Integration of Financial Supervisory Bodies*

1. Integration of Financial Supervisory Bodies* The Korean Experience Seok-Keun Lee Financial Supervisory Service, Korea *The views expressed in this paper are those of the presenter and do not necessarily reflect those of the Financial Supervisory Service of Korea.

2. Financial Supervisory System Before Integration Legislation Licensing Policy making MOFE (Ministry of Finance & Economy) MB (Monetary Board) BOK (Bank of Korea) OBS (Office of Bank Supervision) SSB (Securities Supervisory Board) ISB (Insurance Supervisory Board) NSA (Non-bank Supervisory Authority) Prudential Supervision KDIC (Korea Deposit Insurance Corporation) ※ To be integrated

3. Financial Supervisory System Before Integration (Continued) • MOFE had the authorities of licensing, legislation and most of supervision policy making. - OBS, SSB, ISB and NSA supervised financial institutions under their respective jurisdictions without licensing authorities. • MOFE directly supervised some of financial institutions with insufficient manpower. - specialized banks, merchant banks, credit card companies, credit unions, mutual savings bank, trust businesses of commercial banks, lease companies, etc. - MOFE delegated its examining authority of credit unions, mutual savings bank and lease companies to OBS and NSA. • Minister of MOFE was the chairman of Monetary Board, which controlled BOK (the central bank)

4. Needs for Change in the Financial Supervisory Structure • Government - Long history of conflicts between MOFE and BOK over independence of BOK and banking supervision authority • Academia - Growing convergence of financial services - Poorly supervised business areas due to fragmentation of supervisory functions - Government and politics may affect financial supervision - Lack of effective supervision especially for non-banks • Financial Market - Complicated & fragmented supervision - Needs for market-oriented supervision

5. Reactions of Government & National Assembly • Continuous discussions at “Financial Industry Development Committee” under MOFE • Establishment of “Presidential Committee on Financial Reform” (January 1997) • Recommendations of the Committee (June 1997) - Independence of BOK (Separation of banking supervisory function from BOK) - Consolidation of 4 financial supervisory bodies - Establishment of the independent Financial Supervisory Authority (separate from MOFE) • Government proposed the bill based on the recommendations (August 1997) • National Assembly passed the bill (December 1997)

6. The Act on Establishment of Financial Supervisory Organizations (December 29, 1997) • April 1, 1998 - Establishment of Financial Supervisory Commission (FSC), which controls OBS, SSB, ISB & NSA as an independent regulatory government agency under the Office of the Prime Minister - Establishment of SFC (Securities & Futures Commission) - Separation of OBS from BOK - Governor of BOK to become the Chairman of the Monetary Board • January 1, 1999 - Consolidation of OBS, SSB, ISB, NSA into a single independent supervisory body as the Financial Supervisory Service (FSS), an executive arm of the FSC - 15 officers (Governor, 4 Deputy Governors, 9 Assistant Governors and the Auditor) can be appointed for FSS - Chairman of FSC concurrently holds the position of the Governor of FSS

7. Financial Supervisory System After Integration FSC MOFE BOK SFC KDIC (Korea Deposit Insurance Corporation) FSS ※ integrated body

8. Financial Supervisory System After Integration(Continued) • FSC - Consists of 9 commissioners (chairman, vice-chairman, standing commissioner, and 6 non-standing commissioner including Vice-Minister of MOFE, Deputy Governor of BOK and President of KDIC) appointed by the President for 3 year term - Formulates financial policies and performs supervisory functions in the following areas: financial supervision, oversight of financial restructuring, licensing and delegation of supervisory authorities to FSS • SFC - Consists of 5 commissioners (including Vice-Chairman of FSC as Chairman of SFC, standing commissioner and 3 non-standing commissioners) appointed by the President for 3 year term - Oversees the securities and futures markets for FSC • FSS - Consists of 10 officers (Governor, 3 Deputy Governors, 5 Assistant Governors and the Auditor) who serve a 3 year term - Supervises and Examines nearly all the financial institutions • MOFE - Drafts legislations on financial supervision to the National Assembly - Coordinates financial sector policies

9. Considerations in Integrating Activities (April 1998) • Economic Crisis - Financial crisis: December 1997 - High bankruptcy rate, jobless rate, interest rate and exchange rate • New government and short deadline - New president and new cabinet - To be finished by the end of 1998 • Already integrated partly in April 1998 - FSC which controls 4 supervisory bodies was established in April 1998 - FSC should show synergy effect as an integrated body since April 1998 • Differences among 4 supervisory bodies - Grade, Salary ranking, IT system, Rank, Promotion system, Budget, etc - 4 labor unions

