Financial Legislative Task 'Expedited Resolution System'... "Financial Services Commission Should Not Solely Decide on Initiation"

Korea Institute of Finance Report
"Consultation with the Ministry of Economy and Finance and the Bank of Korea is Necessary"
FSC to Gather Opinions in the First Quarter, Aiming for Government Legislation in the First Half of the Year

The Financial Services Commission (FSC) is facing calls to mandate consultation with the Ministry of Economy and Finance and the Bank of Korea, rather than allowing the FSC to unilaterally decide on the resolution procedures for insolvent financial institutions under this year's government legislation promoting the 'Prompt Resolution System.' This comes alongside suggestions that South Korea needs to introduce a prompt resolution system for insolvent financial companies to prepare for financial crises similar to last year's Silicon Valley Bank (SVB) incident.

Lee Young-kyung, Senior Research Fellow at the Korea Institute of Finance, explained in a recently published report titled "Legal Issues for the Introduction of a Prompt Bank Resolution System" that "it is desirable for multiple institutions to be involved to ensure that decisions on whether to initiate prompt resolution procedures are not made arbitrarily or unilaterally." Lee noted, "Since the prompt resolution system skips or shortens several stages of the general bank resolution process, the rights of stakeholders may be infringed upon," adding, "Rather than having a single institution determine whether there is a systemic crisis or a crisis in the overall financial market, it is necessary to involve multiple institutions, as in the UK or the US, to reduce arbitrary judgments." Lee proposed that when introducing the prompt resolution system, consultation with the Ministry of Economy and Finance and the Bank of Korea should be mandatory rather than allowing the FSC to decide alone, and that reports should also be made to the President and the National Assembly.

The prompt resolution system allows insolvent financial institutions to be swiftly sold or have their assets transferred without the consent of shareholders or other stakeholders. During the SVB crisis, the US and the UK were able to quickly resolve the situation using this system. The US Federal Deposit Insurance Corporation (FDIC) closed SVB and established a bridge bank within two days to transfer deposits and assets, while the UK swiftly sold SVB's UK subsidiary to HSBC.

In the UK, decisions regarding measures under the special resolution regime are jointly made by the Financial Conduct Authority, the central bank, and the Treasury. In the US, the Secretary of the Treasury determines whether there is a systemic crisis after recommendations from the Federal Reserve Board and consultations with the President.

The report emphasized that South Korea's financial system is increasingly exposed to crises similar to SVB due to digitalization, increasing the need for the system's introduction. Lee stated, "With internet banking and mobile apps becoming commonplace in the digital financial environment, vulnerability to digital bank runs has increased," adding, "As financial transactions become more complex and bank insolvencies can lead to systemic crises, the introduction of a prompt resolution system is necessary."

The related government legislation is included in this year's FSC work plan. An FSC official said, "Just as the US and UK authorities completed the resolution within three days during the 2023 Silicon Valley Bank (SVB) crisis, we also need institutional measures to respond swiftly in times of crisis," adding, "Our goal is to gather opinions through public hearings and seminars in the first quarter and complete legislation within the first half of the year."

Currently, South Korea operates a financial institution resolution system under the 'Act on the Structural Improvement of the Financial Industry (Geumsan Act),' established during the 1998 foreign exchange crisis. Although some improvements were made in 2020 reflecting international organization recommendations, it is still considered insufficient to cope with the rapidly changing financial environment.

In particular, under the current system, various procedures such as determining insolvent financial institutions, imposing management improvement orders, and checking compliance typically take more than three months. This contrasts sharply with the US and UK, which completed resolution procedures within days during the SVB crisis.

This content was produced with the assistance of AI translation services.