## EXECUTIVE SUMMARY

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---

### Overview
- Oversight of the Korean financial system is broadly effective; FSC and FSS have regulatory and supervisory regimes in line with international standards with only a few remaining gaps.
- Authorities addressed most recommendations of the previous FSAP and progressed benchmarking with Basel Core Principles (BCP), Insurance Core Principles (ICP), and IOSCO Objectives and Principles for Securities Supervision (IOP).
- Multiagency arrangement (FSC/FSS, Bank of Korea (BoK), Korea Deposit Insurance Corporation (KDIC)) creates coordination complexity across:
  - horizontal coordination between government and agencies, and
  - vertical coordination between levels of governance.
- Sectoral regulatory and supervisory practices create preconditions for group-wide supervision with strong focus on bank dominated groups; group-wide supervision implemented using sectoral laws and supplementary to sector-level supervision.

### Key findings on institutional and supervisory framework
- FSC: part of Government; oversees supervisory policies, legislation, and adopts legally binding supervisory decisions.
- FSS: mandated with daily supervisory tasks; operates under guidance of FSC.
- System is predominantly rules-based and broadly aligned with international standards; limitations include:
  - Missing a ‘forward looking’ character—supervisors’ ability to proactively address buildup of risks is hampered.
  - Approaches like Pillar 2 or an ORSA are not fully adopted in supervisory practice.
  - Supervisory tools tend to be ex-post rather than preemptive.
- Remit of financial conglomerates supervision covers only groups dominated by banking business; significant nonbanking risk remains uncovered.
- Group-level supervisory approaches not applied consistently across holding financial groups (HFG).
- Absence of a modern recovery and resolution framework for complex groups increases cost of handling financial stress.
- Major gap: lack of authority to regulate nonholding financial groups (NFG). Consequences include:
  - Inability to assess or regulate risks from nonfinancial affiliates that may pose vulnerabilities to financial affiliates.
  - Need for authority to understand broader groups of affiliates and obtain relevant information from non-financial affiliates.
  - Need to ensure group structure does not impede effective supervision, including authority to designate a “head of group”.
- Current precise definition of the head of the financial conglomerate can be too prescriptive; additional quantitative and qualitative criteria and flexibility recommended.
- Supervisory practice should apply a look-through approach to entire groups and all affiliates; multilayer analyses of conglomerate maps would significantly elevate supervisory understanding.
- More supervisory attention recommended on climate risk and other emerging risks affecting groups across their structures.

### Forward-looking supervisory enhancements
- Increase use of periodic in-depth reviews of group-level capital and liquidity management approaches, including governance frameworks; specific practices include:
  - Credit risk management reviews.
  - Internal Capital Adequacy Assessment Process (ICAAP) and capital planning.
  - Internal Liquidity Adequacy Assessment Process (ILAAP) and liquidity planning and recovery planning for banking groups.
  - In insurance, incorporate ORSA findings into overall risk assessments and provide systematic feedback to companies.
- Use forward-looking practices to:
  - Promote financial resiliency.
  - Clarify expectations of boards and senior managers of financial holding companies.
  - Inform evaluations of board and senior management effectiveness and Pillar 2 requirements.
- FSC/FSS should leverage its integrated supervisor position to connect forward-looking and in-depth approaches into a strong integrated framework for groups.
- Current group-level supervision is primarily organized around legal-entity supervision with a relatively small team of “group-level” supervisors; authorities may need to increase staffing for large financial conglomerates or rebalance resource allocation.
- Given planned overseas expansion of large Korean financial groups, enhance cross-border supervisory coordination:
  - Intensify monitoring of overseas expansion.
  - Strengthen cooperation with host authorities at the working level.
  - Set up supervisory colleges.
  - Give more attention to managing failure of cross-border firms.

### Regulatory framework and gaps
- Remit of conglomerate supervision largely limited to groups with clearly defined head—a financial holding company (FHC); non-holding financial groups with mixed commercial and financial services are not regulated on a group level.
- Proposed/considered measures by FSC include:
  - Implementation of binding prudential framework for non-holding financial groups and disclosure.
  - Reporting of detailed information about group structure to motivate groups to streamline organization.
- A group-level capital ratio for non-holding financial groups should reflect:
  - double/multiple gearing,
  - group-level contagion and concentration risk,
  - overall governance of the group with focus on complexity and size (including a wider group).

### Main recommendations (selected)
- Preconditions for Effective Conglomerate Supervision
  - 1. Redistribute powers and responsibilities between the FSC and FSS, delegate budgetary, supervisory guideline, and enforcement processes to the FSS; FSC to assume role on strategy, financial legislation, and financial infrastructure. (¶25-32, pp 17-19; ¶35, p 20) — LT H
  - 2. Improve information flow and coordination across sectoral supervisors and build capacity for coordinated oversight of conduct and prudential supervision. (¶33, p 19; ¶120, 122, 125, pp 43-44) — ST M
- Conglomerate Regulatory and Supervisory Framework
  - 3. Enhance regulatory and supervisory powers of the FSC/FSS to all financial conglomerates, including NFGs, by extending legal framework to reach non-financial institutions of a wider-group for data and information. (¶34, 36, p 20; ¶48, p 24) — MT H
  - 4. Expand legally binding prudential requirements to cover all systemically important/significant financial conglomerates, including NFGs, considering specificities of existing conglomerates. (¶52-55, pp 25-27) — MT H
  - 5. Enhance regulatory framework for all financial conglomerates by requiring sufficiently transparent structures (including disclosure) that would not impede crisis actions. (¶37, 20) — LT H
  - 6. Implement detailed regulations and increase supervisory focus on DSIBs’ group-level recovery planning and preparedness, reflecting conglomerate complexity. (¶51, p 25; ¶65, p 30, ¶116, p 42) — LT H
  - 7. Gradually enhance cross-border cooperation, including considering establishment of supervisory colleges for particular financial groups/institutions; closely monitor overseas expansion. (¶167-169, p 54) — LT M
  - 8. FSC, FSS, BoK and KDIC should jointly assess the value of current regulatory reporting requirements in monitoring risks to financial stability and revise reporting as warranted. (¶62, p 30) — MT H
  - 9. Enhance use of multilayer analyses and assessments of conglomerate maps in a comprehensive risk-based approach addressing multiple gearing, excessive leverage, contagion risk, concentration risk, conflicts of interest, and governance. (¶121, p 43) — MT M
  - 10. In applying prudential ‘proportionality’ ensure stronger requirements on governance, risk management, liquidity and capital using all supervisory tools, including ORSA and Pillar 2, with increased supervisory intensity and enforcement for systemically important FHCs and specialized banks. (¶126-134, pp 44-45; ¶142, p 48; ¶159-160, pp 51-52) — ST H
  - 11. Strengthen corporate governance requirements with higher supervisory engagement with boards and senior managers, enforcement of accountabilities, and supported by strong accounting and auditing standards. (¶39, p 21; ¶58-61, pp 27-29; ¶111, p 41; ¶130-135, pp 46-47; ¶160, p 51; ¶165, p 53) — MT H

- Supporting actions (selected)
  - 12. Complete introduction of a fully risk-based solvency regime, focus on capital adequacy, and ensure prudent and proportional implementation of Korea Insurance Capital Standard (K-ICS). (¶88, p 35) — ST H
  - 13. Intensify supervision and review role of specialized banks ensuring those undertaking commercial banking activities conform with prudential requirements applicable to nationwide banks. (¶71, p 31; ¶118, pp 42-43) — ST H
  - 14. Develop strategic supervisory plan for mutual saving banks and mutual credit cooperatives (MCCs) and encourage consolidation to restore financial soundness. (¶74-77, pp 32-33) — MT H
  - 15. Grant operational powers to the supervisor to restrict development or sale of financial products, activities and practices causing significant investor, consumer, or depositor protection concerns. (¶161-166, pp 52-52) — ST H
  - 16. Develop interagency cooperation framework led by FSC/FSS/BoK on climate risk to discuss emerging risks and propose policy actions across the financial system. (¶171, p 55) — ST H

### Institutional architecture and agency roles
- Key agencies and responsibilities:
  - FSC: chartering/licensing MSBs and credit unions; sets prudential rules; defines FSS budget details including headcounts and paygrade distribution.
  - FSS: primary supervisor of MSBs; primary supervisor role for credit unions; conducts examinations; funded primarily from fees; small appropriation from BoK.
  - SFC: within FSC; five members appointed by the President for renewable three-year term; directs investigations of market misconduct; establishes accounting and audit standards.
  - BoK: monetary and credit policy, payment systems, lender of last resort; Monetary Policy Board is top decision-making body.
  - KDIC: deposit insurance funds and resolution programs; Commission of 7 members is main policymaking body.
- Organizational overlaps and coordination:
  - Four-agency setup (FSC, FSS, BoK, KDIC) with overlapping responsibilities and cross-memberships in boards.
  - Cooperation via protocols, joint consultative bodies, working groups, and regular meetings.
  - Efficiency challenges in enforcement actions, budgetary process, and coordination of on-site examinations.

### Budgetary and governance details
- FSS operating budget: KRW350 billion for about 2000 personnel.
- Revenue composition:
  - Supervision fees ≈ 80 percent of revenues.
  - Securities registration fees = 17 percent.
  - Contributions from BoK = 2.7 percent.
- Any surplus of total revenue over operating expenses are returned to industry players every year; recommendation to consider retaining surplus as a reserve.

### Group supervision frameworks: HFGs and NFGs
- Two regulatory frameworks:
  - FHCA provides legal basis for HFGs (holding structure).
  - CPFC are nonbinding recommendations for NFGs (complex structures not headed by a holding company).
- HFG constraints:
  - Bank cannot be member of a mixed conglomerate; only HFGs composed solely of financial institutions.
  - Only financial companies or financial-related business allowed as HFG subsidiaries; second/third-tier subsidiaries limited.
  - Strict rules on intra-group transactions: prohibition of investment among subsidiaries and restrictions on credit granting among subsidiaries.
  - Minority holdings limited via additional capital requirements; specific excesses add 1,250 percent to RWAs.
  - Reporting and approval required for HFG structural changes (FHCA Article 16–18 and Article 61).
- NFG status and limitations:
  - Legal framework for NFGs under gradual development; CPFC define representative company responsibilities including quarterly reporting (CPFC Article 17) and group risk-management consultative body (CPFC Article 9).
  - FSC developed minimum capital ratio for NFGs to capture aggregated capital and double/multiple gearing; calibration ongoing.
  - NFG capital ratio cannot fully capture intragroup complexity or guarantee availability/quality of capital but increases transparency.

### Corporate governance, boards, and accountability
- Corporate Governance Act (CGA) and Commercial Act (CA) govern corporate governance across banks, securities firms, insurers, credit card companies, MSBs, and financial holding companies.
- Board requirements:
  - At least 3 independent directors who must represent a majority of board members.
  - Boards must have risk and audit committees and remuneration committees.
- Weaknesses:
  - FSC/FSS lack legal authority to evaluate and approve board members and senior officers prior to appointment.
  - Appointments do not require formal approvals by FSC/FSS; institutions responsible for ongoing reviews.
  - Supervisors cannot fully enforce pre-appointment accountability expectations, complicating group-level senior manager assessments.

### Audit, accounting, and auditor oversight
- Accounting standards based on IFRS since 2011; Korea committed to full adoption of IFRS.
- Insurance liability valuation under RSIB follows IFRS 4; IFRS 17 scheduled replacement expected in 2022.
- Insurance solvency and RBC:
  - Insurers must calculate available capital and required capital based on consolidated financial statements in accordance with K-IFRS (Appendix 22 of DRSIB).
  - Corrective actions tied to RBC levels:
    - RBC ratio < 100 percent → prompt corrective action.
    - RBC ratio 50–100 percent → management improvement recommendation (MIR).
    - RBC ratio 0–50 percent → management improvement demand (MID).
    - RBC ratio < 0 percent → management improvement order (MIO).
  - Internal model approaches currently not allowed; from 2020 insurers can apply to use such models.
  - K-ICS implementation and calibration planned for 2022 with FSS quantitative impact studies.
- Audit oversight reforms:
  - Amendments to the Act on External Audit in November 2018 raise auditors’ quality control standards.
  - New registration regime for audit firms performing audits of publicly traded companies introduced.
  - Recommendation: expand auditors’ obligations beyond financial statement audits to include verifying regulatory reporting accuracy, assessing effectiveness of internal control processes, and reporting major flaws to FSC/FSS.
  - Gap: group-wide external auditor obligation not required; cooperation among auditors of conglomerate companies not mandated.

