Financial Crime World

Title: South Korea’s Financial Regulation: A Comprehensive Look at the Banking System and Basel III Implementation

1. Overview of the South Korean Banking Sector

  • Establishment of the Financial Supervisory Service (FSS) and Financial Services Commission (FSC) in 1999 and 2002, respectively
  • Dominated by banks and non-bank financial institutions (NBDIs), with banks and NBDIs accounting for approximately 70% and 30% of the total assets, respectively
  • Rapid growth of the financial sector, with banking sector assets more than tripling from 1,142 KRW trillion in 2004 to 2,978 KRW trillion in 2017

2. South Korea’s Financial System

  • Banks and specialized banks form the backbone of the financial system, accounting for over half of its assets
  • Specialized banks subject to the same prudential supervision as commercial banks by the FSS
  • Financial investment services companies also play a significant role, accounting for about 14% of the total assets

3. Reform and Basel III Implementation in South Korea

  • Introduction of Basel III framework in December 2013
  • Issuance of rules regarding Pillar 2 and planning to introduce the Large Exposure framework
  • Well-capitalized banking sector, maintaining a CET1 ratio of around 15% in 2017
  • Less stringent regulation of mutual savings banks (MSBs) and mutual credit cooperatives (MCCs) poses potential risks

4. Detailed Assessment of the Republic of South Korea

Topic I: Supervisory Framework

  • Equivalent assessment due to the country’s implementation of Basel III international regulatory standards and two-tier supervisory structure

Topic II: Own Funds

  • Partially equivalent assessment due to differences in the inclusion of dividend stoppers within the South Korean legislation

Section 6: Own Funds - Dividend Stoppers

  • South Korean Banking Act stipulates distribution privileges for Additional Tier 1 (AT1) holders
  • Dividend stoppers not allowed in the EU framework

Topic III: Credit Risk Requirements

  • Largely equivalent assessment due to similarities in South Korea’s regulations on credit risk, credit risk mitigation, and securitization compared to the EU framework

Section 8: Capital Requirements for Credit Risk - Standardized Approach

  • Exposure classes and risk weights largely identical, but some differences, such as no reduced risk weights for original maturity lending to Public Sector Entities in the Korean regulation

South Korea’s financial regulatory system has shown remarkable resilience and adaptability in the face of global financial developments, including the implementation of Basel III and other prudential regulations. This represents a crucial stride towards strengthening the country’s financial sector and enhancing its reputation as a global financial hub.