Not Ready for Introduction

The Financial Supervisory Service (FSS) recently collected written opinions on the bail-in system from Korea's four major financial holding companies, which expressed opposition to it.

The Financial Supervisory Service (FSS) recently received written opinions on the introduction of recovery and resolution plans (RRPs) and bail-in systems from four major financial holding companies (KB, Shinhan, Hana and NH) and five major banks (KB, Shinhan, KEB Hana, NH and Woori).

The bail-in system is designed to make shareholders and creditors bear financial companies’ losses first so that more-than-necessary public funds are not provided for insolvent financial companies. The collection of opinions implies that the FSS is preparing to introduce the new system.

The financial holding companies are opposed to the bail-in system, claiming that it could lead to a drop in credit rating based on a reduced possibility of government support in the event of a crisis and the drop in credit rating could result in a rise in procurement interest rate. In the United States and Europe, where bail-in is already in effect, the credit ratings of financial holding companies supposed to absorb credit losses first are generally lower than those of banks. For example, Wells Fargo & Company’s and Wells Fargo Bank’s S&P credit ratings as of March this year were A- Stable and A+ Stable, respectively. Likewise, those of Citigroup and Citibank were BBB+ and A+, respectively.

At present, the four South Korean financial holding companies’ current credit ratings are AAA Stable, the same as their subsidiary banks. “A decline in credit rating and a rise in procurement interest rate will significantly hamper efforts for international capital procurement,” one of the holding companies mentioned.
 

The FSS explained that only the RRP is going to be test-run within this year and the bail-in will be introduced in stages depending on international market conditions with just 10 or so countries having adopted it among 24 FSB member countries. “Bail-in requires prior legislation in that it forces creditors to bear losses,” said the FSS, adding, “Details like the scope of its application should be further examined as well.”


 

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