### Banking sector: capital, liquidity, and supervisory tools
- Basel III capital regime and minimum capital ratios:
  - minimum CET1 capital ratio: 4.5 percent
  - minimum Tier 1 capital ratio: 6.0 percent
  - minimum total capital ratio: 8.0 percent
- D-SIB surcharge: 1 percent for D-SIBs except one government-owned D-SIB not subject due to government guarantee.
- Buffers:
  - Capital conservation buffer: 2.5 percent
  - Countercyclical capital buffer: 0 to 2.5 percent (FSC may turn on); currently not mandated.
- Liquidity and reporting:
  - LCR and NSFR implemented in line with Basel 3; BCBS RCAP found Korean LCR regime compliant.
  - Additional requirements:
    - Loan to deposit requirement: 100 percent
    - FX LCR requirement: 80 percent
    - Various maturity mismatch restrictions
  - FX-specific rules:
    - Stable foreign exchange funding ratio: maintain 100 percent or above (except Eximbank 90 percent or above) (RSBB article 65; DRSBB article 39 and Appendix 14).
    - FX LCR: minimum 80 percent (60 percent for KDB) (RSBB article 63-2; DRSBB article 39 and Appendix 3-6).
    - Eximbank and small-scale banks: FX liquidity ratio at least 85 percent and mismatch ratio above -10 percent (RSBB article 64; DRSBB article 39 and Appendix 14).
- Internet banks:
  - Benefited from less stringent framework following Basel I; Basel III to be gradually implemented starting with 2020 (Appendix X).
  - Ownership limits:
    - Internet banks: non-financial entities may hold up to 34 percent with voting rights.
    - Traditional banks: non-financial entities’ stake capped at 10 percent (no voting rights for shares in excess of 4 percent).
- Supervisory practices:
  - CAMEL-R framework and periodic comprehensive examinations every 2–3 years (large banks/D-SIBs biannual).
  - RFI framework for HFGs with review cycles of 2–3 years; RFI covers Risk Management (R), Financial Condition (F), Potential Impact (I).

### Other deposit-taking institutions (ODIs), MSBs and MCCs
- Mutual saving banks (MSBs):
  - 79 MSBs with total assets roughly 70 trillion KRW (2 percent of assets of deposit taking institutions). (¶12)
  - Minimum total risk-based capital (RBC): 7 percent using a framework similar to Basel 1.
  - For MSBs with KRW1 trillion or more in aggregate assets, minimum capital adequacy requirement: 8 percent.
  - Recommendation: impose single limit of 8 percent and consider recent international capital standard as basis for national legislation.
- Mutual credit cooperatives (MCCs):
  - 3,544 MCCs with total of 17.1 million members and assets of 670 trillion KRW. (¶12)
  - Net worth ratio limits:
    - Credit unions, fisheries cooperatives and forestry cooperatives: 2.0 percent
    - Agricultural cooperatives: 5.0 percent
    - Community credit cooperatives: 4.0 percent
  - Recommendation: apply simple liquidity ratio limit for MCCs and harmonize asset classification and minimum reserve requirements from 2020.
- Recommendation: Continue regulatory upgrades beyond 2020 and adopt medium term reform strategy to enhance level playing field across deposit-taking institutions.

### Insurance supervision and solvency regime
- Insurance objectives under IBA Article 1: (i) ensuring sound management; (ii) protecting rights of policyholders; (iii) promoting insurance industry; (iv) contributing to balanced national economy.
- Valuation and accounting:
  - Liabilities under RSIB measured at cost per IFRS 4; IFRS 17 replacement scheduled for 2022.
  - Insurers required to assess adequacy of liability reserves and calculate current estimates of future cash flows.
- Governance and ORSA:
  - ORSA implemented in 2016; phase-in granted by FSC/FSS; findings incorporated into risk assessment but systematic feedback not provided.
  - Prescribed key control functions: risk management, compliance, actuarial matters, internal audit.
- RAAS supervisory regime:
  - RAAS quantitative/non-quantitative evaluation with 17 quantitative assessment indices; examination frequency depends on RAAS category.
  - Examination categories and frequency:
    - Autonomous monitoring: every three to four years.
    - Intensive monitoring: every one to two years.
    - Emergency: examined immediately.
- Policy recommendations for insurers:
  - Exploit full potential of ORSA and incentivize earlier implementation.
  - Deepen FSS risk dialogue with senior management.
  - Feed aggregated findings into macroprudential surveillance.
  - Strengthen corporate governance and hold boards accountable.
  - Consider Pillar 2 capital add-ons in K-ICS context for firms deviating from standard assumptions.
  - Carefully design capital charge for longevity risks considering demographic shifts.

### Asset management, CIS, and market conduct
- Asset management industry:
  - As of July 2019 total AUM by registered asset managers ≈ KRW 1,093 trillion. (¶15)
  - AUM increased from KRW 685 trillion in 2014 to KRW 1,093.8 trillion in June 2019 (increase of 75 percent). (¶15)
  - Number of asset managers increased from 86 to 260 over same period. (¶15)
- CIS framework broadly compliant with IOSCO; areas in pipeline include MMF reforms and valuation/stress testing.
- Fund classification thresholds:
  - If solicited retail investors and participating retail/professional investors each 49 or fewer → privately offered fund.
  - If both 50 or more → publicly offered fund.
- MMF reforms:
  - Legal changes requiring market-value assessment and stress testing of institutional MMFs were adopted shortly before publication.
  - Recommendations: fully implement IOSCO MMF recommendations; require market-value assessment and periodic stress testing for MMFs.
- Conduct risks:
  - Rising mis-selling and misconduct, with notable incidents involving equity linked securities (ELS) and derivative linked securities (DLS).
  - Authorities recommended stronger surveillance, thematic assessments, scaled-up on-site inspections, and external audits for entities posing market integrity risks.

### Data, conglomerate maps, and consolidated supervision
- Total number of financial conglomerates meeting PFCS definition: 44. (B. Market Landscape)
- Banking groups represented by 13 conglomerates with assets amounting 90.5 percent of total assets of the banking system.
- As of December 2018:
  - 9 holding financial groups with total assets of 2.068 trillion won, and 30 non-holding financial groups with total assets amounting 1,179 trillion won. (footnote)
  - HFGs have more than doubled total assets over last ten years, exceeding 2,000 trillion won; HFG assets comprise 42 percent of aggregate financial sector assets. (¶6)
  - Non-holding financial groups operate with overall assets of 1,179 trillion won, as of December 2018. (¶7)
- Total financial entities supervised by FSC/FSS: 5,511. (¶8)
- Of 19 commercial and specialized banks:
  - 14 operate under bank holding companies with approximately 275 subsidiaries. (¶9)
  - 19 domestic banks composition: 6 commercial banks (4 Korean and 2 foreign-owned ‘nationwide banks’), 6 regional banks, 2 internet-only banks, and 5 specialized banks. (¶10)
  - Capital composition in domestic banks: 82 percent CET1, 4 percent AT1, and 14.0 percent tier 2 capital. (¶10)
- Insurance sector as of end-2018:
  - 54 insurance undertakings: 24 life, 20 non-life, 10 reinsurers. (¶13)
  - Insurers managed KRW 1,011.7 trillion as of end-2018 (~two thirds of GDP). Three quarters managed by life companies. (¶14)
  - Asset allocation for insurers: bond holdings 48 percent; loan exposures 18 percent. (¶14)
- Securities industry:
  - Objective to support creation of large investment banks defined as those with equity capital above KRW10 trillion. (¶16)
  - 22 out of 55 brokerages are foreign owned (40 percent), but foreign securities firms accounted for around 10 percent of industry's workforce (8 percent) and paid-up capital (11 percent). (¶16)

### Climate risk: observations and recommended institutional response
- Market developments:
  - First ESG foreign currency bonds in 2013; first KRW ESG bonds in 2018.
  - 2019: Korea reportedly had 16 percent of global ESG foreign currency bond issuance.
  - National Pension Service (NPS) adopted principles on responsible investments in 2018.
  - BoK joined NGFS in 2019; BoK published Climate Change and Financial Stability report stress test results in June 2018.
- Gaps and recommendations:
  - Institutional steering and coordinated action plan by FSC/FSS/BoK pending.
  - Disclosure: carbon emissions reporting established for listed companies; FSB Task Force on Climate-related Financial Disclosures framework should be reflected in sustainable management reports.
  - No enforced financial institution reporting of climate-related financial risks to authorities; legislation on corporate social responsibility in business reports pending.
  - Data gaps and lack of unified taxonomy for “green”/“brown” assets impede implementation.
- Risk channels:
  - Banks: transition risk via exposure of Korean corporates and SMEs to jurisdictions restructuring toward sustainability.
  - Insurers: physical risk from natural disasters (Korea moderately exposed to typhoons and occasional snowfalls).
  - 2019 Pacific typhoon season record global economic losses; typhoon “Lingling” cost less than USD 300 million to Korea.

### Supervisory intensity, tools, and recommended practices
- Move beyond rules-based approach to forward-looking supervision—use periodic in-depth thematic and firm-specific reviews for ICAAP, ILAAP, recovery planning, credit risk management.
- Integrate ICAAP/ORSA findings into supervisory dialogue and use outcomes to inform Pillar 2 and board/senior management assessments.
- Strengthen authority to impose meaningful group-wide requirements and expectations.
- Improve supervisory engagement with external auditors and develop group-level auditor interactions and obligations.
- Enhance cross-border cooperation and consider establishing supervisory colleges for major Korean groups with significant foreign operations.

*International Monetary Fund — Republic of Korea Financial Sector Assessment Program (FSAP) mission findings and recommendations as presented in the source chapter.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### Overview
- Oversight of the Korean financial system is broadly effective. Korea’s Financial Services Commission (FSC) and Financial Supervisory Service (FSS) have in place regulatory and supervisory regimes in line with international standards with only a few remaining gaps.
- The authorities have addressed most of the recommendations of the previous FSAP and made good progress in benchmarking their frameworks with the Basel Core Principles (BCP), the Insurance Core Principles (ICP) and the International Organization of Securities Commissions (IOSCO) Objectives and Principles for Securities Supervision (IOP).
- The multiagency arrangement (FSC/FSS, Bank of Korea (BoK), Korea Deposit Insurance Corporation (KDIC)) creates complexity that makes coordination challenging across:
  - horizontal coordination between government and agencies, and
  - vertical coordination between levels (or tiers) of governance.
- The regulatory and supervisory practices at the sectoral level create preconditions for effective groupwide supervision, with a strong focus on bank dominated groups. Group-wide supervision is implemented using sectoral laws and is supplementary to sector-level supervision.

### Key findings on institutional and supervisory framework
- The FSC is part of the Government and oversees supervisory policies, legislation, and adopts legally binding decisions in supervision; the FSS is mandated with daily tasks of supervision and operates under guidance of the FSC.
- The post-crisis agenda resulted in a predominantly rules-based system implemented broadly in line with international standards; however:
  - The system misses a ‘forward looking’ character and hampers supervisors’ ability to proactively address buildup of risks.
  - Approaches like Pillar 2 or an ORSA are not fully adopted in supervisory practice.
  - Tools used by supervisors do not have a preemptive effect and only ex-post follow up on identified risks and shortcomings.
- The remit of financial conglomerates supervision covers only groups dominated by banking business, leaving significant nonbanking risk uncovered.
- Group-level supervisory approaches are not applied consistently across holding financial groups (HFG).
- There is an absence of a modern resolution and recovery framework for complex groups, increasing the cost of handling financial stress.
- A major gap: lack of authority to regulate financial conglomerates that do not have a straightforward holding company structure (nonholding financial groups, NFG). Consequently:
  - Authorities cannot assess or regulate risks emerging from operations of nonfinancial affiliates that may be a source of potential vulnerability to financial affiliates.
  - The authorities should have authority to understand broader groups of affiliates and obtain relevant information from non-financial affiliates.
  - Authorities should ensure a group’s specific structure does not impede effective supervision, including authority to designate a “head of group”.
- The current precise definition of the head of the financial conglomerate can be too prescriptive and, in exceptional cases, undermine effectiveness; additional quantitative and qualitative criteria and flexibility could strengthen the approach.
- Supervisory practice should apply a look-through approach to entire groups and all affiliates, focusing on quality of capital and risks’ dynamics; multilayer analyses of conglomerate maps would significantly elevate supervisory understanding.
- More supervisory attention should focus on climate risk and other emerging risks affecting groups across their structures.

### Forward-looking supervisory enhancements
- Increase use of periodic in-depth reviews of group-level capital and liquidity management approaches, including governance frameworks. Specific practices include:
  - Credit risk management reviews.
  - Internal Capital Adequacy Assessment Process (ICAAP) and capital planning.
  - Internal Liquidity Adequacy Assessment Process (ILAAP) and liquidity planning and recovery planning for banking groups.
  - In insurance, incorporate ORSA findings into overall risk assessments and provide systematic feedback to companies.
- Supervisory emphasis on forward-looking practices should be used to:
  - Promote financial resiliency.
  - Clarify expectations of boards and senior managers of financial holding companies.
  - Inform evaluations of board and senior management effectiveness and Pillar 2 requirements.
- FSC/FSS should further leverage its position as an integrated supervisor to connect forward-looking and in-depth approaches into a strong integrated framework for groups.
- Current group-level supervision is primarily organized around legal-entity supervision with a relatively small team of “group-level” supervisors; authorities may need to increase staffing for large financial conglomerates or rebalance resource allocation.
- Given plans for overseas expansion of large Korean financial groups, enhance cross-border supervisory coordination:
  - Intensify monitoring of overseas expansion.
  - Strengthen cooperation with host authorities at the working level.
  - Set up supervisory colleges.
  - Give more attention to managing failure of cross-border firms.

