Deposit Insurance System in Korea & Actions in Response to the Global Financial Crisis

2010 IADI ARC Conference Arusha, Tanzania Deposit Insurance System in Korea & Actions in Response to the Global Financial Crisis July 29, 2010 Yangig Cho (Team Leader of Korea Deposit Insurance Corporation) (Leopards on Kilimanjaro)

Executive Summary • Korea, as an SOE (small open economy), has achieved the fastest industrialization since 1960's • Over the last decade and a half, Korea has experienced two financial crises in 1997 and in 2008 • Korea successfully managed the crises thanks to efficient Financial Safety Net (FSN) including the Deposit Insurance System (DIS) (Coat of arms of Tanzania)

Agenda • Deposit Insurance System in Korea • Impact of Global Financial Crisis on Korean Economy • Actions in Response to the Global Financial Crisis • LessonsLearned (The flag of Tanzania)

I-1. Components of the Financial Safety Net MoSF (Fiscal /Foreign Currency Policy) FSC (Financial Policy) BOK (Monetary Policy) KAMCO (NPL Cleanup) KDIC (Deposit Protection & Resolution) FSS (Financial Supervision) KAMCO (NPL Cleanup) KDIC (Deposit Protection & Resolution) FSS (Financial Supervision) *MoSF : Ministry of Strategy and Finance FSC : Financial Services Commission BOK : Bank of Korea FSS : Financial Supervisory Service KAMCO : Korea Asset Management Corporation

I-2. Cooperation within the FSN FSC BOK KDIC Financial Services Commission Monetary Policy Committee Deposit Insurance Committee • Chair & Vice Chairperson • Vice Minister of MoSF • Senior Deputy Governor • of BOK • President of KDIC • Governor of FSS • Two experts • recommended by FSC • and KCCI • Governor & Senior Deputy • Governor of BOK • Five experts recommended • by BOK, MoSF, FSC, • KFB, and KCCI • President of KDIC • Vice Minister of MoSF • Senior Deputy • Governor of BOK • Vice Chairperson of FSC • Three experts • recommended by FSC, • MoSF, and BOK Cross participation through joint committees, financial information sharing, joint investigation, etc. * KCCI : Korea Chamber of Commerce and Industry KFB : Korea Federation of Banks

Establishment in 1996 Integrated deposit insurer since 1998 Highest decision-making body : Deposit insurance committee Coverage Sectors (6 sectors) Banks, financial investment companies, life and non-life insurance companies, merchant banks, mutual savings banks 321 FIs Total amount of insured deposits 1,001 tr won ($864 bn.) Coverage Limit 50 mil. won($43,178) * 2.2 times of GDP Per Capita($19,690) Insured Depository Products DI Premiums Rate I-3. Introduction of the KDIC * Excluding deposits by government and insured FIs, etc. (%) (As of Dec. 31, 2009; KRW/USD=1,158)

I-4. Major Functions of the KDIC Identify troubled FIs through on and off-site monitoring and request FIs or supervisory authorities to take appropriate actions for preventing failure Deposit insurance policies / Management of the Deposit Insurance Fund Ongoing Risk Surveillance Policy & Fund Management KDIC Investigation Resolution Investigate persons accountable for insolvency of FIs to file a civil damage suit against them Number of staff : 577 (including 7 executive directors) In the event of failure, KDIC not only resolves the troubled FIs in an orderly and timely manner through various methods such as OBA, P&A, liquidation, etc., but also provides insurance coverage to depositors Recovery Recovers funds injected into the resolution of failed institutions by receiving bankruptcy dividends or by monetization of assets (eg. Shares)

I-5. Progress of Financial Restructuring in Korea (Number of transactions, 1997-2008) • OBA : Open Bank Assistance (Source: Public Fund Oversight Committee) • MSB : Mutual Savings Bank • Credit Union : excluded from insurance coverage from 2004 • Including only FIs to which public funds were injected from KDIC or KAMCO In order to minimize loss to Deposit Insurance Fund, KDIC adopts various resolution schemes such as OBA, P&A, and bridge bank, in addition to deposit payoff

Agenda II. Impact of Global Financial Crisis on Korean Economy (The flag of Tanzania)

II-1. Transmission of Financial Crisis Crisis in Developed Countries Impact on Emerging Market Deleveraging Financial Path Credit Crunch ConfidenceCrisis Psychological Path Real Economy Path Economic Slowdown SOEs are inherently vulnerable to global financial crisis development (Source : Korea Development Institute)

II-2. Impact on Korean Economy Concern over Credit Crunch, Foreign Currency Shortage Korean economy, open and highly integrated to global market, was hit hard by recent crisis Sudden Reversal of Capital Flows Concern over Economic Recession Sharp Drop in Export • Dependence on trade : 90.5% (trade/GDP, 2006-2008) * G7 average of trade/GDP: 56.1% • Share of foreign-investor-owned stocks in total market capitalization: 30.9% (Dec.’07)

II-3. Reversal of Capital Flows ($ bn.) 1) S.T. Borrowing : short-term borrowing due in less than 1 year 2) “Crisis” means a period in which the capital account recorded deficits in succession. Resulting from the deleveraging process, foreign capital suddenly began to outflow during the crises

