Best Practices in Preventing and Monitoring Systemic Risk.ppt
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1、Best Practices in Preventing and Monitoring Systemic Risk,The Bank of Korea Ilhwan Kim,July 9, 2009,Contents,Among the causes of the recent global financial crisis, we may single out the lax regulation of hedge funds and large unregulated non-bank financial institutions (hereafter NFIs). In Korea, o
2、nly a few hedge funds have a domestic market presence and their way of doing business has had little influence on the financial market. Things have not yet reached such a pitch as to give cause for concern.Recently, theCapital Market and Investment Services Actcame into effect. It provided a platfor
3、m for the introduction of hedge funds.,. Introduction,It put in place a legal foundation for setting ceilings on derivatives investment and borrowing of money.We had experience of system risk arising owing to the relatively more relaxed regulatory regime applied to large NFIs.Examine the systemic ri
4、sk generated by the reckless way in which merchant banking corporations (hereafter MBCs) and credit card companies (hereafter CCCs) operated in Korea.Look at the measures adopted by the policy authorities in response.Draw on it in order to consider best practices in preventing and monitoring systemi
5、c risk arising from large NFIs rather than hedge funds.,. Introduction,MBCs, as the highly-leveraged non-banking financial institutions in Korea before the 1997 currency crisis, had carried out businesses similar to those of banks. MBCs business : Discounting commercial paper, Medium and long-term l
6、ending, Leasing, Securities brokerage, International financing, and Factoring. MBCs are believed to have triggered the currency crisis, due to the following factors;Severe maturity mismatches,. Business activities of non-bank financial institutions, and the policy authorities measures in response.,1
7、. Merchant Banking Corporations,MBCs Borrowed short-term capital at high interest rates in the international financial markets, and used the funds to extend long-term credit or invest in illiquid bonds in emerging markets. This resulted in severe maturity mismatches between their foreign currency li
8、abilities and assets.In these circumstances, MBCs had troubles in short-term foreign currency borrowing and roll-overs due to the worsening international financial market conditions.Following defaults on EME bonds in which they had invested, they faced foreign currency liquidity shortages.,1. Mercha
9、nt Banking Corporations,Expansion of their domestic business scopes into more risky areas.Despite lacking credit rating and analysis abilities, MBCs had extended non-secured loans to corporations with low credit ratings, by discounting CP.As a result, MBC asset soundness was much aggravated due to t
10、he defaults of such corporations from 1997.As MBCs started to withdraw their loans from faltering firms in response, a vicious spiral of accelerating firm bankruptcies and increasing MBC weakness occurred.,1. Merchant Banking Corporations,The loosening of regulations also triggered the currency cris
11、is in some sense, causing MBCs deterioration. Financial supervisory and regulatory frame not systemically establishedAlthough the policy authorities had the right to regulate the MBCs, it had no infrastructure for supervision such as supervisory experts and organizations. Their function in systemic
12、and comprehensive coordination of MBCs supervision turned out to be weak.,1. Merchant Banking Corporations,Negligent MBC business activity regulation For the purpose of easing regulation of financial institutions, the new market entry of MBCs was allowed without any setting of required principles.To
13、 attract foreign capital, establishment of new MBCs and conversion of all the existing investment finance companies into MBCs were allowed. The rapid increase in number of MBCs caused excessive competition and lowering of business quality. The government ignored the MBCs herd behavior, such as crowd
14、ed establishment of overseas branches.This led to reckless foreign currency borrowing, increased funding costs and unsound asset management.,1. Merchant Banking Corporations,Insufficient regulationThe capital adequacy regulatory system was underdeveloped.Before the currency crisis, the government re
15、gulated MBCs by means of a naive financial gearing ratio standard.MBCs conducted careless asset management without considering the related risks.The regulations on MBC credit concentration were loosened.The permitted ceiling on MBC credit to conglomerates was three times that for commercial banks.Lo
16、ans and leases made to dispersed ownership companies were excluded from ceiling calculation.,1. Merchant Banking Corporations,Although MBCs loans, mostly unsecured, should have been more strictly regulated than those of banks, they were relatively loosely regulated.As a result, the troubles at MBCs
17、worsened rapidly.There were imbalances between the regulations on MBCs short-term and their long-term foreign currency borrowings. In cases of medium and long-term (over 1-year maturity) foreign currency borrowing, MBCs were required to declare the transactions to the government. For transaction amo
18、unts more than 10 million US dollars, they had to notify the government beforehand. Short-term (less than 1-year maturity) borrowings were not only unrestricted but also excluded from the application of ceiling on total short-term borrowings. MBCs enormously expanded their short-term borrowings whic
19、h were more risky.,1. Merchant Banking Corporations,Overseas securities investment was unregulated.The ceiling on investment in local securities had been regulated. However, investment in overseas securities, had been excluded from application of the ceiling. Without making any provision for risk, M
20、BCs had continued to borrow short-term foreign currency and invest it in emerging-market bonds.There were characterized by high risk and low liquidity. The policy authorities worked to overcome the financial turmoil through restructuring, such as forcing the market exits or M&As of bad MBCs.Only two
21、 MBCs are currently in business in Korea and their scope of business reduced. They are regulated in accordance with the same criteria as banks.,1. Merchant Banking Corporations,After the 1997 currency crisis, the number of CCCs increased substantially.The reasons were the growth of retail financing
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