### Regulatory framework and gaps
- The remit of conglomerate supervision is largely limited to groups with a clearly defined head—a financial holding company (FHC); nonholding financial groups with a mix of commercial and financial services firms are not regulated on a group level.
- Proposed and considered measures (by the FSC) include:
  - Implementation of binding prudential framework for non-holding financial groups and disclosure.
  - Reporting of detailed information about group structure to motivate groups to streamline their organization.
- A group-level capital ratio for non-holding financial groups should reflect:
  - double/multiple gearing,
  - group-level contagion and concentration risk,
  - overall governance of the group with focus on its complexity and size (including a wider group).

### Main recommendations (Table 1: Korea: Main Recommendations)
- Preconditions for Effective Conglomerate Supervision
  1. Strengthen effectiveness of supervision by redistribution of powers and responsibilities between the FSC and FSS, by greater delegation of budgetary, supervisory guidelines, and enforcement processes to the FSS, and the FSC assuming a role on strategy, financial legislation, and financial infrastructure. (¶25-32, pp 17-19; ¶35, p 20) — LT H
  2. Improve information flow and coordination across sectoral supervisors and build up capacity for coordinated oversight of both conduct and prudential supervision. (¶33, p 19; ¶120, 122, 125, pp 43-44) — ST M

- Conglomerate Regulatory and Supervisory Framework
  3. Enhance regulatory and supervisory powers of the FSC/FSS to all financial conglomerates, including “non-holding financial groups” by extending the legal framework, including to reach non-financial institutions of a wider-group, for the purpose of requiring data and information supporting the FSC/FSS’s core activities. (¶34, 36, p 20; ¶48, p 24) — MT H
  4. Expand the legally binding prudential requirements to cover all systemically important / significant financial conglomerates, including “non-holding financial groups”, considering the specificities of existing financial conglomerates. (¶52-55, pp 25-27) — MT H
  5. Enhance regulatory framework for all financial conglomerates by the requirement of a sufficiently transparent structure (including their disclosure) which would not impede effectiveness of actions taken in crisis situations, threatening the stability of financial institutions. (¶37, 20) — LT H

*REPUBLIC OF KOREA — INTERNATIONAL MONETARY FUND*

### 6.   To further promote resiliency at the largest groups, implement detailed regulations

### 6.   To further promote resiliency at the largest groups, implement detailed regulations

### Main recommendations (concluded) — Conglomerate supervisory practices
- 6. To further promote resiliency at the largest groups, implement detailed regulations and increase supervisory focus on DSIBs’ group-level recovery planning and preparedness, reflecting a complexity of financial conglomerates. (¶51, p 25; ¶65, p 30, ¶116, p 42) — LT H
- 7. Gradually enhance cross-border cooperation, including the consideration of establishing supervisory colleges for particular financial groups/institutions. Closely monitor overseas expansion of financial institutions. (¶167-169, p 54) — LT M
- 8. FSC, FSS, BoK and KDIC should jointly assess the value of current regulatory reporting requirements in the context of efforts to monitor and assess risks to financial stability. Revise reporting requirements as deemed warranted. (¶62, p 30) — MT H
- 9. Enhance the use the outcomes of the multilayer analyses and assessments of conglomerates’ maps in a comprehensive risk based approach, addressing among others multiple gearing, excessive leverage, contagion risk, concentration risk, conflicts of interests, overall governance of the group, etc. (¶121, p 43) — MT M
- 10. In applying the principle of prudential ‘proportionality’ ensure stronger requirements on governance, risk management, liquidity and capital, using all available supervisory tools, including ORSA and Pillar 2, and with increased supervisory intensity and enforcement for systemically important FHCs and specialized banks. (¶126-134, pp 44-45; ¶142, p 48; ¶159-160, pp 51-52) — ST H
- 11. Strengthen corporate governance requirements with higher levels of supervisory engagement with the boards and senior managers regarding their responsibility to oversee the execution of the approved risk-management framework and internal controls practices on an enterprise and a group wide level, including enforcement of their accountabilities and supported by strong accounting and auditing standards. (¶39, p 21; ¶58-61, pp 27-29; ¶111, p 41; ¶130-135, pp 46-47; ¶160, p 51; ¶165, p 53) — MT H

### Supporting actions
- 12. Complete the introduction of a fully risk-based solvency regime, provide a stronger focus on capital adequacy, and ensure a prudent and proportional implementation of Korea Insurance Capital Standard (K-ICS). (¶88, p 35) — ST H
- 13. Intensify supervision and review the role of specialized banks ensuring that those undertaking commercial banking activities strictly conform with all prudential requirements applicable to nationwide banks. (¶71, p 31; ¶118, pp 42-43) — ST H
- 14. Develop a strategic supervisory plan for mutual saving banks and mutual credit cooperatives (MCCs) and encourage further consolidation, to help restore financial soundness. (¶74-77, pp 32-33) — MT H
- 15. Grant operational powers to the supervisor to restrict the development or sale of financial products, activities and practices causing significant investor, consumer, and or depositor protection concerns. (¶161-166, pp 52-52) — ST H
- 16. Develop interagency cooperation framework led by the FSC/FSS/BOK on climate risk to discuss emerging risks and propose policy actions across the financial system. (¶171, p 55) — ST H

### Institutional and market context — key findings and statistics
- The note was prepared in the context of the FSAP missions to Korea from August 20 to September 6, 2019 and from December 3 to December 19, 2019. (Introduction A. Scope and Approach)
- The approach referenced the Joint Forum Principles for Financial Conglomerate Supervision of 2012 (PFCS) and cross-cutting topics including corporate governance, risk management, liquidity and capital assessment process, organization of supervision, cross-border cooperation, and climate risk.
- The overall number of financial conglomerates—meeting the definition of the PFCS— is 44. (B. Market Landscape)
- Banking groups are represented by 13 conglomerates, with assets amounting 90.5 percent the total assets of the banking system.
- As of December 2018:
  - There were 9 holding financial groups with total assets of 2.068 trillion won, and 30 non-holding financial groups with total assets amounting 1,179 trillion won. In 2019, one more financial conglomerate was recognized as a holding financial group. (footnote)
  - HFGs have more than doubled their total assets over the last ten years, exceeding 2,000 trillion won. HFGs’ assets comprise 42 percent of the aggregate assets of the financial sector. (¶6)
  - Non-holding financial groups operate with the overall assets of 1,179 trillion won, as of December 2018. (¶7)
- In total, there are 5,511 financial entities supervised by the FSC/FSS. (¶8)
- Of the 19 commercial and specialized banks in Korea:
  - 14 are operating under bank holding companies, which have a total of approximately 275 subsidiaries. (¶9)
  - The 19 domestic banks consist of 6 commercial banks (4 Korean and 2 foreign-owned ‘nationwide banks’), 6 regional banks, 2 internet-only banks and 5 specialized banks. (¶10)
  - Capital composition in domestic banks: 82 percent of total capital in the form of Common Equity Tier 1 (CET1), 4 percent of Additional Tier 1 (AT1) capital, and 14.0 percent of tier 2 capital. (¶10)
- Mutual saving banks (MSBs) and mutual credit cooperatives (MCCs):
  - There are 79 MSBs, with total assets of roughly 70 trillion Korean Won (KRW) (accounting for 2 percent of the total assets of the deposit taking institutions). (¶12)
  - There are 3,544 MCCs with a total of 17.1 million members and assets of 670 trillion KRW. (¶12)
- Insurance sector as of end-2018:
  - A total of 54 insurance undertakings; 24 life and 20 non-life companies, as well as ten reinsurers. (¶13)
  - Insurers managed KRW 1,011.7 trillion as of end-2018, corresponding to around two thirds of GDP. Three quarters are managed by life companies. (¶14)
  - Asset allocation for insurers: bond holdings 48 percent; loan exposures 18 percent. (¶14)
- Asset management industry:
  - As of July 2019, total assets under management by registered asset managers was around KRW 1,093 trillion. (¶15)
  - AUM increased from KRW 685 trillion in 2014 to KRW 1,093.8 trillion in June 2019, an increase of 75 percent. (¶15)
  - Number of asset managers increased from 86 to 260 over the same period. (¶15)
- Securities industry:
  - Objective to support creation of large investment banks defined as those with equity capital above KRW10 trillion. (¶16)
  - 22 out of 55 brokerages are foreign owned (40 percent of total firms), but foreign securities firms accounted for around 10 percent of the industry's total workforce (eight percent) and paid-up capital (11 percent). (¶16)

### Institutional framework and mandates
- Korea uses an integrated financial supervision model, with the FSC/FSS as Korea’s integrated financial supervisory authority. (¶17)
- The FSC is the lead regulator responsible for rulemaking, licensing, major enforcement decisions, and the government’s financial market policy. The FSC Chairman is appointed by the President with the recommendation of the Prime Minister; the Vice Chairman is appointed by the President with the recommendation of the Chairman of the FSC. (¶18; footnote)
- The FSS examines and supervises financial institutions and performs bank, insurance and capital market prudential supervision; it is led by the Governor, four deputy governors (or less), and nine assistant governors (or less). (¶19; footnote)
- By law the FSC/FSS are tasked with regulation and supervision of financial conglomerates, except of non-holding financial groups. Under conglomerates supervision, the FSC/FSS currently are responsible for HFGs, regulated in all relevant areas recognized by international standards, except of the recovery and resolution preparedness framework. The Fair-Trade Commission (FTC) regulates other large Korean groups under antitrust and market concentration objectives. (¶20)

*International Monetary Fund — Republic of Korea Financial Sector Assessment Program (FSAP) mission findings and recommendations as presented in the source chapter.*

### 21.      The FSC/FSS share responsibility for regulation and supervision of ODIs with several

### 1korea2020002 - 21.      The FSC/FSS share responsibility for regulation and supervision of ODIs with several

### Institutional architecture and agency roles
- Key agencies and primary responsibilities:
  - FSC: chartering and licensing MSBs and credit unions; setting prudential rules; defines the budget of the FSS with relatively great level of detail, including determining the number of headcounts and the distribution of paygrades.
  - FSS: primary supervisor of MSBs; primarily supervised role for credit unions; conducts examinations; provides technical information to the FSC; funded primarily from fees collected from financial institutions and securities issuers as well as a small appropriation from the BoK.
  - SFC: integrated within the FSC structure; five members appointed by the President for a renewable three-year term; directs investigations of market misconduct and abuse such as insider trading and market manipulation; establishes accounting and audit standards; conducts preliminary review of regulatory matters to be deliberated by the FSC.
  - BoK (Bank of Korea): responsible for monetary and credit policies, payment systems operations, lender of last resort; top decision-making body is the Monetary Policy Board; has its own plan of examinations; can request the FSS to conduct examinations or participate in joint examinations; may be involved in supervision of regulated entities depending on circumstances.
  - KDIC: manages deposit insurance funds and runs resolution programs including deposit payouts and financial assistance; can request FSS examinations or initiate joint examinations; has its own supervisory program including annual stress-test style simulation exercises; main policy making body is the Commission which consists of 7 members.

- Organizational and supervisory overlaps and coordination:
  - Complex setup of four agencies (the FSC and the FSS, the BoK, and the KDIC) with different and overlapping responsibilities and authorities, including cross-memberships in their boards.
  - Cooperation facilitated through protocols, joint consultative bodies, working groups, and regular meetings of key stakeholders.
  - Efficiency challenges noted in enforcement actions, budgetary process, and coordination of on-site examinations; examination purposes may vary in label but be largely similar in substance.

- Specific institutional details:
  - The Monetary Policy Board shall be composed of seven members: the Governor; the Senior Deputy Governor of the BoK; one member recommended by the Minister of Strategy and Finance; one member recommended by the Governor of the BoK; one member recommended by the Chairman of the FSC; one member recommended by the Chairman of the Korea Chamber of Commerce and Industry; and one member recommended by the Chairman of the Korea Federation of Banks. The Governor shall be appointed by the President following deliberation by the State Council and a Personnel Hearing in the National Assembly.
  - The president of the KDIC Commission composition: The president of the Corporation; the Vice Chairman of the FSC; the Vice Minister of Strategy and Finance; The Vice Governor of the BoK; one member commissioned by the FSC, and 2 members commissioned by the FSC on the recommendation of the Minister of Strategy and Finance and the Governor of the BoK. The president shall be appointed and dismissed by the President of Korea upon the recommendation of the Chairman of the FSC. The vice president shall be appointed and dismissed by the FSC upon the recommendation of the president of the Corporation.