10. 12 month Integration Process • December 29, 1997 – March 31, 1998 (3 months) - MOFE coordinated the financial supervision activities - The President nominated the future Chairman of the FSC - The Chairman organized several task forces (March 1998) • April 1, 1998 – December 31, 1998 (9 months) - FSC and SFC were established (April 1) - OBS, SSB, ISB and NSA were under FSC from April 1 - Task Forces* were launched for the operation of FSC, Financial Restructuring and basic integration works (April 1) * Financial Restructuring Unit, Planning and Coordination Team, Supervisory Regulations Improvement Team, Supervisory Organization Innovation Team, Team for Renovation of Financial Intermediation, Office of Planning and Administration - Task Forces* were launched for FSS establishment works(July) * HR, organization, budget, asset management, IT etc - Organization structure of FSS was decided (December 18) - Staff deployment for FSS (End of December)

11. What was accomplished during 9 months? • Financial Restructuring & Corporate Restructuring - Among 27 commercial banks, 2 large commercial banks were nationalized, 5 small banks with negative capital ratios closed and 2 banks were merged to other banks during 9 months • Preparations for integrated supervision works - Built a cooperative mechanism such as a joint inspection and information-sharing system among 4 supervisory bodies - Harmonized different supervision practices and standards for banking, securities, insurance and other financial industries - Improved the current supervision practices focused on supervisory efficiency with new systematic supervision criteria - Studied functional (rather than institutional) supervision, which eliminates gray zones in regulation - Reformed outdated and distorted financial practices

12. What was accomplished during 9 months?(Continued) • Preparations for integrated Organization - Making blueprint of Organizational Structure and Decision Making Structure with the help of a big international consulting firm ∙ Manger-level key persons from 4 agencies participated in the task force - Establishing a unified personnel management system ∙ Unification of Seniority Standard - Workshops for integration of people ∙ Senior, middle and lower level staff - Training for integrated works ∙ All the staff learn the basics of other area works - Reducing manpower for the new streamlined organization - Integration of buildings and equipments - Making a detailed implementation plan of integration works

13. The First Organizational Structure of Integrated FSS • Process-Entity Organization - Structured first around core processes (authorization, policy making, examination and enforcement) - Structured secondly by entity (banks, securities, insurance companies , and non-bank institutions) • Strengthened coordination function - Establishing 2 coordination offices in policy making and examination function - 2 Deputy governors directly supervise the 2 coordination offices • Integration of common functions in 4 bodies - consumer protection, research, training, external relations and other general & administration functions • Flattening or reducing reporting layers

14. Benefits of Integration • Big help to financial restructuring - Cooperation among various supervision departments (banking supervision dept., non-bank supervision dept., and mutual fund supervision dept.) for workout of large conglomerate • Enhancing prudential supervision - Level up prudential standards of a certain industry (e.g., savings bank) to the best standards of other industries (e.g., commercial bank) • Effective supervision over financial conglomerate - Simultaneous examinations of all kinds of financial companies in the financial conglomerate • Preventing non-supervised business areas in the financial industry - Easily discuss with other supervisory authorities (departments) • Enhancing fair trading efficiently in capital market - Investigate easily bank accounts of unfair traders

15. Difficulties during the integration process • Designing the New Integrated Organizational Structure - Reducing total number of department (64 departments → 42 departments) - Each of 4 supervisory bodies tried to have more departments for its own area (less departments means less promotions) • Reducing total number of staff (1700 → 1200) - Number of employees in commercial banks decreased from 115,000 to 75,000(about 34% decrease) - Who are to be retired? • Unification of 4 different grade and salary ranking - Establishing the unified standard about seniority • Executing 2 big tasks simultaneously - Financial restructuring for recovery of financial crisis - Integrating 4 agencies within 9 months

16. Key Factors for Completion of Quick Integration • Separation of 2 big special works from the routine works - Operating 2 kinds of task forces (financial restructuring works and integration works) • Competent & Strong Leadership - Various experiences (Government and Market) • Sufficient discussion among 4 agencies for unification of many kinds of system including organization structure • Engagement of Neutral Outsiders - Big consulting firm, academia and government • Showing synergy effect in a very short term - Effective financial restructuring and corporate restructuring

17. Why big bang approach in Korea? • Many discussions were already done in a long period (more than 10 years) • Upper structure of the integrated body was already decided by the law and the President - FSC was established 9 months before the integration - Chairman was nominated 10 months before integration • Senior management structure (e.g. number of high officers) of FSS were also already decided by the law - Only needs the integration of lower structure of 4 supervisory agencies • Financial crisis did not allow gradual approach - Bill was made just before the financial crisis and passed just after occurrence of the crisis

18. Big Bang & Gradual approach • Dependent on - Culture and public sentiment of the country - Specific circumstances (e.g., economic crisis, political change, etc.) at that time • Big Bang’s benefit in Korea - Overcome financial crisis quickly - Level up supervision activities quickly - Level up financial industries quickly • Problems expected in gradual approach in Korea - More difficult & slow restructuring - Completion of integration can be uncertain