South Korea Plans Financial Tool To Head Off Crises

DigitalCFO Newsroom | 27 July 2022

South Korea’s top financial regulator unveiled on Tuesday a draft plan for supporting distressed financial companies to prevent failures.

South Korea’s top financial regulator unveiled on Tuesday a draft plan for supporting distressed financial companies to prevent failures, rather than waiting to bail them out after they had defaulted and caused economic damage.

Under the plan, a credit facility run by the Korea Deposit Insurance Corporation (KDIC) would provide credit guarantees to financial companies in difficulty to sustain them while they arranged to replenish capital by issuing and selling bonds or preferred equity.

The facility would also provide short-term loans, the Financial Services Commission said in a statement, adding that it could be created by late 2023 if legislative revisions and other preparations went smoothly.

Taxpayers’ money would not be needed, it said. The KDIC would use its resources, already supported by deposit insurance premiums, and charge fees for extending guarantees and loans.

The commission said South Korea had several policy tools designed to cope with financial crises but the new plan was aimed at creating a means for staving them off.

In financial crises in the late 1990s and in 2008 and 2009, the South Korean economy suffered severely as financial companies became illiquid and had trouble paying obligations. The authorities helped them recapitalise, but by that time the damage had been done.

The commission stressed that the financial system was currently sound. The proposed facility may be called the financial stability account.

Source: Reuters