- Statistics on FSS budget and funding:
  - Total operating budget of the FSS is KRW350 billion for an overall staff strength of about 2000 personnel.
  - Supervision fees from financial institutions make up approximately 80 percent of total revenues collected.
  - Securities registration fees account for 17 percent of the total.
  - Contributions from the BoK account for 2.7 percent of the total.
  - Any surplus from the total revenue collected over operating expenses are returned to the industry players every year.

### Main findings on institutional framework and governance
- Priority and mandate clarity:
  - The FSC/FSS should ensure that "safety and soundness of the Korean financial system" is a top and clearly stated priority in their mission and objectives.
  - Mixing supervisory focus with objectives such as enhancing competitiveness and promoting Korea as a global financial center risks undermining perceived independence and supervisory effectiveness.

- Budgetary rigidity and suggestions:
  - Current budget process is rigid—FSC defines FSS budget details; FSS role is limited to providing technical information.
  - Flexibility in supervision budget allocation is important but difficult under current arrangements.
  - Recommendation: consider precise budgetary rules complemented by guidance based on principles, delegating concrete budget decisions to the FSS while maintaining strong oversight of spending.

- Surplus management:
  - FSC/FSS should consider maintaining any surplus of the FSS budget as a reserve to be built over time and used when needed, particularly when market activity (and fee revenue) falls but supervisory demands remain or increase.

- Enforcement process and role delineation:
  - FSS has an enforcement council with internal and external members reviewing enforcement proposals; external members often participate later (e.g., board of appeal) because early involvement may discourage bold examiner proposals.
  - Recommendation: rearrange enforcement process to better match gravity of supervisory findings; give FSS a greater role in defining substance of enforcement decisions with FSC endorsement and process control—FSC would retain formal action authority but rely more on FSS input.

- Leadership tenure and independence:
  - Heads of FSC/FSS and SFC are appointed for a three years term; this is considered a narrow timeframe for long-term strategy execution.
  - The three most recent heads of the FSC and the FSS resigned before the end of their mandates.
  - Recommendation: extend terms defined by law and strengthen legal independence safeguards; modify selection process to better accommodate qualification requirements.

- Regulation style:
  - System primarily consists of binding rules with limited principle-based guidance.
  - Recommendation: consider principle-based guidelines to address a wider variety of issues and promote good practices.

- Cross-sectoral/group supervision developments:
  - FSC/FSS created cross-sectoral divisions dedicated to group supervision; FSS cross-sectoral divisions report directly to First Senior Deputy Governor and to Senior Deputy Governors; first cross-sectoral examination found efficient.
  - Recommendation: build capacity by increasing staff for cross-sectoral supervision; FSC positioned Financial Group Regulation Bureau high in hierarchy and formed joint consultative body to improve supervisory cooperation.

- Nonholding Financial Groups (NFGs) and legal mandate gaps:
  - FSC/FSS lack powers to supervise conglomerates without a clearly defined holding structure; supervision of NFGs is exercised on basis of FSC recommendations which are not legally binding.
  - The FSC’s/FSS’s legal mandate towards NFGs needs to be expanded; strong legal mandate required to impose group-level regulation and actions.

- Complexity and vulnerabilities in Mutual Credit Cooperatives (MCCs):
  - MCC system is complex: sectoral silos and multi-tier supervisory system; chartering and supervision depend on purpose and ministry; primary prudential regulator is FSC except for community credit cooperatives (Ministry of the Interior and Safety).
  - Recommendation: FSC should strengthen steering role by developing a strategic supervisory plan to (i) underpin actions to strengthen stability of these institutions, and (ii) support FSC’s leading role as prudential regulator, including alignment of prudential standards and institutional powers.

### Regulatory framework strengths and gaps
- Group-level supervision and information access:
  - Supervision lacks legal mandate to regulate financial conglomerates without straightforward holding structure; authorities cannot assess and regulate risks from nonfinancial parts of groups or comprehensively supervise financial institutions in such groups.
  - Recommendation: mandate the authorities to reach a wider group with information requests; develop prudential framework for "non-holding financial groups"; require information disclosure of group ownership structure; require group structures that do not impede effective supervision, recovery and resolution.

- Prudential requirements across levels:
  - Korea has a solid, rules-based regulatory regime largely in line with international standards; capital requirements exist at the holding company level.
  - Liquidity requirements currently apply only at banks and other financial subsidiaries—lack of liquidity requirements at the holding company level is an important gap given growth of non-banking activities in DSIB banking groups.
  - Authorities are piloting thresholds for concentration and large exposure restrictions but still considering best approach for Korean banking system.
  - Insurance reforms: implementation of the new K-ICS and IFRS 17 are important reforms.
  - Capital markets: need to accelerate implementation of the IOSCO MMF Recommendations.

- Corporate governance and accountability weaknesses:
  - Major weakness: accountability of boards to meet expectations for fit and proper assessments and to run firms in a safe and sound manner.
  - FSC/FSS do not have legal authority to evaluate and approve board members and senior officers against specific qualification requirements prior to appointment; regular supervisory assessments cannot fully replace pre-appointment approvals.
  - On group level, assessing board and senior manager responsibility for issues occurring at a subsidiary poses a challenge.

- Audit, accounting, and reporting reforms needed:
  - Authorities need to accelerate reforms addressing accounting risks and expand auditors’ obligations beyond financial statement audits.
  - Recommendation: implement planned financial statements review system and link it to audit and accounting oversight to achieve comprehensive assessments.
  - Additional auditor assignments could include accuracy of regulatory reporting and effectiveness of internal control processes (risk management and systems) at enterprise and group level.
  - Auditors should be required to report major flaws and failures to the FSC/FSS.

*Source: IMF staff report excerpt provided in content unit 1korea2020002 - 21.*

### 41.      There are two regulatory frameworks established for supervision of financial

### 1korea2020002 - 41.      There are two regulatory frameworks established for supervision of financial

### Overview
- Two regulatory frameworks exist for supervision of financial conglomerates for two different types of group structures.
  - The FHCA provides a legal basis for supervision of groups meeting defined characteristics of a holding structure—HFGs.
  - The Consultation Papers on the Supervision of Financial Conglomerates (CPFC), nonbinding recommendations, set standards for supervision of NFGs, groups with a complex structure, not headed by a holding company.
- The assessment is based on the regulation which was in force by June 30, 2019.

### HFG (Holding Financial Groups): legal framework and constraints
- HFGs face a restrictive regulatory framework that:
  - Determines less complex group structures and specificities in overall governance.
  - Uses a strong compliance-based supervisory approach aimed to prevent industrial conglomerates from establishing a bank as the treasury within the group.
- Legal and structural constraints:
  - A bank cannot be a member of a mixed conglomerate, but only of HFGs composed solely of financial institutions.
  - Only financial companies or companies pursuing financial-related business are allowed as HFG subsidiaries; only financial companies in related business can be incorporated as the holding company’s second-tier or third-tier subsidiaries.
  - Regulation implies simple and hierarchic structures of HFGs, consisting of holding companies and two tiers of subsidiaries.
- Strict rules on intra-group transactions and investments:
  - Prohibition of the investment among subsidiaries.
  - Restriction on the amount of credit granting among subsidiaries.
  - Prohibition of a subsidiary’s granting credit to as well as stock investment in the holding company.
- Minority holdings and capital requirements:
  - Minority holdings are limited by additional capital requirements.
  - Rules apply to bank holding companies when investment in non-financial affiliates exceeds 15 percent of the total amount of the holding company’s investment.
  - The larger number of the following that exceeds the given limits is added to the RWAs (with a weight of 1,250 percent):
    - 1) excess of investment in an individual non-financial company that exceeds 15 percent of the bank holding company’s equity;
    - 2) excess of the total summation of investment in non-financial companies that exceeds 60 percent of the bank holding company’s equity.
- Reporting and approval:
  - Any change to the group structure of the HFG is reported to the FSC/FSS and is subject to regulatory approval.
  - FHCs must report to, or acquire the approval of, the FSC/FSS when they plan on newly incorporating a subsidiary into the group.
  - FHCs need to report to the authorities when they no longer control a certain subsidiary. (Article 16 – 18 and Article 61 of the FHCA)

### NFG (Non-holding Financial Groups): status, tools, and limitations
- Legal framework and development:
  - A legal framework for NFGs on a group-wide basis is under gradual development, aiming to bring more transparency to these groups.
  - NFGs are defined as financial conglomerates by international standards, but application of the principles is challenging given complex structures and lack of a legally binding regulatory framework.
  - Legislators proposed two bills largely inspired by the CPFC to the Parliament; these bills have been pending for more than one year (relevant bills were proposed in June and November 2018).
- Supervisory limitations and reporting:
  - There is currently no process by which financial authorities can approve or control changes in the group structure for NFGs.
  - For NFGs, a ‘representative company’ must report to the FSC on a quarterly basis on the current status of the group’s ownership and governance structure, and any other changes. (Article 17 of the CPFC)
  - The representative company is defined as a financial institution within a NFG, designated and legally responsible for compliance with regulatory requirements on a group-wide basis towards the FSC/FSS.
- Prudential tools and calibration:
  - The CPFC recommends capital ratios calculated on an aggregate level for all financial institutions that are members of the same group.
  - The FSC developed a minimum capital ratio for NFGs broadly inspired by the 1999 Principles; it:
    - Compares aggregated capital of group financial institutions and sectoral capital requirements, taking into account double/multiple gearing among these institutions.
    - Requires calculation of capital requirements for contagion and concentration risk.
    - Is being calibrated by the FSC to reflect the complexity and size of the group (including a wider group).
  - The representative company of the NFG is assigned a similar role as a holding company and is responsible for compliance with prudential standards on a group level and is a primary contact point for supervision.
  - NFGs are required to establish a risk-management consultative body comprised of the representative company and other constituent financial affiliates to manage group-wide risks and to coordinate and arbitrate various risk-related issues and interests. (Article 9 of the CPFC)
- Limitations of the NFG capital ratio:
  - Cannot fully capture the complexity of intragroup relations.
  - Cannot guarantee that capital would be available or could quickly be made available where losses occur.
  - May face challenges assuring the appropriate quality of capital.
  - Nonetheless, it is useful to increase transparency and to signal supervisory attention, and to promote streamlining of relations within the financial part of NFGs.

### Interaction with other authorities and information gaps
- Information on wider groups of nonfinancial corporations (primarily relevant for NFGs) is accessible only through cooperation with the FTC, which can limit the FSC/FSS’s authority toward groups.
  - The FTC has a specific mandate and collects information that may not always match supervisory needs.
  - Cooperation with the FTC is rather limited.
- The FSC/FSS proposal to request information through a ‘representative company’ is considered a suitable approach for potential enforcement.

### Supervision powers, enforcement tools, and gaps
- FSC/FSS powers and tools:
  - Cannot require HFGs to take on a specific legal form or group structure, but can restrict subsidiary ownership and require subsidiaries to only control financial institutions in related business as second-tier subsidiaries.
  - For NFGs, supervisory tools are more indirect and include capital adequacy requirements for financial affiliates.
  - FSC/FSS can restrict a subsidiary of an FHC from owning stocks of another subsidiary or require structural constraints.
- Prompt corrective actions and resolution:
  - Prompt corrective actions can be effectively adopted only for HFCs, as NFGs at the group level are not regulated by law — a significant gap.
  - For NFGs, FSC/FSS can only recommend measures (e.g., non-binding management improvement plan).
  - The recovery and resolution framework should be applied to domestic systematically important banking groups to support group supervision with additional tools.
  - Little thought has been given to managing failure of cross-border firms; an approach needs to be developed, including a strategy for engaging relevant authorities overseas.

### Corporate governance and fit-and-proper arrangements
- Corporate governance regulation:
  - FSC/FSS established regulations covering corporate governance applicable to all financial institutions and financial holding companies.
  - The Corporate Governance Act (CGA) governs corporate governance of banks, securities firms, insurers, credit card companies, MSBs, and financial holding companies; it is backstopped by the Commercial Act (CA).
  - CGA includes requirements for board composition and operation, roles and responsibilities for internal controls and risk management, and prudential requirements for large shareholders.
- Board composition and committees:
  - At least 3 members must be independent directors, and these must represent a majority of board members.
  - The board must have risk and audit committees; the requirement applies at both the legal entity and holding company level.
  - Boards must have remuneration committees to deliberate and decide remuneration methods, ensure no excessive risk-taking through remuneration systems, and defer payment of remuneration payable to specific executive officers and employees.
  - Each financial company must establish internal control standards incorporating rules and integrity obligations for executive officers and employees. (Article 24 of the CGA)
- Enforcement gaps in governance:
  - Internal procedures of financial institutions (instead of supervisory reviews) on corporate governance are the basic instrument to ensure compliance, which may challenge supervisory consistency and enforcement.
  - Financial institutions are expected to submit an annual report on board management and operation and disclose it; supervisors may find it difficult to achieve a uniform standard without earlier involvement.
  - FSC/FSS do not have legal authority to evaluate and approve board members and senior officers against specific qualification requirements, reducing accountability of boards with respect to fit-and-proper expectations.
  - Appointments do not require formal approvals by the FSC/FSS; institutions are responsible for on-going reviews of qualifications.
  - The lack of pre-appointment approvals reduces supervisors’ ability to set concrete accountability expectations at the start of mandates; similar issues apply to group-level senior managers where responsibility across subsidiaries is difficult to assess.

