Enhancement of Financial Institutions’ Loss Absorption Capacity and Strengthening Stability
“Preventing Spread of Real Economy’s Insolvency to Entire Financial Sector”
Operation of Short Selling Inspection System, Focused Investigation on Violations
At a press conference held at the Financial Supervisory Service (FSS) in Yeouido, Seoul, on the 10th, Lee Bok-hyun, Governor of the FSS, stated, “We will maintain a ‘zero tolerance policy’ for financial products mis-selling induced by large-scale consumer damages, insufficient internal controls, and major financial accidents.” Governor Lee is seen delivering his opening remarks. [Yonhap]
[Herald Economy=Kim Eun-hee and Jung Yun-hee] To strengthen the integrated capital and liquidity management systems of bank groups, the FSS plans to introduce regulations on liquidity and leverage ratios (the ratio of borrowed capital to equity capital) for bank holding companies. This is intended to prevent insolvency in the real economy from spreading across the financial sector by enhancing the loss absorption capacity of financial companies.
To manage real estate project financing (PF) and household loans that are becoming the crisis point of our economy, a quarterly detailed inspection system will be established and implemented. With the full resumption of short selling and the launch of an alternative trading system (ATS) scheduled for this year, preemptive supervision and inspections will be reinforced to prevent consumer damages.
The FSS reaffirmed its stance of taking strict action against unfair practices like large-scale mis-selling and major financial incidents with a zero tolerance principle. There is also an ongoing goal to severely crack down on illegal and unhealthy practices in the capital markets.
Governor Lee stated at the FSS auditorium in Yeouido, Seoul, on the 10th, “This year, uncertainties are expected to expand across all political and economic fields. We will maintain a more vigilant stance than ever and protect the stability of the financial market and system,” as he announced the 2025 operational plan.
The FSS will focus on analyzing the impact of internal and external macroeconomic instability factors on the financial market, such as policy changes by the new U.S. government, interest rate path uncertainties, high exchange rates, and growth rate slowdown due to sluggish domestic demand, identifying potential risks. The FSS plans to respond swiftly to major instability factors based on organic cooperation with economic and financial authorities, such as conducting stress tests with the Bank of Korea.
Specifically, the introduction of liquidity and leverage ratio regulations for bank holding companies will enhance loss absorption capabilities, strengthening prudential supervision of financial companies. The FSS will establish new monitoring indicators like the foreign currency Liquidity Coverage Ratio (LCR) and expand the number of institutions subject to related stress tests to 18 insurance and securities firms, respectively, thereby strengthening foreign exchange risk management. The financial soundness status of companies will also be intensively monitored on a daily basis.
Governor Lee emphasized, “With the increasing political and economic uncertainties, we are carrying a heavier sense of responsibility and vigilance than ever before,” adding, “We will enhance and refine the soundness system such as improving the loss absorption capacity of financial companies to prevent the spread of real economy insolvency to the entire financial sector.”
Furthermore, the FSS is actively preparing for the full resumption of short selling and the launch of ATS. The FSS aims to complete the computerization of short selling by the end of next month and proceed with the resumption of short selling. The FSS plans to strengthen monitoring systems for habitual offenders of unfair trading and swiftly conduct focused investigations upon identifying violation cases after the operation of the National Short Selling Monitoring System (NSDS).
Regarding infrastructure construction for advancing the capital market, the FSS plans to thoroughly inspect in preparation for the launch of ATS next month, and prepare plans for enforcing listing maintenance requirements and streamlining delisting procedures for timely exit of marginal companies, as well as strengthening disclosures related to exercising voting rights and shareholder rights.
Governor Lee remarked, “We will consistently pursue capital market advancement tasks to smoothly operate the inherent roles of capital markets in providing productive financial support and increasing national assets,” stating intentions to maintain a stringent stance against illegal and unhealthy activities in the capital market by strengthening investigations on habitual exploiters and professional groups involved in unfair trading, and reinforcing accounting reviews on IPOs and marginal companies.