SIFIs will have three months after designation to submit recovery plans to regulators. The FSC will have the authority to demand action from a SIFI in line with the recovery plan.
South Korea’s FSC (Financial Services Commission) has proposed a revised Enforcement Decree to help enhance recovery and resolution regimes at SIFIs and improve their ability to prepare for and respond to crises.
The revision follows from a revision to the Act on the Structural Improvement of the Financial Industry, passed at the National Assembly in December 2020 to strengthen the recovery and resolution regimes of SIFIs, as recommended by the FSB (Financial Stability Board).
The revised Enforcement Decree stipulates that the FSC will select SIFIs each year, based FIs’ function, scale, links to other FIs, and influence on the domestic financial markets. The selection of SIFIs will be confined to banks and bank holding companies.
Once designated, SIFIs will have three months to prepare and submit recovery plans to the FSS (Financial Supervisory Service).
The FSC says the recovery plans should be board-approved and contain specific details about the role and responsibilities of board members and executives, major business areas, standards of determining crisis situations, and specific crisis management measures.
Typically recovery plans would include measures for recapitalisation and financing to address possible insolvency or bankruptcy of a financial company, in order to protect financial markets and minimise the use of public funds to resolve such a situation.
The FSS will be required to evaluate the recovery plans submitted by SIFIs and file evaluation reports to the FSC within three months.
Based on recovery plans submitted by SIFIs, the KDIC (Korea Deposit Insurance Corporation) will at the same time be required to draw up resolution plans for handling a SIFI that is incapable of recovering on its own. These plans must be submitted to the FSC within six months.
A deliberative body within the FSC will decide on final approval of both recovery and resolution plans within two months.
The FSC has the authority to ask SIFIs to settle certain issues that it considers may hinder an orderly resolution process. In crisis situations, the FSC may also demand action be taken by a SIFI in line with the recovery plan.
When a SIFI is categorised as insolvent, the FSC may also restrict termination rights on qualified financial contracts. Such a decision should be immediately and publicly announced, where the period of temporary suspension should not exceed two business days.
The revised Enforcement Decree will be put up for public notice until 1 April 2021.