### Key exact figures and legal references
- Assessment reference date: June 30, 2019.
- HFG definition criteria (FHCA §2):
  - i) It shall control at least 1 financial institution;
  - ii) Total assets are greater than or equal to 500 billion won;
  - iii) The total amount of stock values of its subsidiaries shall exceed 50 percent of the total amount of its assets.
- Minority/related capital weighting: 1,250 percent added to RWAs for specified excesses.
- Investment thresholds triggering additional measures:
  - 15 percent (individual non-financial company investment relative to bank holding company’s equity).
  - 60 percent (total summation of investment in non-financial companies relative to bank holding company’s equity).
- Relevant articles cited:
  - FHCA Article 16 – 18 and Article 61 (reporting/approval for HFG structural changes).
  - CPFC Article 17 (quarterly reporting by representative company).
  - CPFC Article 9 (risk-management consultative body requirement).
  - CGA Article 24 (internal control standards).
- Board independence minimum: At least 3 independent directors who must represent a majority of board members.

*REPUBLIC OF KOREA — INTERNATIONAL MONETARY FUND*

### 60.      The role of the FSC/FSS in assessments of major shareholders is complemented by the

### 1korea2020002 - 60.      The role of the FSC/FSS in assessments of major shareholders is complemented by the

### FSC/FSS mandate, coordination, and group-wide assessments
- The FSC/FSS authority to assess the financial soundness and the integrity of major shareholders is defined by the CGA and is applied to all supervised financial institutions and financial holding companies. The regulation also defines detailed requirements for FHCs.
- For NFGs, a periodic group-wide risk management assessment of the group is recommended, evaluating the overall safety and transparency of the ownership and governance structure of the group.
- The role of the FSC/FSS is complemented by the broader mandate of the FTC. Currently, the FSC/FSS benefit from information collected by the FTC, but cooperation has greater potential which should be explored.
- Recommendation: Enhance cooperation between the FSC/FSS and the FTC to improve assessments of major shareholders and group-wide risks.

### Corporate governance and risk management framework established by FSC/FSS
- Board responsibilities:
  - The board of the head of the group (an FHC or a ‘representative company’) is expected to be capable of understanding the group structure, management strategy and the material risks of the group. The board of the FHC deliberates and makes decisions on group business management, including formulation of group management strategies, realignment of organizational structure, and management of group-wide risks. For NFG, the board of the representative company should have a grasp over group-wide issues and risks. (Article 9 of the CPFC)
- Capital management:
  - FSC/FSS require the board of the FHC to formulate capital management policies by identifying and assessing group-wide risks in a comprehensive manner, including risks of unregulated entities. The board must review and approve whether risk management strategies and capital management policies are consistent with management strategies. (Article 12(2) of the Detailed Supervisory Regulations on Financial Holding Companies)
  - Financial conglomerates should design capital management policies that include crisis-situation analysis.
  - The FSC/FSS require that the board of the FHC and recommends that the board (or the Risk Management Committee) of the NFG proactively manages its capital. The results of stress testing are expected to be reflected in capital planning and liquidity management processes, including as preparation for a crisis situation.
- Liquidity management:
  - The head of the group (FHC/representative company) is required/recommended to develop group-wide liquidity management processes and funding programs consistent with the group’s scope of business, risk factors, and restrictions. (Article 29 of the Supervisory Regulations on Financial Holding Companies and Article 9 and Appendix 1 of the CPFC)
  - Liquidity management must consider limits on allowable risk size, early warning systems, crisis-situation analyses, contingency funding plans, diversification of funding channels and maturity periods.
- Risk management and internal control standards:
  - Boards of financial conglomerates must set and implement risk management and internal control standards; financial institutions are requested to establish an independent risk management unit.
  - Internal control framework must capture group-wide risks. Conglomerates are required to document standards and processes covering nature of business, transaction issues, transaction risks and interconnectedness of financial affiliates. (Articles and Appendices referenced in source)

### Supervisory tools and remediation incentives
- Limitation: The FSC/FSS has only limited tools for requiring firms to address qualitative weaknesses that may impact a financial company’s safety and soundness.
- Recommendation: Consider ways to strengthen incentives for banks to fix material risk management and control deficiencies.
  - As a starting point, communicate assessments and expectations to boards and senior management for rapid remediation of weaknesses in areas the FSS views as most critical (e.g., financial resiliency and compliance with conduct-related rules).

### Reporting, information flows, and inter-agency coordination
- The FSC/FSS use broad authority to require comprehensive regulatory reporting and receive an extensive set of reports.
- Concern: The information collected/reported to the FSS may not include the full suite of useful information for cooperative efforts of the FSC, FSS, KDIC and BoK related to financial stability.
- Recommendation: Convene a working group of FSC, FSS, KDIC and BoK to discuss potential data/information needs over the next 5-10 years and consider revising reporting requirements if needed.

### Banks — capital, buffers, and systemically important banks
- Korea has implemented capital requirements in line with Basel 3. The 2016 BCBS RCAP found the capital regime to be “largely compliant”. Two elements were found to not be compliant: transitional arrangements and definition of capital. Both were being addressed during the recent mission.
- Minimum capital ratios for banks:
  - minimum CET1 capital ratio: 4.5 percent
  - minimum Tier 1 capital ratio: 6.0 percent
  - minimum total capital ratio: 8.0 percent
- D-SIBs:
  - Capital surcharge: 1 percent for D-SIBs, except for one government-owned D-SIB not subject to the surcharge due to a government guarantee agreement.
- Buffers:
  - Capital conservation buffer: 2.5 percent
  - Countercyclical capital buffer: 0 to 2.5 percent (FSC may turn on); currently not mandated.

### Recovery, resolution, and liquidity at group level
- Recovery planning:
  - Recovery and resolution efforts are still being considered. Assessments of recovery planning at D-SIBs should be given more attention.
  - Banks typically have “self-rescue plans” which are less comprehensive than recovery plans; these could be a basis for recovery preparedness procedures.
- Group-level liquidity regulation gap:
  - Lack of liquidity regulations at the consolidated holding company level constrains FSC/FSS ability to effectively evaluate group-wide liquidity risks.
  - No LCR or NSFR requirement at holding company level — should be addressed as soon as practicably possible.
  - FSS supervisors understand the gap and are working to implement requirements at the consolidated group level.

### Liquidity regulation at bank level and reporting
- Bank-level liquidity requirements include LCR and NSFR implemented in line with Basel 3 standards. The 2016 BCBS RCAP review found the Korean LCR regime compliant.
- Additional requirements:
  - Loan to deposit requirement: 100 percent
  - FX LCR requirement: 80 percent
  - Various maturity mismatch restrictions
- LCR implementation:
  - LCR for highly liquid assets and highly liquid foreign assets introduced by revising RSBB (Article 26 and Article 63) and DRSBB (Appendix 3-6) in Dec. 2014.
  - Banks required to continuously comply with the LCR for highly liquid assets and highly liquid foreign assets (on US dollar basis) and report an average outstanding balance on a monthly basis by calculating the LCR for each working day.
  - Basel III minimum LCR requirement at 100 percent applies to domestic banks on a consolidated bank-level basis.
  - Banks must submit Business Reports on maturity mismatches each quarter and on monthly average LCR, daily LCR, and contractual maturity mismatches every month to the FSC/FSS (Appendix 3-6 of the DRSBB).
- FX-specific rules:
  - Stable foreign exchange funding ratio: all domestic banks (except those with less than US $50 million in FX loans outstanding) must maintain the stable foreign exchange funding ratio at 100 percent or above (90 percent or above for the Eximbank) (article 65 of the RSBB and article 39 and Appendix 14 of the DRSBB).
  - FX LCR requirement:
    - Domestic banks excluding Eximbank and small-scale banks are subject to an FX LCR requirement set at a minimum of 80 percent (60 percent for Korean Development Bank (KDB)), article 63-2 of the RSBB, article 39 and Appendix 3-6 of the DRSBB.
    - Eximbank and small-scale banks: FX liquidity ratio must be at least 85 percent and the mismatch ratio must be above -10 percent (article 64 of the RSBB and article 39 and Appendix 14 of the DRSBB).
- Policy banks:
  - Policy banks face almost identical prudential regulations as commercial banks, but the FSC’s role as a majority shareholder (in some cases) and presence of other supervisors (MOEF, Presidential Board of Audit and Inspection, Parliament) can undermine the FSC/FSS leading supervisory roles.
- Stress testing:
  - Banks are required to carry out regular stress testing of liquidity risk. FSC/FSS review results and use check lists to ensure coverage.
  - Stress test results expected to guide liquidity risk management strategy, determine liquidity risk appetite, adjust holdings of high quality liquid assets, and design contingency funding plans.
  - Stress scenarios must incorporate each bank’s unique business characteristics and market-wide stressed conditions.

### Internet banks
- Internet banks currently benefit from a less stringent framework to support development, following Basel I framework, but Basel III will be gradually implemented starting with 2020 (Appendix X).
- Authorities are encouraged to proceed with intended unification of prudential regulation for banks to maintain a level playing field.
- Ownership limits:
  - For Internet banks, non-financial entities may hold up to 34 percent of the shares of the bank with voting rights.
  - For traditional banks, non-financial entities’ stake is capped at 10 percent (no voting rights granted for shares in excess of 4 percent).

### Other deposit-taking institutions (ODIs) — MSBs and MCCs
- MSBs:
  - Minimum total risk-based capital (RBC): 7 percent using a framework similar to Basel 1.
  - For MSBs with KRW1 trillion or more in aggregate assets, minimum capital adequacy requirement: 8 percent.
  - Recommendation: Impose a single limit of 8 percent and consider using the recent international capital standard as the basis for national legislation, proportionately.
- MCCs:
  - Net worth ratio relative to aggregate assets is calculated without risk weights. Different limits by segment:
    - Credit unions, fisheries cooperatives and forestry cooperatives: 2.0 percent limit
    - Agricultural cooperatives: 5.0 percent limit
    - Community credit cooperatives: 4.0 percent limit
  - Observation: Underlying logic of different limits is not obvious; none reach levels recommended as good practice by international organizations of cooperatives and their regulators.
- Additional prudential ratios:
  - Simple liquidity ratio (liquid assets and liquid liabilities that mature within three months) for MSBs: must be above 100 percent pursuant to Article 40-4(3) of the Regulation on Mutual Savings Bank Business.
  - MCCs: same ratio applies but no limit exists for them; recommendation: apply a limit for MCCs.
  - Loan-to-deposit ratio: in place for MCCs; MSBs should comply with similar rules from 2020, with a phase-in period.
  - Asset classification and minimum reserve requirements: harmonized from 2020.
- Recommendation: Continue regulatory upgrades beyond 2020, adopt a new medium term strategy of reforms to enhance level playing field across deposit-taking institutions and increase prudence and alignment with international good practice.

### Insurance supervision objectives and framework
- Objectives of insurance supervision as defined in the IBA (Article 1 IBA):
  - (i) ensuring the sound management of insurance companies;
  - (ii) protecting the rights and interests of policyholders and other interested parties;
  - (iii) promoting the insurance industry;
  - (iv) contributing to the balanced development of the national economy.
- Details on FSC’s and FSS’ responsibilities and powers are further laid out in EDIBA, ERIBA, RSIB, and DRSIB.

*Source: 1korea2020002 - 60. The role of the FSC/FSS in assessments of major shareholders is complemented by the — IMF publication content provided.*

### 79.      The valuation of liabilities under the RSIB is based on current international accounting

### 1korea2020002 - 79.      The valuation of liabilities under the RSIB is based on current international accounting

### Valuation of insurance liabilities and assets
- Liabilities under the RSIB are measured at cost in accordance with International Organization of Securities Commissions (IFRS) 4.
- A fair value measurement of liabilities will be introduced when IFRS 17 replaces IFRS 4, currently scheduled for 2022.
- Korea is committed to full adoption of IFRS; FSC/FSS are expected to fully implement IFRS 17 and revise the RISB accordingly once the IASB decides on the implementation details.
- To complement cost accounting under existing standards, insurers are required to:
  - assess the adequacy of liability reserves;
  - calculate current estimates of future cash flows from insurance contracts (similar to fair value);
  - set aside any difference with liability reserves calculated at cost to better reflect changing economic conditions on liability values.
- Asset values:
  - Determined based on IAS 39 and therefore broadly incorporate an economic valuation.
  - After implementation of IFRS 17, measurement will be based on IFRS 9.
  - Assets are measured in accordance with international accounting standards that adopt the fair value approach, so economic conditions are reflected in asset measurement.

