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Resolution of Insolvent Financial Institutions

The Deposit Insurance Committee and the Financial Services Commission have the authority to declare a financial institution insolvent or insolvency-threatened when its financial status is so unsound that it is unlikely to return to normal operation.

Principles for Financial Assistance

The principles for financial assistance were established in accordance with international standards in reference to the experiences of other countries and through discussions with the IMF. The specific principles are as follows:

Least Cost Principle

Financial institutions that receive public funds are selected according to strict criteria, and the amount of support is decided after a due diligence by private sector experts including accountants, so that insolvent financial institutions can be resolved with minimum costs.

Loss-Sharing Principle

Funds are provided after a capital decrease, change of management and staff down-sizing to make sure that the company’s shareholders, management and employees share the losses. Among the employees of the failed financial institution, those who are responsible for the failure are subject to civil and criminal action.

Self-help Effort Principle

Financial assistance is provided on the assumption of rigorous self-help efforts. To make that happen, an MOU on Business Normalization is signed between the KDIC and the public fund-injected financial institution. With regard to financial institutions that have signed MOUs with the KDIC, the KDIC reserves the right to review and assess their management performance and take corrective action.

See ‘Management of MOUs.’
Transparency/Objectivity Principle

Transparency is ensured through the step-by-step application of Prompt Corrective Action (PCA) restrictions according to pre-determined standards, and public funds are provided by restructuring specialists like the KDIC.

Methods of Support

The KDIC supports an insolvent financial institution largely through two methods: deposit payouts and financial assistance.

Where an insolvent financial institution has stopped repaying its deposits, the KDIC reimburses the institution’s depositors.

Otherwise, it provides assistance to a third party who tries to rehabilitate the insolvent (or insolvency-threatened) financial institution by taking it over or merging with the company. There are four methods to provide funds: lending and deposit of funds; purchase of assets and liabilities and takeover of loans; equity participation; and contribution.