Revision to contain Korean banks’ crisis, keep funding cost low: Moody’s

A proposed revision of a South Korean law is expected to maintain Korean commercial banks’ solvency and keep its funding cost low, Moody’s Investors Service said Monday.

Announced by the Financial Services Commission on Thursday, the revision is designed to introduce measures to improve the recovery and resolution planning of significantly important financial institutions, namely banking groups here. Effective starting July, the new rule is expected to urge banks to specify action plans in times of crisis and keep financial contagions at bay.

The recovery and resolution planning will be applicable to five major banking groups Hana, NongHyup, KB, Shinhan and Woori, as well as their respective commercial bank subsidiaries.

“The recovery plan aims to prepare the banks to specify triggers of crisis situations and devise specific details on actions that the management can take to maintain the bank‘s solvency as a going concern,” wrote Ok Tae-jong, Moody’s assistant vice president and analyst.

The measure is in line with the recommendations of the Financial Stability Board in 2014. The FSC, on the other hand, did not incorporate a plan for bail-ins of senior creditors, contrary to the recommendations. Ok said the move is credit-positive for Korean banks’ senior creditors.

“We believe the FSC has excluded bail-ins of senior creditors because of concerns over banks’ funding costs,” Ok wrote.

Under the revision of the Enforcement Decree of the Act on the Structural Improvement of the Financial Industry, Korean banks will be obliged to submit their recovery plans to the watchdog Financial Supervisory Service annually. In the meantime, the Korea Deposit Insurance Corp. will draw up resolution plans for the banks. Both the FSS and KDIC will report recovery and resolution plans to the FSC, which will evaluate and approve the plans.

By Son Ji-hyoung (consnow@heraldcorp.com)