### Risk-based capital (RBC) and solvency regime
- FSC/FSS introduced and strengthened an RBC regime for solvency; pursuant to Appendix 22 of the DRSIB, insurers must calculate available capital and required capital based on consolidated financial statements in accordance with K-IFRS.
- RSIB requires insurers to compute available capital by considering the quality and permanent nature of capital resources and to measure tier 1 capital, tier 2 capital, deduction items, and others.
- Reforms since the last FSAP include:
  - charges for interest rate risk and credit risk were raised in July 2015;
  - a group capital regime was introduced in 2016.
- Corrective actions tied to RBC levels:
  - RBC ratio under 100 percent triggers prompt corrective action.
  - FSC imposes a management improvement recommendation (MIR) for RBC ratio between 50 percent and 100 percent.
  - Management improvement demand (MID) is imposed for RBC ratio between 0 percent and 50 percent.
  - Management improvement order (MIO) is imposed for RBC ratio below 0 percent.
- Required capital calculation:
  - A standardized approach covers insurance risk, interest rate risk, credit risk, market risk, and operational risk.
  - Internal model approaches using insurers’ own statistical data are not allowed currently, but from 2020 onwards insurers can apply to use such models.
- Solvency regime update:
  - Implementation date scheduled for 2022, together with IFRS 17, which will determine valuation of insurance liabilities.
  - FSS ran two quantitative impact studies on the new fully risk-based solvency regime, the K-ICS.
  - Results of these field tests are not publicly available but will determine calibration of the RBC and the need for a phase-in approach.

### Governance, internal controls, and ORSA
- The Governance Act and the IBA require effective systems of risk management and internal controls, including at group level.
- Prescribed key control functions: risk management, compliance, actuarial matters, and internal audit.
- Internal control standards include:
  - segregation of duties;
  - establishment of an organizational structure;
  - clarification of roles of the BoD, executives, and compliance officers in relation to internal control;
  - establishment of an effective reporting system for managerial decision making;
  - enforcement against employees who violate internal control standards;
  - processes or standards for prevention of violation of finance-related laws and regulations;
  - methods and procedures to manage conflicts of interests.
- ORSA requirements:
  - Insurers are required to establish an ORSA implemented in 2016 (phase-in granted by FSC/FSS and not yet applied by all companies).
  - ORSA aims to identify, assess, monitor, and control risks from insurance operations, asset management, and other business activities and to assess internal capital.
  - Insurers must measure and manage major risks including insurance risk, interest rate risk, market risk, credit risk and operational risk.
  - Insurers should set and comply with risk tolerance limits and transaction limits by risk covered, transaction, division (trading unit), and employee.

### Prudential asset management and legacy issues
- FSC/FSS regulates insurers’ investment activities with limits and restrictions under Article 104 of the IBA to ensure stability, liquidity, profitability, and public interests.
- Limits exist for certain asset classes, credit extensions, and trading with large shareholders; insurers must keep liquidity ratios above certain levels.
- Under RAAS, investment risk is managed and supervised via quantitative indicators such as investment risk ratio, non-performing asset ratio, and coverage ratio.
- Policy recommendations and structural concerns:
  - Implementation of K-ICS is a welcome prudential enhancement.
  - Public focus on perceived capital shortfall and transitional measures should not overshadow need for structural adjustments in life insurance sector.
  - FSC/FSS should assess long-term viability of business models and, for companies with weak solvency and low or negative profitability, evaluate shareholder financial strength and possibility of capital injections.
  - Consideration should be given to address high-guarantee legacy business (e.g., evaluate legal basis for portfolio transfers, run-offs, conversion offers).
  - For firms with distinct risk profiles and governance/internal control weaknesses, consider explicit Pillar 2 capital add-ons.
  - Longevity risks should be addressed with prudent calibration of capital charge that builds on historic experience and incorporates expected changes in policyholder behavior.

### Asset Management and Collective Investment Schemes (CIS)
- Overall CIS regulatory structure is robust and broadly compliant with IOSCO principles and standards; some areas remain in the pipeline.
- Main legal framework: Financial Investment Services and Capital Markets Act (FSCMA) effective February 2009; CGA introduced in 2016.
- Fund classification:
  - If number of solicited retail investors and number of participating retail and professional investors (excluding institutional investors) are each 49 or fewer → privately offered fund.
  - If both numbers are 50 or more → publicly offered fund.
  - Publicly offered funds regulated under FSCMA; privately offered funds subject to special provisions and exemptions.
- Governance and large shareholder controls:
  - Specific requirements on governance and ownership, including for conglomerate-affiliated asset managers.
  - CGA requires pre-approval from FSC for change in large shareholder; FSC can order disposal of shares acquired without approval within six months and such unapproved shares may not exercise voting rights.
  - Affiliates of asset managers are prohibited from being the trust business entity that manages and holds custody of CIS assets.
  - Eligibility assessment of large shareholders is conducted every two years.
- Prudential capital and risk management for asset managers:
  - Asset managers managing publicly offered funds must keep capital above minimum operating capital (sum of capital required to be maintained, capital required for managing investor assets, and capital required for managing proprietary assets).
  - Asset managers required to set up risk management systems including a risk management team (or group) and risk management guidelines.
  - FSCMA does not impose restrictions on investment in foreign assets by asset managers; per FSS, no segments managing pools of money are outside FSC/FSS oversight.
- Trust business entity role:
  - Trust business entity checks CIS manager compliance with leverage limits, derivatives risk limits, and use of securities financing.
  - If violation found, trust business entity demands corrective measures; if not implemented within three business days, it should report to the FSC.
- Custody and valuation:
  - CIS assets must be entrusted to a trust business entity that owes fiduciary duty of due care and must segregate proprietary assets and CIS assets.
  - General basis of valuation of CIS assets is in compliance with IOSCO principles, but acceleration of IOSCO MMF Recommendations implementation is needed.
  - Valuation of MMF should use market value or fair value as required by IOSCO Policy Recommendations on MMF; authorities have informed the mission this is in the process of being implemented.
  - Assessment based on regulation effective by June 30, 2019; legal changes requiring market-value assessment and stress testing of institutional MMFs were adopted shortly before publication of the Note.
- Liquidity and leverage safeguards:
  - CIS framework includes portfolio-level investment limits, liquidity risk management policies and stress testing, and disclosure/reporting on liquidity.
  - FSCMA prescribes asset types and investment limits by asset class; separate regulations exist for MMFs.
  - Privately offered funds face less onerous regulations than publicly offered funds.
  - MMFs are divided into retail MMFs and institutional MMFs and managed accordingly.
  - Authorities recognize systemic risk from liquidity crises and large sell-off orders by MMFs; FSC/FSS proposed rule changes requiring periodic stress testing on MMFs and marked-to-market valuations for institutional MMFs.
  - Borrowing is allowed only for hedge funds; not allowed for publicly offered funds (excluding real estate funds).
  - Borrowing limits determined by leverage ratio, with leverage defined as sum of amounts borrowed, risk amount from derivatives trades, and debt guarantee or amount of collateral provided.
  - Derivatives-based leverage is primarily used for FX hedging and other hedging purposes.

### Audit framework and auditor oversight
- Audit framework is a relevant component of conglomerate supervision with focus on group-level assurances.
- Gap identified: group auditors are not required; regulation does not require cooperation and information exchange among auditors of financial conglomerate companies.
- 2013 FSAP identified need to strengthen:
  - quality control requirements for audit firms that audit listed companies and financial institutions;
  - audit oversight programs to address risks of non-compliance with market rules;
  - enforcement of violations of independence and quality control requirements.
- Current status:
  - Accounting standards have been based on international standards since 2011 with adoption of IFRS, reflected in Enforcement Decree of the FSCMA and Enforcement Decree of the Act on External Audit of Stock Companies.
  - Act on External Audit of Stock Companies stipulates scope of companies subject to external audits and threshold criteria for small sized companies not required to have external audits.
  - Auditors are subject to adequate levels of oversight but oversight, accountability, enforcement, and sanctions regimes need further strengthening to address risks of accounting and audit fraud.
  - Several reforms introduced at the end of 2018 to the Act on the External Audit of Stock Companies and are in the pipeline for implementation.
  - Authorities are recommended to intensify efforts to implement these provisions and address accounting fraud and audit quality issues that continue to exist in Korea.

*Source: Excerpt from IMF Country Report (Republic of Korea) chapter on financial sector oversight and regulation.*

### 105.      The authorities have worked towards strengthening the enforcement of violations on

### 1korea2020002 - 105.      The authorities have worked towards strengthening the enforcement of violations on

### Enforcement of audit independence and quality control
- Amendments to the Act on External Audit in November 2018 aimed to raise auditors’ quality control standards and practices.
- Specific enforcement provisions target the CEO and the audit quality control officer of an audit firm for negligent audits when a serious audit flaw is uncovered in a publicly traded company.
- A new registration regime for audit firms performing audits of publicly traded companies requires accounting firms to satisfy certain levels of physical facilities and quality control standards to be permitted to audit publicly traded companies.
- Plans under consideration include publicly disclosing quality control recommendations by supervisors following audit reviews and the names of auditing firms that fail to comply with supervisor-issued recommendations.

### Auditor obligations and scope
- Recommendation to accelerate implementation of reforms to address risks of accounting and audit fraud and to continue initiatives for comprehensive quality assessment of audits.
- Authorities are encouraged to expand auditors’ obligations beyond financial statement audits, particularly for supervision of financial institutions.
- Suggested additional auditor tasks include:
  - Verifying the accuracy of regulatory reporting.
  - Assessing effectiveness of internal control processes, including risk management and systems.
  - Reporting major flaws and failures to the FSC/FSS.
  - Establishing these obligations at the group level.

### Supervision and supervisory cooperation — summary and approach
- As an integrated supervisor, the FSC/FSS is positioned to carry out strong, group-wide supervision, but current practice is organized around legal entities with a relatively small team of “group-level” supervisors.
- Given systemic importance of groups and growth driven by non-bank activities, authorities need to develop and implement more group-wide supervision practices.
- Recommendations and observations:
  - Develop supervisory approaches capturing additional dimensions of group organization risks, including multilayer analyses of conglomerate maps to link group structure, quality of capital and risk dynamics (including crisis scenarios).
  - Move beyond a rules-based approach; consider greater use of forward-looking approaches and measures, which require significant legal and regulatory changes to support ex ante actions when risk management practices are inadequate but no rule violation has occurred.
  - Increase emphasis on in-depth qualitative assessments of critical group-wide practices: Credit Risk Management, ICAAP, ILAAP, and recovery planning.
  - Strengthen authority to impose meaningful group-wide requirements, expectations, and guidelines; integrate forward-looking measures of financial condition into rating frameworks and supervisory outcomes, especially for DSIBs at consolidated group level.
  - Use evaluations of internal capital assessments to inform Pillar 2 assessments within a formal annual supervisory review process for large banks; use annual ORSA reports in insurance to provide systemic feedback.

### Supervisory interactions, governance, and external auditors
- Supervision of corporate governance needs enhancement, particularly at holding company level; current framework lacks direct assessments of board and senior management effectiveness.
- Strengthen supervisory engagement with external auditors:
  - Develop qualitatively rich exchanges corresponding to crucial audit phases of systemically important financial institutions and groups.
  - Provide regular feedback to auditors, discuss cross-cutting issues, promote consistency, and include a group-level perspective in dialogues.
- Prudential supervision concerns:
  - Limited FSS ability to act promptly and even-handedly towards state-owned banks, mutual savings banks and ODIs due to jurisdictional and delegation constraints, potentially impacting conglomerates.
  - Pursuit of economic and social goals via commercially oriented financial institutions can erode system soundness and level playing field.

### Securities markets, investor protection, and accounting/audit fraud
- Korea’s securities markets supervisory structure is broadly well-functioning, but rising mis-selling and misconduct harm reputations of some groups.
- Underdeveloped consumer and investor protection framework could affect market confidence if severe redemption and liquidity pressures in funds and asset management industry are not recognized and addressed.
- Authorities should:
  - (i) fully implement the key IOSCO Money Market Funds (MMF) recommendations;
  - (ii) conduct stronger surveillance of capital market and nonbank risks with a more regular inspection program;
  - (iii) develop a systemic risk framework that incorporates the securities sector and features stress tests on the asset management industry, particularly for MMF funds;
  - (iv) accelerate implementation of reforms to address risks of accounting and audit fraud.

### Financial conglomerates — supervisory practices and gaps
- FSAP focused on holding financial groups (HFGs); supervision of non-holding financial groups (NFGs) is only just being launched.
- Key findings:
  - Solid standard exists for HFG supervisory framework and commitment to implement framework for NFGs.
  - Supervisory practices need enhancement to capture systemic risks and increase compliance with international standards.
  - Recovery and resolution efforts remain work in progress; assessments of recovery planning at large groups have not been introduced.
  - Supervisory evaluations of group-level governance (boards and senior management) remain underdeveloped.
- Recommended priorities:
  - Establish emphasis on forward-looking practices (credit risk management, ICAAP, ILAAP, recovery planning) with periodic in-depth examinations and integrate results into evaluations of board and senior management effectiveness.
  - Develop overall group supervision framework covering all financial conglomerates, including non-holding groups, with legally binding prudential requirements applicable to all financial conglomerates.
  - Enhance cooperation with the FTC to leverage its comprehensive view of conglomerate structures and monitoring of intragroup large transactions (including guarantees) to prevent multiple gearing and hidden leverage.
    - Note: FTC publishes group structures annually and has power to file criminal charges against BoD members for inaccurate information reported to the FTC.

