2. 1 FINANCIAL SUPERVISION: MEASURING UP TO GLOBAL STANDARDS Lee Jang-Yung Assistant Governor Financial Supervisory Service

3. Page 2 Financial Supervisory Service Contents I. Korea ’ s Financial Supervision: An Overview II. Capital Market Supervision III. International Cooperation

4. Page 3 Financial Supervisory Service I. Korea ’ s Financial Supervision: An Overview ‣ Korea’s financial services industry enjoyed rapid ‣ Korea’s financial services industry enjoyed rapid growth after Asian financial crisis growth after Asian financial crisis - Banking, Securities, Insurance industry : asset size - Banking, Securities, Insurance industry : asset size tripled tripled - Stock market(5 th ), Bond market(3 rd ) in Asia - Stock market(5 th ), Bond market(3 rd ) in Asia ‣ Korea’s financial services industry enjoyed rapid ‣ Korea’s financial services industry enjoyed rapid growth after Asian financial crisis growth after Asian financial crisis - Banking, Securities, Insurance industry : asset size - Banking, Securities, Insurance industry : asset size tripled tripled - Stock market(5 th ), Bond market(3 rd ) in Asia - Stock market(5 th ), Bond market(3 rd ) in Asia

5. Page 4 Financial Supervisory Service Evolving Global Environment Risk-based supervision increasingly applied to NBFI  Capital requirements for insurance companies (EU, US)  Capital requirements for securities units of banking organizations (EU’s Capital Requirement Directive) Increased integration and mutual dependence  Can amplify systemic risk in global financial markets Aggressive expansion into overseas markets  Need to strengthen global competitiveness of domestic firms

6. Page 5 Financial Supervisory Service Korea’s Approach to Financial Supervision 1.Raising risk management skill sets of domestic financial institutions Banking Sector  Preparation for a smooth transition to a new banking regime under Basel II accord, set to take effect in January 2008

7. Page 6 Financial Supervisory Service Korea’s Approach to Financial Supervision ① Preparations Started in March 2002, finalized standards in June 2007 Adopt standardized approach or IRB approach in 2008 Preparations for the New Basel Accord Amend relevant banking regulations Set up a monitoring system ② Tasks remaining

8. Page 7 Financial Supervisory Service Korea’s Approach to Financial Supervision Insurance Companies  Working to adopt a risk-based capital regime  Started operating the Risk Assessment and Application System in April 2007 Securities companies  Working to introduce a risk-based supervision system

9. Page 8 Financial Supervisory Service Korea’s Approach to Financial Supervision 2. Helping domestic financial institutions grow to become global players Provide a level playing field Support overseas business expansion  Welcome feedback from foreigners on Korea’s regulatory environment  Provide regulatory information in English  Simplify and accelerate regulatory process for opening overseas branches  Provide information and support services for overseas businesses

10. Page 9 Financial Supervisory Service II. Capital Market Supervision ‣ Korea’s Capital Market Reform ‣ International Financial Reporting Standards ‣ Capital Market Infrastructure

11. Page 10 Financial Supervisory Service Changing Global Environment Trend toward debt and equity  Increase in financing through the capital market Financing Structure (Stock market capitalization / total bank loans)  Asset securitization, such as ABS and CDO, on the rise 1995 2005 Change Germany18.4%33.8%15.4 p.p. Japan50.4%65.1%14.7 p.p. US101.5%116.8%15.3 p.p.

12. Page 11 Financial Supervisory Service Changing Global Environment Regulatory reform to stimulate capital markets  US: Financial Services Modernization Act (1999)  UK: Financial Services Act (1986)  Japan: Financial Instruments Exchange Law (2006)

13. Page 12 Financial Supervisory Service Korea’s Regulatory Policies 1.Korea’s Capital Market Reform Enactment of the Financial Investment Services & Capital Market Act to spark a “ big bang ” in the financial services industry  Enacted June 2007  To take effect in February 2009

14. Page 13 Financial Supervisory Service Korea’s Regulatory Policies Financial Investment Services & Capital Market Act - Types of securities and derivatives specifically enumerated - Broad definition of financial investment products - Flexibility in designing new, innovative products and services ① Financial Products ② Financial Services Financial Investment Company (FIC) Merchant Bank Futures Co. Asset Mgmt. Co. Trustee Co. Securities Co.

15. Page 14 Financial Supervisory Service Korea’s Regulatory Policies Financial Investment Services & Capital Market Act ③ Functional Regulation Sectoral regulationFunctional regulation ④ Consumer Protection  Consumers fully informed of investment risks  “Know your customer” rule

16. Page 15 Financial Supervisory Service Korea’s Regulatory Policies 2. International Financial Reporting Standards Roadmap for adoption of IFRS  Reporting under IFRS mandatory (2011) - May elect to use IFRS (2009)  Quarterly consolidated financial reporting - Companies with assets of KRW2 trillion or more (2011) - Companies with assets of less than KRW2 trillion (2013)

17. Page 16 Financial Supervisory Service Korea’s Regulatory Policies 3. Capital Market Infrastructure Improvements in market infrastructure  Consolidated securities exchanges  Created Data Analysis, Retrieval & Transfer (DART), an electronic corporate disclosure system and enforced fair disclosure rules  Improved listing and delisting requirements

18. Page 17 Financial Supervisory Service Korea’s Regulatory Policies Initiatives to improve market infrastructure  Integrate separate trading systems for stock futures and Treasury futures  Integrate trading systems for the Stock Market, KOSDAQ Market, and Futures Market  Incorporate XBRL into DART  Introduce electronic securities

19. Page 18 Financial Supervisory Service III. International Cooperation ‣ Strengthen supervisory cooperation and information exchange

20. Page 19 Financial Supervisory Service Changing Global Environment Need for close, concerted cooperation and coordination among policymakers and regulators  Financial crisis in 1990s  Crisis in global credit market triggered by subprime mortgages  Flow of speculative funds and growth of complex financial groups that operate globally

21. Page 20 Financial Supervisory Service Korea’s Approach Supervisory cooperation  Expand network of MOUs with foreign supervisors  Take active part in international supervisory organizations  Host international conferences Information exchange  Capital market infrastructure, such as DART 1. Strengthen supervisory cooperation and information exchange

22. Page 21 Financial Supervisory Service Thank You