2003年-世界发展银行全球_Korea___Financial_Sector_Assessment_18页_3mb

Financial Sector Assessment of Korea (June 2003)

I. Introduction and Key Recommendations

Korea has made significant progress in financial and corporate sector reform since the 1997-98 crisis, including strengthening prudential supervision and addressing non-performing assets in the banking sector. The banking sector has been consolidated, becoming more profit-oriented, with foreign participation tripling since 1996. However, several key areas still require reform to ensure long-term financial stability.

Key Recommendations:

• Enhance supervisory practices: Improve off-site supervision, integrate risk assessment, and ensure systematic analysis of stress-test results.
• Clarify responsibilities: Make the division of roles between MOFE, FSC, and FSS more transparent.
• Strengthen regulatory independence: Ensure that regulatory bodies operate independently and free from undue influence.
• Improve capital adequacy: Redefine capital requirements for the insurance sector, particularly for life insurance companies.
• Monitor non-bank deposit institutions: Address soundness issues and ensure proper oversight.
• Strengthen the insolvency framework: Pass the Consolidated Insolvency Law to provide a legal basis for close-out netting and handle corporate distress effectively.
• Promote market development: Deepen money, bond, and foreign exchange markets through better government debt management and increased foreign participation.
• Improve corporate governance and disclosure: Continue alignment with international best practices, enhance audit committees, and improve related-party transaction transparency.

II. Short-Term Vulnerabilities

1. Derivatives and Supervisory Challenges

• The derivatives market, established in 1996, has grown to one of the largest in the world.
• Supervision of derivatives activities, particularly at KDB, is inadequate.
• KDB has not undergone a targeted audit of its derivative operations in over two years.
• The FSS has established a special team to address these issues, but the supervisory framework is still underdeveloped.

2. Other Supervisory Challenges

• Non-performing loans (NPLs) have been securitized, with some credit enhancements provided by banks.
• Lack of transparency and adequate supervision in the ABS market remains a concern.
• Insufficient information on connected lending and related-party transactions.
• Technical capacity of supervisors to conduct stress-tests is unclear.

3. Weaknesses in Non-Bank Deposit Institutions

• While not systemically important, a crisis in this sector could damage the reputation of the financial system.
• These institutions have significant exposure and require closer monitoring.

4. Weak Investment Trust Companies (ITCs)

• Public awareness of ITCs' financial difficulties is increasing.
• Negative capital ratios pose a risk to market confidence and could lead to contagion in the financial system.

5. Delays in Corporate Restructuring

• About a quarter of Korean corporations are unprofitable and highly leveraged.
• These companies pose a risk to banks and could lead to significant credit losses.
• The restructuring process has not fully addressed these issues.

III. Medium-Term and Structural Issues

A. Financial Sector Supervision and Regulation

• The FSC, FSS, and SFC have a strong regulatory record but face challenges in independence and transparency.
• MOFE's influence on regulatory interpretation raises concerns about the independence of the supervisory bodies.
• The rapid turnover of FSC leadership and staff movement between MOFE and FSC may undermine credibility.
• Legal protection for supervisory staff is lacking, potentially constraining their ability to act in the public interest.

B. Legal Infrastructure

• Korea has a respected judiciary, but court procedures can be slow and opaque.
• The legal framework for secured transactions is sound, but lacks provisions for non-possessory pledges.
• A single unitary law addressing consumer rehabilitation and cross-border insolvency would be beneficial.
• The success of the new legal framework depends on the behavior of creditors and their willingness to support corporate recovery.

C. Sectoral Issues

1. Banks and Non-Bank Financial Institutions

• The banking sector has seen a significant increase in foreign ownership and concentration.
• Government ownership remains high, with nearly 60% of the sector controlled by the government in mid-2002.
• Efforts to divest government stakes are ongoing, but full privatization has not been achieved.
• Non-bank deposit institutions are diverse but face soundness issues, particularly among credit unions.

2. Insurance and Pensions

• The insurance market is large, with high insurance penetration (13% of GDP).
• Life insurance companies are undercapitalized and face challenges in meeting fully phased-in capital requirements.
• Non-life insurance companies are more stable, with improving profitability.
• The role of KIDI in product development and approval raises concerns about stifling innovation and in-house expertise.

Summary of Key Findings

• Korea has made substantial progress in financial sector reform.
• Continued reform is essential to address remaining vulnerabilities and ensure long-term stability.
• Strengthening regulatory independence, improving supervisory practices, and deepening financial markets are critical.
• Corporate restructuring and insolvency reform must be completed to prevent systemic risks.