### Data, conglomerate maps, and consolidated supervision
- FSS collects conglomerate maps and other data that provide crucial insights if connected to a holistic picture of group-level risks.
- A comprehensive analysis should encompass:
  - Ownership structure.
  - Control via contractual arrangements.
  - Profit/loss sharing within the group.
  - Guarantees and other instruments transferring risks between entities.
  - Important capital and liquidity flows (including smaller but frequent amounts).
  - Other arrangements establishing dependencies among group members.
  - Potential recovery and resolution arrangements.
- Current consolidated supervision is underdeveloped; FSS is well positioned to implement a comprehensive consolidated supervision program with heightened emphasis on recently designated D-SIBs at group level.
- Resource and organizational observations:
  - Enhance focus on group-level risks and practices; consider increasing resources specifically focused on group-level supervision.
  - Current inputs come from multiple FSS stakeholders (Bank Supervision Department, Bank Examination Departments, Bank Risk Office, Financial Group Office), but without stronger group focus this may create complexity and risk that subsidiary issues are lost.
  - Cross-sector examinations are typically carried out within subsidiaries by sectoral supervisors; greater cross-sector focus would enhance supervision of groups.

### Supervisory tools, cycles, and thematic reviews
- For bank-led HFGs, FSS uses the RFI assessment framework with review cycles of 2-3 years depending on group size.
  - RFI reviews three elements: Risk Management (R), Financial Condition (F), and Potential Impact (I).
  - A composite rating is calculated based on specific weightings for each category; the RFI is built largely on inputs from sectoral supervisors.
  - FSS meets with FHC representatives (for example, group-level audit committee). Outside the 2-3-year cycle, the rating is generally not updated; the cycle is not synchronized across institutions and communication of results is not formalized.
- FSS has increased use of thematic cross-sectoral reviews and activity-based approaches to examine specific activities across HFG subsidiaries; reviewers encourage greater use of these approaches and recommend firm-specific examinations take a cross-sectoral perspective.
- Staffing and intensity:
  - Opportunities exist to enhance effectiveness by increasing staffing for large financial conglomerates or rebalancing resource allocation.
  - For large institutions, including DSIBs, supervisory intensity should be increased with more top-to-bottom reviews of critical practices (group-wide ICAAP/ORSA and capital planning, ILAAP and liquidity planning, recovery planning).
  - Periodic in-depth examinations should assess risk identification, measurement, internal controls around key risk data and information, reporting to management and the board, and internal audit roles.

*REPUBLIC OF KOREA INTERNATIONAL MONETARY FUND*

### 127.      The group-wide internal capital processes (ICAAP/ORSA) should be fully integrated

### 1korea2020002 - 127.      The group-wide internal capital processes (ICAAP/ORSA) should be fully integrated

### Group-wide ICAAP/ORSA: current status and required integration
- The FSC/FSS introduced a rule to require ICAAP at the subsidiary and group level in 2016.
- ICAAP ‘reviews’ are a key part of the annual Risk Assessment process done by the FSS and consist largely of reading and analyzing the required annual ICAAP report required of banks and the holding companies.
- The process to date is still under development at the group level: banking groups’ legal entities carry out some entity-level analysis and the holding companies consolidate those.
- In insurance, the ORSA was introduced in 2016; while all companies have developed implementation plans, the FSC/FSS has granted a phase-in for many companies.
- For companies that already submit an annual ORSA report, findings from the review are incorporated into the risk assessment, but no systematic feedback in the form of a risk dialogue is provided to the companies.

### Supervisory assessment and enhancements for ICAAP/ORSA
- Supervisory efforts should be enhanced by conducting periodic in-depth supervisory reviews of banks’ internal capital assessments and capital planning.
- Currently, in-depth oversight of ICAAP at banks is largely carried out by internal audit departments at the subsidiary level, with reporting on their assessments going to the FSS annually.
- The FSS should evaluate that firms capture all material risks across the group and incorporate them into considerations of capital needs, including assessing whether the BoD is getting the information it needs to make informed decisions about capital needs at each subsidiary and on a consolidated group level.
- ICAAP or ILAAP are not part of the framework of either MSBs or MCCs; with modernization, ICAAP and Pillar 2 should be considered for MSBs.

### Liquidity risk management at group level
- FSS supervisors do not directly assess group-level liquidity risk management for HFGs.
- Lack of group-level liquidity risk requirements and supervision is identified as a significant shortcoming given large Korean banks’ and insurance corporations’ plans to continue expanding overseas operations and other financial intermediation activities.
- Comprehensive off-site analyses of group level liquidity will benefit from implementing LCR or NSFR requirement at the holding company level.
- Additional data about relevant cash-flows among entities within banking groups could assist in identifying important inter-group dynamics and the roles of various subsidiaries.

### Corporate governance, internal audit, and supervisory engagement
- Supervision of corporate governance remains a work in progress, particularly at the holding company level.
- The supervisory focus continues to be on primary legal entities individually, though group-level governance is covered by regulation.
- Emphasis should be increased on the roles of group-wide internal audit and the group board’s audit committee, including direct assessments of group-level audit effectiveness.
- The FSS does not make an explicit assessment of whether internal audit can be relied upon to cover prudential issues; the FSS makes these assessments itself.
- There must be greater accountability placed on boards and senior managers, which could include putting in place a senior managers regime similar to those in several developed markets.
- An elevation of efforts in addressing governance and culture at firms, and levels of engagement and accountability on boards and senior managers in the supervisory approach, is needed.
- A dialogue between supervisors and external auditors should be intensified: supervisors do not meet regularly external auditors; best practice is to meet auditors at least annually and for systematically important or troubled institutions to meet in a preparatory phase.

### Supervisory practices for banks: CAMEL-R, on-site/off-site balance, and intensity
- The supervisory assessment for banks is built on the CAMEL-R framework and the supervision process focuses primarily on traditional assessments of CAMEL factors and a Risk Assessment at the bank level.
- The CAMEL-R rating includes both quantitative and qualitative factors and is updated biannually as a result of the comprehensive exams.
- The quantitative elements of the Risk Assessment are carried out annually, with qualitative factors assessed during onsite exams as warranted in the biannual exam.
- Each bank is in practice subject to a periodic comprehensive examination every 2-3 years, depending on size; large banks and D-SIBs are subject to biannual comprehensive examinations, while smaller banks are generally examined every three years.
- The FSS’ approach makes extensive use of continuous offsite monitoring and requires banks to submit Business Reports for calculation of regulatory liquidity requirements such as LCR, FX LCR, loan-to-deposit ratios (denominated in KRW), FX liquidity ratios, and the NSFR.
- The CAMEL-R assessment determines supervisory scrutiny levels, but other than increased scrutiny there are no binding restrictions driven by the rating process; this undermines the rating’s incentive effect.

### Capital framework, internal models, and stress testing
- Korea’s reliance on internal models-based approaches to RWA calculation combined with a leverage ratio backstop creates conflicting incentives for banks and increases the importance of supervisory reviews of modeling approaches.
- Supervisory focus should include risk identification and D-SIBs group-wide capacity to capture and report all risks across the group to ensure comprehensiveness of risks captured in models used for RWA calculations and for internal and FSS stress testing.
- The FSS should increase the importance placed on stress testing for assessing capital adequacy, including both top down and bottom up stress tests run by the banks and FSS.
- Strong consideration should be given to requiring D-SIB groups to meet post-stress minimum capital thresholds.
- Internal stress tests run by banking groups for ICAAP and capital planning should face greater supervisory scrutiny and serve as a key window into FSS assessments of risk management and internal controls.

### Liquidity supervision and qualitative assessments
- Supervision of liquidity risk management is focused on the bank level for all commercial banks; offsite monitoring of liquidity positions is on a bank consolidated basis using required regulatory reports on all limits and restrictions.
- Supervisors receive data on contractual maturity mismatches, concentrations of funding, and available unencumbered assets in the form of Business Reports.
- Qualitative assessments of liquidity risk management are carried out as part of onsite examinations primarily through the biannual ‘comprehensive examinations’ when planning finds liquidity warrants focus; examiners are provided with check lists for qualitative assessment.
- Between biannual comprehensive exams, supervisors receive quantitative data on a quarterly (and often more frequent) basis for liquidity.

### Observations on supervisory intensity and tools
- The FSS has been increasing on-site supervision but the balance still tilts toward monitoring against rules-based requirements.
- The FSS could enhance effectiveness by increasing the intensity of supervision, particularly for the D-SIBs, and spending more resources on analyses and examinations for firms deemed to represent systemic risk.
- The value of a Pillar 2 add-on process is limited as currently framed; it has not been recently tested and has not been used. Formalizing an annual supervisory review process could increase the Pillar 2 assessment’s effectiveness and transparency.
- Risk-focused thematic and targeted reviews are increasingly used to assess specific practices and activities requiring follow up.

### Supervisory arrangements for MSBs and MCCs; cooperative sector
- Supervisory approach for MSBs and MCCs contains important elements: off-site supervision, frequent monitoring, regular CAEL assessments, and use of composite CAMEL ratings calculated by examination departments.
- The FSS may request auditors of MSBs to submit information for supervision; the FSS holds no power to make a similar request in the case of MCCs, representing a gap.
- The sector of MSBs has stabilized since 2011 but requires close supervisory attention; their business models serve higher-risk unbanked or financially underserved individuals and small businesses.
- Several MSBs are members of financial conglomerates, including NFGs; their growth can make their position in groups more significant and will require supervisors to align approaches with supervision of other institutions, primarily banks.
- Credit cooperatives represent more than 16 percent of the total assets of deposit taking institution and serve primarily or exclusively some communities; volatile market conditions can create challenges requiring coordinated responses among supervisors.
- MCCs do not belong to any financial group as they are independent legal entities with a diversified shareholders structure.

*Source: 1korea2020002 - INTERNATIONAL MONETARY FUND*

### 154.      As in banking, the insurance supervisory approach remains largely rules based. The FSS

### 1korea2020002 - 154.

### Insurance supervision framework and RAAS
- The FSS supervises insurance companies through the RAAS, a supervisory evaluation and rating regime comprising a qualitative and quantitative evaluation.
- Quantitative evaluation of the components is conducted quarterly or ad-hoc if deemed necessary; qualitative evaluations are conducted during on-site examinations.
- RAAS involves analysis of: management risk, insurance risk, interest rate risk, investment risk, liquidity risk, capital adequacy, and earnings.
- RAAS consists of quantitative and non-quantitative factors; the quantitative factors have 17 assessment indices.
- The FSS uses quarterly business reports submitted by insurance companies.
- The FSS applies different weights to evaluation components to reflect differences between life and non-life companies; some components may be excluded depending on business characteristics.

### Examination cycles and supervisory intensity
- The examination cycle is largely determined by the RAAS score.
- Four categories of supervisory intensity: (i) autonomous, (ii) regular, (iii) intensive, and (iv) emergency.
- Examination frequency by category:
  - Autonomous monitoring: every three to four years.
  - Intensive monitoring: every one to two years.
  - Emergency category: examined immediately.

### ORSA and stress testing
- The FSS reviews insurance companies’ risk management and financial conditions based on ORSA results submitted by firms.
- The FSS may request details on calculation methods for risks used in the ORSA.
- ORSA adequacy is reviewed during RAAS and may trigger requests to strengthen risk management or capital adequacy.
- Insurance companies must conduct stress tests for major risks at least semiannually and comprehensive stress testing at least annually.
- The FSC/FSS develops scenarios depending on macroeconomic and financial market indicators; stress test outcomes are reviewed by the FSS at least once a year.
- Scope of stress tests: impacts on balance sheets, income statements, RBC ratios, and liquidity.
- Typical time horizon: set in accordance with expected duration of the stress and the risk characteristics of assets and liabilities; usually set at a year or longer.
- Minimum risks to include: insurance risk, interest rate risk, market risk, credit risk, operational risk, and liquidity risk.
- For comprehensive stress tests, insurers must consider diversification impact from correlations of risk factors and provide appropriate explanation and rationale to the FSS.

### Supervisory priorities and recommendations for insurance
- The FSAP considers higher supervisory intensity and a more forward-looking perspective imperative due to aging, the low-yield environment, and intense competition.
- Recommendations:
  - Exploit the full potential of the ORSA and incentivize earlier implementation by all insurance companies.
  - Deepen FSS risk dialogue with companies’ senior management and internal control functions.
  - Feed aggregated findings into macroprudential surveillance and horizontal analysis.
  - Strengthen corporate governance and hold Boards of Directors accountable.
  - Consider more forward-looking and qualitative components in RAAS (including changes to business models).
  - Intensify monitoring of overseas expansion, strengthen working-level cooperation with host authorities, and set up supervisory colleges.

