[Digital Today reporter Ji-young Lee (이지영)] Financial authorities are pushing to introduce a "fast-track resolution regime for financial firms" that would allow troubled financial companies to be wound down in as little as 3 to 4 days. The idea is to sharply cut the time needed to resolve a financial firm by skipping existing procedures such as bidding and shareholder meetings in emergencies where a crisis could spread across financial markets. Authorities will also set up post-resolution compensation safeguards to protect the property rights of shareholders and creditors.

The Financial Services Commission on Wednesday announced a plan to introduce the fast-track resolution regime and said it will seek amendments to related laws, including the Act on the Structural Improvement of the Financial Industry and the Deposit Protection Act.

Under the current system in the Act on the Structural Improvement of the Financial Industry, authorities take a step-by-step approach. They issue prompt corrective action orders to troubled or potentially troubled financial firms and proceed to resolution measures if the firm fails to comply. Because procedures such as bidding and protections for interested parties are required, it typically takes about 150 days from identifying distress to transferring contracts.

The FSC judged that delays in resolving financial firms could increase the scale of distress and resolution costs and prolong deposit withdrawal suspensions, which could lead to instability in financial markets.

It therefore decided to establish a separate system to allow rapid resolution when a sharp deterioration at a financial firm could spread into a market-wide crisis and existing measures make it difficult to prevent it.

Banks, savings banks covered; FSC needs two-thirds approval

The fast-track resolution regime will apply to financial institutions under the Act on the Structural Improvement of the Financial Industry that are eligible for funding support from the Deposit Insurance Fund. These include banks, insurers, securities firms, savings banks and financial holding companies.

However, Nonghyup Bank, Suhyup Bank and mutual finance will be excluded because they have supervisory and resolution frameworks under separate laws. Reinsurers, credit-specialized financial companies, and some asset managers and trust companies will also not be included.

To trigger the fast-track resolution regime, all three requirements must be met. The financial firm must be in distress or at risk of distress, and there must be concern that this could cause a serious financial crisis or significantly undermine financial market stability.

It must also be an emergency situation in which the crisis cannot be prevented through existing measures under the law, such as prompt corrective action, and where there is a public interest need.

The FSC plans to designate target financial firms by a vote of at least two-thirds of the registered members at a Financial Services Commission meeting attended by the Ministry of Finance and Economy, the Financial Supervisory Service, the Korea Deposit Insurance Corporation and the Bank of Korea.

Once designated for fast-track resolution, financial authorities can use various measures such as business suspension, appointment of an administrator, contract transfers, third-party takeovers, share cancellations and consolidations, and licence cancellations.

Skipping bidding, shareholder meeting procedures; post-resolution compensation safeguards

Authorities are also pushing measures that would allow certain procedures under related laws to be skipped to shorten the resolution period.

When the Korea Deposit Insurance Corporation pursues contract transfers or third-party takeovers, it would be allowed to sign private contracts instead of competitive bidding under the State Contracts Act. It would also be able to skip advance notice and opinion-hearing and submission procedures under the Administrative Procedures Act.

Authorities also plan to allow exemptions from board and shareholder meeting resolutions under the Commercial Act and the financial restructuring law, appraisal rights for dissenting shareholders and creditor objection procedures, and merger review under the Fair Trade Act.

For due diligence on assets and liabilities, the KDIC will first conduct a preliminary assessment within 1 to 2 days and carry out final due diligence after resolution, shortening the process.

The goal is to cut the resolution period from about 150 days under the current system to about 3 to 4 days, including weekends.

Authorities will also set up safeguards to protect the rights of shareholders and creditors that could be limited during a rapid resolution process.

The FSC plans to apply the "NCWOL (No Creditors Worse Off than in Liquidation)" principle so that losses suffered by shareholders and creditors due to fast-track resolution do not exceed those under ordinary liquidation or bankruptcy procedures.

After the resolution ends, an external professional institution will conduct settlement due diligence to calculate losses based on liquidation standards. If losses from fast-track resolution are greater, the difference will be compensated from the Deposit Insurance Fund.

The FSC plans to report details such as the content, reasons and results to the National Assembly's Political Affairs Committee within six months after the resolution measures.

The FSC will issue legislative notices for 42 days from Nov. 2 to Dec. 14 for amendments to the financial restructuring law and the deposit protection law. It then plans to submit the bills to the National Assembly after reviews by the Regulatory Reform Committee and the Ministry of Government Legislation and votes by the FSC, vice-ministerial meeting and the cabinet.