BANKING AND NON-PERFORMING ASSET

waxspadeManagement

Nov 18, 2013 (3 years and 29 days ago)

62 views

BANKING AND NON
-
PERFORMING ASSET
MANAGEMENT


1. Prudential Standards


Although a foreign bank's operating presence in Korea is in the form of a branch and not as a
subsidiary, Korean regulations require branches to be separately capitalized. This in turn i
mpacts
other regulations that are based on local branch capital, thereby constraining foreign bank activities.
For example, credit limits to companies/groups are based on branch capital, as are open foreign
exchange positions. Such credit limits are pruden
tial in nature and appropriate. The
recommendations below are consistent with practice elsewhere in the region. For example, Hong
Kong allows the use of global capital. Singapore counts as capital net borrowing from head offices
as well as the use of forei
gn currency units. While these recommendations would, in principle, allow
foreign banks to dramatically expand lending to Korean companies, in practice, constraints imposed
by banks’ internal credit limits would prevent this outcome. In making these sugges
tions, AMCHAM
acknowledges that Korean regulators are developing recommendations to address this issue and
are hopeful that our concerns will be addressed shortly.


Recommendations:


Adopt one (or more) of the following alternatives:




Base prudential limit
s on a bank's global equity.



Include as Class B capital net borrowing from Head Office or from branches outside
Korea.



Allow the creation of foreign currency units within local branches for booking of
foreign currency funded credits, which would not be s
ubject to legal lending limits.

2. Credit Allocation


The Korean government has historically played an active role in allocating credit, initially through
domestic bank policy loans but also through portfolio restrictions that apply to all banks operating

in
Korea. Foreign banks are held to strict monthly ratios for small and medium sized companies. These
ratios severely constrain our operations, resulting in an inefficient allocation and pricing of credit
services.


Recommendations:




Eliminate portfolio l
imits for all banks.

3. Local Currency Funding


Foreign banks have been able to increase capital with relative ease over the past several years
(although thin "capitalization" rules are still a constraint) and negotiable CD limits have also been
increased

dramatically. The won inter
-
bank market is still dominated by Korean banks and is an
unreliable and inflexible source of funding by foreign banks, particularly during periods of tight
market liquidity. Furthermore, the inter
-
bank market does not facilitat
e borrowings for greater
periods of time other than on an overnight basis. The government has revised regulations to allow
commercial funding swaps and has offered to increase central bank funding swaps.


Recommendations:




Establish policies to improve for
eign bank access to the won inter
-
bank market.



Establish policies to develop the inter
-
bank beyond an overnight market into one
which offers a variety of very short
-
term maturity instruments (i.e., 1 month, 3
month, 6 month funding instruments)



Revise ce
ntral bank swap pricing from a fixed return to cost basis.

4. Debt Collection Agency


Effective, privately managed, third party, non
-
banking related loan servicing and debt collection
agencies are needed in order to provide lenders and investors in Non
-
Pe
rforming Loans (NPLs) with
quality, professional NPL restructuring, collection and resolution services. Currently Debt Collection
Licenses are not available to qualified restructuring, loan service and asset management companies
which are not owned by a fi
nancial institution.

The law was changed in April 2000 to allow non
-
bank related companies to manage and collect
loans under the Asset
-
Backed Securities (ABS) Law through the SPAMCO (Special Asset
Management Companies) qualifications process; however, thi
s ABS SPAMCO process is suited only
for larger volume transactions. For small pools of non
-
performing loans, the ABS SPAMCO
requirements are not cost effective.


Recommendations:




Assist in the development of professional, third party, qualified private, n
on
-
banking
related loan
-
servicing and debt collection companies. These companies would be
in addition to those qualifying under the ABS SPAMCO qualification. This change
would provide buyers of non
-
performing debt in the secondary market a non
-
bank related
, qualified loan servicing and debt collection facility, thus
strengthening the prices in the secondary market for NPLs.

5. Transparency of Local Banking Regulations


Korean regulators are moving to address transparency problems but foreign banks continue

to be
hampered by ambiguous and sometimes outdated regulations subject to various interpretations by
different regulatory authorities. The efforts of the Financial Supervisory Service (FSS) to improve its
communications to foreign banks has been considera
ble. Unfortunately other Korea agencies whose
policies can affect the foreign banks’ operations have not communicated their interpretations as
effectively as the FSS.


Recommendations:




Eliminate unnecessary banking regulations.



Communicate the results of

any further regulation interpretation to all Korean
resident banks.

6. Accounting Standards


Significant progress has been made during the past year in the application of accounting principles
for the banking industry. This has been necessary in order to

achieve the success of the
restructuring taking place in the industry. As a result of the country addressing many of the
transparency issues that have existed, opportunities to attract capital have been enhanced.

To complete this process and provide a so
lid framework for the industry as it moves forward, full
adherence to international accounting principles is important. This is particularly true for areas such
as asset valuation, the criteria used for determining loan loss reserves and the treatment of f
oreign
exchange gains and losses. This is critical to the process of improving the credibility of the banks'
financial statements and in attracting the necessary capital to properly strengthen the industry.

It is recognized that there are instances where
the Korean government might find it appropriate to
deviate from international accounting principles for regulatory purposes. However, these decisions
should not affect the annual financial statements prepared for the banks’ shareholders, which
should fully

comply with international accounting principles.


Recommendations:




Complete the revision of Korean Generally Accepted Accounting Practices (GAAPs)
to improve the consistency and accuracy in financial reporting. Strictly follow the
standards once set.

7.

Valuation of Non
-
Performing Loans


Although Korea has taken many important steps to lower the level of non
-
performing loans on the
books of its financial institutions, more could be done to facilitate the process. One impediment to
the selling of Non
-
Perf
orming Loans (NPLs) has been the difference between what a third party is
willing to pay for the asset and the value that the bank is carrying the assets. Many banks are
reluctant to sell assets because of the accounting loss the sale would create. This re
luctance to sell
NPLs appears to be slowing the process of improving the financial strength of the financial
institutions.


Recommendations:




Create an environment whereby financial institutions are required to write down non
-
performing loans to the lower
of the market value or as set out by the
government's asset classification standards.