### Asset managers, CIS, and conduct risks
- Need for enhanced supervision of the asset management industry with a more comprehensive and frequent inspection program given deregulation of private funds and growth of smaller asset managers, including hedge funds.
- Greater focus required on mis-selling and misconduct risks; investment products are viewed as substantial growth business lines by financial groups and could affect larger institutions.
- Misconduct and mis-selling incidents have begun to rise, posing reputational risk for financial conglomerates; risks include severe redemption and liquidity pressures in funds.
- Recent highly publicized losses associated with equity linked securities (ELS) and derivative linked securities (DLS) prompted investigations and highlighted potential systemic implications.
- Authorities received complaints alleging “irresponsible” selling of DLS and related products; investigations are ongoing.

### Policy actions recommended for asset management and market conduct
- Recommendations enumerated:
  - Fully implement the key IOSCO MMF recommendations, ensuring MMF valuations adopt fair value and are marked to market expediently; consider properly structured stress tests for the asset management industry with clearly defined parameters on size and type of funds, particularly for MMF funds.
  - Strengthen surveillance of capital market risks with a more regular inspection program: off-site monitoring, thematic assessments, scaled-up on-site inspections, and external audits for entities that could pose market integrity risks.
  - Develop a systemic risk framework that incorporates the securities sector—potentially as a joint exercise with other parts of the FSS and the BoK—and conduct stress tests on the asset management industry with clearly defined parameters on size and type of funds, particularly for MMF funds.
  - Implement an integrated approach to supervision focused on products offered across the financial system and close supervisory framework gaps across distribution channels.
- Note: An amendment to the Act on Corporate Governance of Financial Companies is in process to require senior managers to verify internal governance arrangements; the amendment is pending in the Parliament.
- Note: Shortly before publication, legal changes requiring market-value assessment and stress testing of institutional MMFs were adopted.

### Cross-border supervisory cooperation
- The FSC/FSS has entered MOUs for supervisory cooperation:
  - Banking: MOUs with 25 jurisdictions on information sharing and supervisory cooperation.
  - Insurance: MOUs in 19 jurisdictions for supervisory cooperation and exchange of information.
  - Alternative Investment Fund Managers Directive: MOUs with 27 jurisdictions that are members of ESMA (signed in July 2014 and June 2015).
  - March. 2019: MOU signed with the U.K. FCA in anticipation of Brexit; nearly identical to ESMA MOUs.
- Asia Region Funds Passport (ARFP):
  - FSC submitted an amendment to the FSCMA for ARFP adoption after cooperation with Japan, Australia, New Zealand, and Thailand in April 2016.
  - ARFP aims to streamline offshore fund registration and facilitate cross-border marketing, but fund managers/funds must meet foreign fund manager qualifications and foreign fund requirements.
  - Uncertainty exists about industry appetite and impact; FSC/FSS should engage more widely with industry to raise awareness.
- Cross-border supervisory tools and suggested enhancements:
  - Regular examinations of foreign branches and subsidiaries, visiting programs, conferences for foreign supervisors, capacity building with host authorities (notably South-East Asia).
  - Recommendation to institutionalize cooperation further by establishing supervisory colleges for major Korean groups with significant foreign operations.

### Climate risk awareness and recommended institutional response
- Development and market facts:
  - First ESG foreign currency bonds issued in 2013; first KRW ESG bonds issued in 2018.
  - 2019: Korea reportedly became a large supplier of such bonds, with 16 percent of the global market share.
  - National Pension system (NPS) adopted principles on responsible investments in 2018 but is still developing ESG investing criteria.
  - BOK joined the Network for Greening the Financial System (NGFS) in 2019.
  - BoK announced stress test results in its Climate Change and Financial Stability report in June 2018.
- Observations and gaps:
  - Actions by institutions are active but would benefit from stronger institutional steering and a clear strategy coordinated by Authorities responsible for financial system oversight.
  - FSC/FSS organized a survey on climate risks and intends comprehensive analysis; a comprehensive action plan coordinated by FSC/FSS/BoK is pending.
  - Disclosure: carbon emissions disclosure for listed companies is established, and companies classified as controlled entities must include emissions and energy usage. The FSB Task Force on Climate-related Financial Disclosures framework should be reflected in sustainable management reports.
  - No measures currently enforce financial institutions to report climate-related financial risks to financial authorities; legislation requiring inclusion of corporate social responsibility matters in business reports is pending in the National Assembly.
  - A unified taxonomy defining “green” or “brown” assets is not central in Authorities’ discussions, and data gaps may impede implementation.
- Risk channels:
  - For banks: transition risk imported from overseas is significant due to exposure of Korean corporates and SMEs to jurisdictions restructuring toward sustainability.
  - For insurers: physical risk from higher frequency and severity of natural disasters is emerging; Korea is moderately exposed to typhoons and occasional snowfalls.
  - 2019 Pacific typhoon season set a new record in economic losses globally, but effects on Korea were limited; typhoon “Lingling” was the costliest event and the fifth strongest since 1959—economic loss amounted to less than USD 300 million.

*Source: IMF staff report content as provided.*

### 1. Strengthen the effectiveness of supervision and the efficiency of

### 1. Strengthen the effectiveness of supervision and the efficiency of supervisory processes

### Strategic governance and resources
- Establish pre-conditions for implementation of long-term strategy by extending the term of the FSC and the FSS top representatives. (Paras 25-31; 35) Timing: LT
- Ensure unconstrained access to resources (subject to accountability) by modifying roles of the FSC/FSS in the budgetary process:
  - The FSC should delegate general budgetary principles and oversee the use of the budget.
  - The FSS should apply these principles, endorse and execute its budget; includes the system of the examiners’ salary levels, consistent in time, which are benchmarked to the industry levels. (Paras 25-31; 35) Timing: LT
- Rearrange the enforcement process. (Paras 25-31; 35) Timing: LT
- Foster regulatory processes by implementing supervisory guidelines issued by the FSS. (Paras 25-31; 35) Timing: LT
- Clearly prioritize supervisory goals, especially the goal of the stability and soundness of the financial system, vis-à-vis developmental goals of the Government. (Paras 25-31; 35) Timing: LT

### Group supervision and cross-sector coordination
- Strengthen information sharing and coordination of activities across supervisors responsible for subsidiaries in different sectors (banks, securities firms, insurance) by building out capacity of ‘group supervision teams’ and ‘supervision coordination departments’ for conduct and prudential supervision. (Paras 33, 120, 122, 125) Timing: ST
- Broaden definition of financial holding company (FHC) by introducing additional criteria, and greater discretionary powers of FSC/FSS. (Para 45) Timing: MT
- Establish a capital framework for “non-holding financial groups” with large financial institutions, capturing relevant risks including potential contagion from a wider-group; group wide risk assessment and risk surcharge (primarily capturing concentration risk and contagion risk) should reflect intra-group transactions and overall corporate governance of the group, including its size and complexity, incentivizing groups to streamline their structures. (Paras 52-55) Timing: MT
- Establish the obligation of group-wide external auditors or its equivalent. Enhance the use of external auditors to support supervision by expanding their mandates and obligations. Define approval process of auditors. (Paras 112, 135) Timing: MT

### Supervisory intensity and sectoral focus
- For large banking groups, continue enhancing supervision of risk management and internal controls by further upgrading periodic in-depth examinations of key bank and group practices, such as ICAAP and capital planning, ILAAP and Credit Risk Management and use the findings to inform assessments of risk management and controls at both levels. (Paras 126-134) Timing: MT
- Increase supervisory intensity of insurers with a focus on risk management and corporate governance; in the context of the Korea Insurance Capital Standard (K-ICS) implementation verify long-term viability of insurers’ business models, financial strength of major shareholders, and need for capital injections. (Para 88) Timing: ST
- Deepen the regular risk dialogue with insurers’ senior management and internal control functions and incentivize earlier ORSA implementation at all insurers. (Para 159) Timing: ST

### Internal controls, audit, and remediation
- Increase focus on the role of internal audit as the eyes and ears of the Board of Directors (BoD) to increase confidence the BoD is well informed of strengths and weaknesses of key practices that support decision making regarding capital and liquidity needs at consolidated holding company level and at major subsidiaries. (Paras 126, 131) Timing: MT
- Require sign off by group-level chief auditor or BoD audit committee when closing out remediation of material weaknesses noted by supervisors. For weaknesses in critical prudential practices this should include a cure period during which the remediation can be shown to have worked as the firm expected. (Paras 112, 135) Timing: MT
- Establish obligation of group-wide external auditors or equivalent and expand mandates/obligations of external auditors; define approval process of auditors. (Paras 112, 135) Timing: MT

### Credit and liquidity risk supervision
- Enhance supervision of credit risk management by periodically carrying out more in-depth examinations of key qualitative elements of enterprise-wide credit risk management covering all parts of the FHC group with material credit exposures (loan books, investment portfolios, trading counterparty relationships, private equity investments, sponsored real estate trusts, etc.). (Paras 110, 116, 119) Timing: MT
  - Draw elements from categories currently required to be reported by banks in the annual ‘credit risk self-assessment’ and include a periodic assessment of the group-wide credit review function.
  - Assess effectiveness of FHC senior management in overseeing firm-wide credit risk management.
  - Assess effectiveness of FHC Risk Committee and Audit Committee with respect to credit risk management.
- For large banking groups, enhance supervision of liquidity risk management by carrying out more in-depth reviews of liquidity risk management at the group level on a periodic basis; at least every two years. (Paras 129, 146, 149) Timing: MT
  - Reviews should consider: data/information quality and timeliness of internal reports used to manage liquidity risk at the group and major subsidiaries; quality and timeliness of data/information provided in regulatory reports used for offsite liquidity monitoring; comprehensiveness of coverage of group-wide liquidity risks, including intraday funding; internal liquidity risk stress testing at the group level; group level contingency funding plans.

### Proportionality, systemic importance, and governance assessments
- Incorporate the principle of proportionality into prudential supervisory expectations and requirements for banking organizations and NBDIs. Requirements and expectations for systemically important FHCs should be stronger in all prudential areas than for smaller firms.
  - Ensure appropriate minimum prudential requirements for depository institutions and related holding companies based on systemic importance.
  - Increase supervisory intensity for DSIBs relative to other banking groups. (Para 126) Timing: MT
- Strengthen corporate governance requirements with higher levels of supervisory engagement with boards and senior managers regarding their responsibility to oversee execution of approved risk-management framework and internal controls practices on an enterprise and group-wide level:
  - For assessments of corporate governance at the group level, increase focus on assessing BoD effectiveness with respect to oversight of execution of the BoD approved risk-management framework and internal controls practices.
  - Incorporate an assessment of the BoD and management effectiveness in supervisory ratings at group level rather than as part of Risk Management in the CAMEL-R bank rating framework.
  - Better link assessments of the BoD and senior management effectiveness to underlying assessments at the sectoral level (e.g., weaknesses at a securities firm subsidiary should inform assessment of the FHC Risk Committee). (Paras 39, 58-61, 111, 130-135, 160, 165) Timing: MT

### Sectoral and supporting actions (insurance-specific)
- Carefully design the capital charge for longevity risks under K-ICS, not only relying on historic experience, but also projecting changing policyholder behavior in a society facing an adverse demographic shift (lower lapse rates, higher preference for annuities instead of lump-sums). (Para 88) Timing: ST
- Explore legal options for dealing with the legacy business of life insurers, including portfolio transfers, run-off entities, financial reinsurance, and conversion offers to policyholders. (Para 88) Timing: ST
- In the context of K-ICS, consider the legal possibility of Pillar 2 capital add-ons for insurers whose risk profile deviates from the standard assumptions of the K-ICS calibration. (Para 88) Timing: ST

### Key institutional and prudential reference points (from appendices)
- Classification of financial conglomerates (2019): BG (13), MXG (26), FC (5). (Appendix VIII)
- Selected prudential limits for deposit taking institutions (Appendix IX):
  - BIS capital ratio: 8 percent; Tier 1 capital ratio: 6 percent; CET 1 capital ratio: 4.5 percent.
  - Capital conservation buffer: 2.5 percent.
  - SIFI surcharge: 0-2 percent.
  - CCyB: 0-2.5 percent.
  - Exposure limit (single borrower): Less than 20 percent of bank capital for the same individual borrower and company.
  - Maximum loan-to-deposit ratio: 100 percent (with transitional allowances noted).
  - LCR: 100 percent; NSFR: 100 percent.
  - FX LCR: 80 percent (60 percent for KDB; N/A for KEXIM, banks with FX liabilities under USD 500 million and less than 5 percent of the total liabilities). (Appendix IX)
- Prudential framework for internet banks (Appendix X): phase-in timeline from Basel I grace period (2017) to full implementation of Basel III and LCR/NSFR/leverage ratio thresholds for periods "2017" through "After 2023".

*Source: Republic of Korea — IMF technical assessment (excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1korea2020002.pdf_