Financial infrastructure

Financial infrastructure (금융의 하부구조) indicates the legal system or institutions that support and oversee the financial institutions and markets in order to ensure smooth financial transactions.

It comprises:
 * the central banking system,
 * the payment and settlement system,
 * the financial supervisory system, and
 * the deposit insurance system.

Central Bank
The central banking system includes the central bank, its organization, decision-making system and sphere of business.

As the lender of last resort with the right to issue banknotes and coins, the central bank performs the function of determining policy rate, imposing reserve requirements on the deposits of banks and, if necessary, supplies financial institutions with needed funds.

These functions contribute to price stabilization, as well as stabilization of the financial system. The Bank of Korea (한국은행), founded on June 12, 1950, serves as Korea’s central bank.

Payment and Settlement System
The payment and settlement system performs the function of settling credits and debts established through real economic and financial transactions.

It consists of means of payment, participant institutions and the settlement system. Means of payment include cash and non-cash instruments such as bills, checks and credit cards.

The participant institutions comprise those financial institutions that provide non-cash instruments of payment, such as banks, the post office and credit card companies; clearing houses (어음교환소), which offset debts between financial institutions and include the Korea Financial Telecommunications and Clearings Institute (KFTC 금융결제원); and the Bank of Korea, which finalizes payment and settlement by transferring funds between the current accounts of financial institutions.

The settlement system is divided into the net and the gross settlement systems, depending upon the settlement method, as well as the retail payment system and the large value payment system, depending upon the features of the transactions concerned.

In general, owing to the natures of the transactions concerned, the retail payment system is operated by the net settlement system and the large value payment system is managed according to the gross settlement system.

In Korea, the gross settlement system for large value payments is conducted through BOK-Wire+, operated by the Bank of Korea. The net settlement system for retail payment is conducted through the bill clearing system, the GIRO system, the bank information network and others, managed by the KFTC.

Financial Supervisory System
The financial supervisory system aims to protect the properties of finance customers and promote financial transactions by ensuring that institutions conduct financial intermediation fairly, as well as by fostering sound management.

For this purpose, financial supervisory institutions perform the function of approving the establishment of financial institutions, drafting regulations to be followed by financial institutions in conducting their business, and overseeing regulatory compliance.

Korea applies an integrated financial supervisory system, in which the Financial Services Commission (FSC 금융위원회) and the Financial Supervisory Service (FSS 금융감독원) supervise nearly all financial institutions.

The FSC deliberates on and determines important matters concerning financial supervision, including financial supervisory policies and the licensing of financial institutions, while the FSS implements the decisions of the FSC and examines and supervises financial institutions.

In addition, the Bank of Korea and the Korea Deposit Insurance Corporation (KDIC 예금보험공사) partially serve supervisory roles with limited functions of financial oversight, such as requesting inspections and conducting joint examinations with the FSS.

Deposit Insurance System
The deposit insurance system is a type of insurance system through which, when a financial institution is unable to pay the principal or interest it owes due to unsuccessful managements, a deposit insurance institution remits a portion or all of the principal and interest in the place of that financial institution.

The deposit insurance system serves as a financial safety net, protecting small-scale depositors from the reckless management of financial institutions and preventing bank runs.

The deposit insurance system in Korea was organized in 1996 with establishment of the KDIC. Currently, bank deposits and selected financial instruments from securities and insurance companies are protected by the system.

Thrift institutions such as credit unions, community credit cooperatives, agricultural cooperatives, fisheries cooperatives and forestry cooperatives support proprietary deposit protection systems, as they aim at mutual aid among cooperative members.

Postal savings and insurance are not covered by the KDIC, because payment in these systems is guaranteed by the government in accordance with the related legislation.