II-4. Tighter Domestic Financial Conditions 41.9% 32.4% 1 4 7 10 1 4 7 10 1 4 2008 2009 2010 1 4 7 10 1 4 7 10 1 4 2008 2009 2010

II-5. Sharp Drop in Export and GDP Growth • Export Volume • Monthly : -43.6% (b/w Sep.’08 and Jan.’09) • Compared to the same period a year ago : -25.2% (1Q ’09) • GDP Growth Rate (YoY) • 5.1% (’07) → 2.3% (’08) → 0.2% (’09) Monthly Export Volume ($ bn.) 2009

Agenda III. Actions in Response to the Global Financial Crisis (The flag of Tanzania)

III-1. Measures Following the Lehman Bankruptcy • For the period of 2008 to 2012 • $832.9 bn. in 2009 • BOK Base Rate : reference rate applied in transactions such as RP Initial and midterm measures were executed promptly and preemptively

III-2. FSC – Stabilization of Financial Market Improve asset soundness of FIs Preemptive recapitalization measures Restructuring Fund (KAMCO) Bank Recapitalization Fund Financial Stabilization Fund (KoFC) Acquiring NPLs Recapitalization Recapitalization, etc. (Equity, loan, guarantee, etc) Resolution of Insolvent FIs Deposit Insurance Fund (KDIC) Public-private joint measures enhanced soundness of capital & assets

LTV, DTI Regulation was adjusted according to changes in housing price LTV(Bank) : 60% (Apr.’03) →40% (Apr.’05) * U.S. 76.60%, Japan 70~80%, UK 70% (2008) DTI(Bank) : 40% (Mar.’06, Special zone) → 40%(Nov.’06, All cities) Loan-to-deposit ratio (excluding CD) ≤ 1 (grace period until 2014) III-3. FSC - Strong Regulation over Mortgage Lending Trend of Housing Prices • LTV : Mortgage Loan to Value (official value of house or APT) ratio • DTI : Monthly Debt Burden of Mortgage To Monthly Income ratio Korean housing price remained stable relative to international market Proactive control of asset bubbles and excessive asset growth were the factors most critical to overcoming the recent crisis

III-4. KDIC’s Role in Crisis Management – 1997 Crisis Actions Outcomes Results Blanket Coverage Coverage Expansion Integrated DIS Financial Restructuring (513 resolved ’97-’08) Preventing Bankrun Boosting Financial Competitiveness Restoring Real Economy Improving Foreign Confidence • In 1997, F/Xand financial crisis arose from weak fundamentals both in the sector of corporates and FIs • KDIC’s decisive response was crucial to overcome the crisis

III-5. KDIC’s Role in Crisis Management – Recent Crisis • Public have a strong confidence in DIS from ’97 experience • KDIC provides perfect protection for depositors during emergencies • KDIC has a well equipped system for resolving failed Fis • KDIC established contingency plan in preparation for possible crisis Sign of Crisis Beginning of Crisis Deepening of Crisis Expansion of Covered Products Partial Protection → Blanket Coverage → KDIC was prepared for another crisis

III-5. KDIC’s Role in Crisis Management – Recent Crisis • Only 5 mutual savings banks failed during the recent crisis (2008-2009) • No sign of bankrun • Partial protection scheme was maintained • Foreign-currency deposits were newly insured (Nov. 3, 2008~) KDIC’s role was limited to minimum ; standby for action

Agenda IV. Lessons Learned (The flag of Tanzania)

1. Prompt and preemptive response Coordination among relevant ministries to promptly prepare countermeasures in key areas : F/X liquidity, Fiscal Stimulus Package, Policy rate cut, etc. Conveyed accurate and detailed information to investors to avoid misunderstanding and restore market confidence 2. Prudent management of financial sector soundness Tight LTV/DTI regulation to maintain total loan delinquency rate at a stable 1% level Support banks to raise BIS ratios through a variety of recapitalization programs Purchase of troubled assets improved the asset soundness of banks  Possibility of massive bank defaults are minimized by maintaining high quality of loans and low growth of assets IV-1. Key Success Factors for SOE Korea as an SOE • has been highly vulnerable to the fluctuations of the global economy • and the consequent capital flows • has nevertheless successfully avoided the damage from recent • crisis based upon following lessons;

3. Strong Fiscal Position of the Korean Government Relatively low level of public debt enabled a large-scale stimulus package when necessary 4. Lessons and Experience from ’97 Asian Financial Crisis Timely response with manuals - Institutional framework (e.g., KDIC and KAMCO) - Legal framework (e.g., Act on the Structural Improvement of the Financial Industry, Consolidated Insolvency Act, and Corporate Restructuring Promotion Act) IV-1. Key Success Factors for SOE

Korea’s Knowledge Sharing Program(KSP) • An Official Development Assistance (ODA) offered by Korean govt. • A comprehensive policy consultation program to share Korea’s development experience - Together with experts from govt., research inst., international organization • Consulting area selected upon discussion - Economic development strategy - Industrialization and export promotion - Economic crisis management - Human resources development • 17 countries participated in KSP (2004-2010) * Please visit http://www.ksp.go.kr/ for more information. KDIC is willing to facilitate application for KSP

Thank You! Email : yicho@kdic.or.kr Phone : 82-2-758-1122 Fax : 82-2-758-1120 (Kibo summit of Kilimanjaro)

Deposit Insurance System in Korea & Actions in Response to the Global Financial Crisis