Financial supervision

Financial supervision (금융감독) means regulatory sevices provided by financial supervisory authorities to maintain the integrity of the financial system and the soundness and fairness financial practices, and to protect financial consumers.

For more information on financial supervision-related institutions, click here.

Key words
financial supervision and regulation, FSC, FSS, merger and conversion

Legal infrastructure
In the aftermath of the IMF Crisis, the financial supervisory system was totally overhauled from scratch. At that time, a number of new laws on financial supervision was enacted or amended as follows:
 * Act on the Establishment, etc. of Financial Services Commission (February 29, 2008) replacing the Act on the Establishment of Financial Supervisory Organizations
 * Act on the Structural Improvement of the Financial Industry
 * Financial Holding Companies Act
 * Banking Act

At present, financial supervision and regulation shall be carried out separately by the Financial Services Commission for policy-making and the Financial Supervisory Service for its implementation.

Financial Services Commission
The Financial Services Commission (FSC, 금융위원회) was established in accordance with the Amendment of the Act for the Establishment of Financial Services Commission which was enacted on February 29, 2008. Subject to the President Lee Myung-bak's election pledge on the "slim government", the new Financial Services Commission was created in April 2008 by integrating the Ministry of Finance and Economy's financial policy function and the Financial Supervisory Commission's supervisory policy function to proactively deal with rapidly changing financial environment. To tackle effectively an emerging trend of conglomeration, financial convergence, and globalization of financial industries, separation of policy-making and execution functions was inevitable to enhance the responsibility of financial administration, thereby advancing the Korean financial supervisory functions.

The FSC takes charge of the matters concerning:
 * Policies and systems on finance;
 * Supervision, inspection and sanctions offinancial institutions;
 * Authorization and permission of establishment, merger, conversion, business transfer and take-over, and business administration of the financial institutions;
 * Management, supervision and surveillance of capital markets;
 * Creation and development of a finance center;
 * Establishment, amendment and abrogation of Acts and subordinate statutes, and provisions related to the abovementioned matters
 * Negotiations between two parties and among the multiple-parties and international cooperation on the supervision of soundness of finance and foreign exchange business management institutions;
 * Supervision of soundness of foreign exchange business management institutions; and
 * Other matters prescribed by other Acts and subordinate statutes as belonging to the FSC.

The FSC is responsible for the stability of financial markets, the promulgation and amendment of financial supervisory rules, the authorization and permission of establishment and mergers of financial companies, and the supervision of the Financial Supervisory Service, etc.

The Securities and Futures Commission (증권선물위원회) shall be established under the FSC to perform the following affairs:
 * Investigation of unfair trade in the capital market;
 * Business accounting standards and accounting supervision;
 * Prior deliberation on important matters related to the management, supervision and surveillance of the capital market, among the FSC affairs;
 * Affairs entrusted by the FSC for the management, supervision and surveillance of the capital market; and
 * Other affairs granted to the Securities and Futures Commission under other Acts and subordinate statutes.

Financial Supervision Service
The Financial Supervisory Service (FSS, 금융감독원) was established on January 2, 1999, under the Act on the Establishment of Financial Supervisory Organizations by bringing together four supervisory bodies - Banking Supervisory Authority, Securities Supervisory Board, Insurance Supervisory Board, and Non-bank Supervisory Authority-into a single supervisory organization.

The primary function of the FSS is examination and supervision of financial institutions but can extend to other oversight and enforcement functions as charged by the Financial Services Commission (the former Financial Supervisory Commission) and the Securities and Futures Commission. FSS is represented by Governor and managed by four Senior Deputy Governors and nine Deputy Governors by sector as shown in the orgainization chart.

Structural improvement of financial Industries
The Act Concerning the Structural Improvement of the Financial Industry was originally the Act concerning Merger and Conversion of Financial Institutions, enacted by the Law No. 4341, March 8, 1991. This Act was amended again by the Law No. 5496, January 8, 1998, in the aftermath of the IMF Crisis in line with the enactment of the Act concerning Establishment of Financial Supervisory Organizations.

The purpose of this Act shall be to contribute to the balanced development of the financial industry by supporting the structural improvement of the financial industry such as the merger, conversion or reorganization of financial institutions, promoting sound competition between financial institutions and raising the efficiency of financial business.

This Act includes regulations about: - Authorization for merger, conversion of financial institutions; - Supporting merger of financial institutions; - Management reform order to the troubled institutions; - Recommendation of a receiver or liquidator in the event of bankruptcy; - The liquidation or bankruptcy of the financial institution; and - Function of an agency involved in the bankruptcy procedure, etc.

Any financial institution intending to merge each other or convert to any other type of financial institutions shall obtain authorization from the Minister of Strategy and Finance. The merger procedure has also been simplified by this Act, such as shortening the observance period in the merger-related paragraphs in the Commercial Act or the Capital Markets Act. In order to prevent the failure of the financial institutions, timely corrective measures are provided such as warning, sending notice, or requiring a management improvement plan, etc.

Financial supervisory/regulatory instruments
It is said that the financial supervisory authorities are equipped with two powerful instruments - Prudential requirements and Credit rating.

During the financial crises in the past, financial institutions whose BIS ratio was below "eight percent" had to meet such prudential requirements. Otherwise, they had only to perish. Likewise, issuers with credit rating below the investment grade cannot manage to survive the capital markets.

Supervisory history
Chronicles of the Korean financial industries are listed here.