"'Like U.S. in SVB Crisis Response'... Cut Resolution of Failing Financial Firms from 150 Days to 3-4 Days"

Government Pushes to Legislate Expedited Resolution Framework for Financial Companies

Banks, insurers, securities firms, and savings banks among those covered

Bidding, shareholder meeting, and merger review procedures waived; losses compensated afterward

The government plans to legislate an expedited resolution framework that would allow failing financial companies to be wound down within three to four days in preparation for potential financial crises. The aim is to sharply shorten the resolution process, which currently takes about 150 days, prevent the failure of individual financial companies from spreading into systemic risk, and curb a sharp rise in resolution costs.

The Financial Services Commission (FSC) said on October 29 that it would issue advance notice of proposed amendments to the Act on the Structural Improvement of the Financial Industry and the Depositor Protection Act next month and submit them to the National Assembly.

The expedited resolution framework the government is pursuing would quickly restructure failing financial companies that could pose a serious risk to the financial system, bypassing the ordinary resolution process. It would also introduce measures to mitigate infringements on the rights of stakeholders, including shareholders and creditors.

The framework would apply to banks eligible for financial support from the deposit insurance fund under the Act on the Structural Improvement of the Financial Industry (excluding Nonghyup and Suhyup), insurers (excluding reinsurers), securities firms, savings banks, and financial holding companies. Specialized credit finance companies, as well as asset management firms and trust companies that do not engage in investment trading or brokerage, would be excluded. Since Nonghyup and Suhyup banks and mutual finance institutions have supervisory and resolution systems under separate laws, the government plans to consider whether to apply the framework to them over the medium to long term.

The conditions for activating the framework would be strictly limited. The financial company must be classified as insolvent or at risk of insolvency, and its failure must pose a risk of causing a serious financial crisis or significantly undermining financial market stability. In addition, there must be an urgent situation in which other measures under the Act, such as prompt corrective action, would be insufficient to prevent the risk, and the public interest must warrant intervention. If all these conditions are met, the FSC may designate the financial institution for expedited resolution with the approval of at least two-thirds of its members in office. The Ministry of Finance and Economy, the Financial Supervisory Service, the Korea Deposit Insurance Corporation, and the Bank of Korea will take part in the decision.

The resolution method will be determined based on factors such as the financial company's asset size and whether a buyer is available. A range of resolution measures under the Act may be used, including suspension of business, appointment of an administrator, transfer of contracts, acquisition by a third party, cancellation or consolidation of shares, and revocation of licenses and approvals.

The key feature is a major simplification of the resolution process. The framework would allow the government to bypass bidding procedures under the State Contracts Act, advance notice requirements under the Administrative Procedures Act, board and shareholder meeting resolutions under the Commercial Act, and business combination reviews under the Fair Trade Act. The Korea Deposit Insurance Corporation would also conduct a preliminary assessment of assets and liabilities within one to two days, with a full assessment to follow. The plan is to complete the resolution within three to four days, including weekends.

Safeguards would also be put in place to protect the property rights of shareholders and creditors. Losses resulting from expedited resolution would not be allowed to exceed those that would have arisen in ordinary liquidation or bankruptcy proceedings. After the resolution is completed, liquidation-based losses would be calculated, and any difference would be compensated from the deposit insurance fund.

The FSC would be required to report the relevant details, reasons, and outcomes to the National Assembly's Political Affairs Committee within six months of taking resolution measures.

The framework is intended to prepare for situations in which financial instability spreads rapidly, as it did during the 2023 Silicon Valley Bank (SVB) crisis in the United States. Major countries, including the United States and the United Kingdom, strengthened their expedited resolution systems after the global financial crisis. In South Korea, however, the framework has focused on advance crisis response and liquidity support, limiting the ability to resolve failing institutions quickly.

The proposed amendments to the Act on the Structural Improvement of the Financial Industry and the Depositor Protection Act will be open for public comment from November 2 to December 14. They will then undergo reviews by the Regulatory Reform Committee and the Ministry of Government Legislation, followed by deliberations and approval by the FSC, a vice-ministerial meeting, and the Cabinet, before being submitted to the National Assembly.

An FSC official said, "Introducing the expedited resolution framework will allow us to proactively prevent the sudden failure of a financial company from spreading into systemic risk. We expect it will also contribute to financial market stability and the protection of financial consumers."

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