credit Finance Association on August 31 to exchange opinions on major issues facing the credit card industry. Governor Kwon asked credit card companies to take steps to ensure compliance with the recently revised merchant fee regulations, strengthen risk management over revolving credit cards, redouble efforts to root out improper solicitation practices, and step up corporate social responsibility activities. 28_ FINANCIAL SUPERVISORY SERVICE

29 Publications Title Date of Publication Publisher Asset-Backed Securities Guide August 2012 Financial Supervisory Service FSS Newsletter _29