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Supervisory Evaluation and Rating

The FSS periodically evaluates financial institutions’ financial health and operations and assigns an overall rating. Supervisory rating was first introduced for banks in October 1996 following Korea’s membership in the Organization for Economic Co-operation and Development (OECD) and Bank for International Settlements (BIS). The rating system was soon expanded to other types of financial institutions. It took effect for securities companies in January 1999, insurance companies and specialized credit finance companies in January 2000, mutual savings banks and specialized banks in July and August, respectively, of 2000, and financial holding companies in December 2000, and asset management companies in July 2001.

Component and Composite Ratings

Banks subject to supervisory rating are commercial banks (national and regional banks), the five specialized banks, domestic banks' foreign banking operations, and foreign bank branches.

Commercial Banks and Foreign Bank Branches

For the evaluation and rating of commercial banks and their foreign operations, CAMELSㅡcapital, assets, management, earnings, liquidity, and sensitivity to riskㅡwas replaced with CAMEL-R for risk management beginning in the fourth quarter of 2012. The evaluation of each of the six components is based on a combination of quantitative and non-quantitative factors. (Ratings for the management and risk management components are assigned using only non-quantitative metrics.) For the evaluation and rating of domestic banks’ overseas banking operations and foreign bank branches, ROCAㅡrisk management, operational control, compliance, and asset qualityㅡis employed.

Rating Components and Evaluation Factors

Rating Components and Evaluation Factors
Component Quantitative Evaluation Factors Non-quantitative Evaluation Factors Assigned Weight
1. Capital Adequacy
  • Total capital ratio;
  • Tier 1 capital ratio;
  • Common equity tier 1 ratio;
  • Leverage ratio;
  • Compliance with supervisory guidelines;
  • Capital adequacy taking into account risk characteristics and magnitudes;
  • Adequacy of the composition of capital, the likelihood of future capital impairment;
  • Management’s approach to preserving capital soundness;

20%

2. Asset Quality
  • Ratio of loans with increased risk of losses;
  • Ratio of loans classified as substandard or below (SBLs);
  • Ratio of loans with delinquent payment;
  • Loan loss provision ratio;
  • Seasonally adjusted delinquency rate;
  • Appropriateness of credit risks management;
  • Identification, measurement, and assessment of credit risks;
  • Appropriateness of credit extension policy;
  • Appropriateness of asset classification practices;
  • Adequacy of allowances for loan and other credit loss;
  • Appropriateness of loan management;
  • Identification and management of problematic loans;

25%

3. Management

 

  • Soundness of governance structure;
  • Appropriateness of management policy formulation and implementation;
  • Appropriateness of performance-based remuneration;
  • Assessment of business efficiency and improvement plans;
  • Assessment of internal controls and other operational aspects of business;
  • Compliance with laws and regulations and remedial measures recommended by supervisors following an examination;
  • Compliance with corporate social responsibility (CSR);

15%

4. Earnings
  • Return on assets;
  • Cost-asset ratio;
  • Cost-income ratio;
  • Risk-adjusted return on equity;
  • Risks to the size and components of earnings;
  • Appropriateness of earnings structure;
  • Appropriateness of expense structure;
  • Business effectiveness and capacity to generate future earnings;

10%

5. Liquidity
  • Liquidity coverage ratio;
  • Foreign exchange liquidity ratio;
  • Won-denominated loan-to-deposit ratio;
  • Stable foreign exchange funding ratio;
  • Appropriateness of liquidity risk management;
  • Volatility variables and factors for liquidity;
  • Appropriateness of funding structure and operation;
  • Stress test operation and management;

15%

6. Risk Management

 

  • Appropriateness of risk governance structure and policy management;
  • Status of risk management processes and controls;
  • Appropriateness of risk identification, measurement, and evaluation;

15%

Specialized Banks

The supervisory rating for each of the five specialized banks is assigned on the basis of the evaluation of six components: capital adequacy, asset quality, compliance, risk management, earnings, and liquidity or CACREL. For the evaluation of the earnings component of Korea Development Bank (KDB) and the Industrial Bank of Korea (IBK), only non-quantitative metrics are used. Similarly, the earnings component is excluded for the rating of the Export-Import Bank of Korea ("KEXIM"); in respect of liquidity, KEXIM is also not subject to liquidity coverage ratio rules that are applicable to commercial banks. In addition, the foreign branch operations of the specialized banks are evaluated on the basis of asset quality, compliance, and risk management only.

Nonbank Financial Companies

For the evaluation and rating of nonbank financial companies, the five components of CAMELㅡcapital adequacy, asset quality, management, earnings, and liquidityㅡare used.

Financial Investment Services Providers

A newly revised common supervisory rating system for financial investment services providers took effect in April 2009 after the Financial Investment Services and Capital Markets Act took effect on February 4, 2009. The revised common rating system divides the evaluation criteria into two: common evaluation and business-specific evaluation.

The common evaluation criteria comprise capital adequacy, earnings, and internal controls and account for 60 percent of the supervisory evaluation and rating. On the other hand, the business-specific criteria, which account for 40 percent of the supervisory evaluation and rating, comprise components that vary with the type of financial investment services business. Thus, for brokers and dealers, the evaluation components are liquidity and stability; for collective investment scheme operators, the two components are liquidity and appropriateness of asset management. Similarly, for real estate trust services providers, the other components are liquidity and asset soundness. For financial firms that engage in multiple financial investment services businesses, varying weights are assigned on the basis of the earnings from each business.

Insurance Companies

Supervisory evaluation and rating for insurance companies was upgraded to RAASㅡrisk assessment application systemㅡfrom CAMEL in September 2012. RAAS comprises seven evaluation and rating components: business management risk, insurance risk, interest rate risk, investment risk, liquidity risk, capital adequacy, and earnings; each of the seven components are further divided into quantitative and non-quantitative evaluation factors. Each component is rated on a 1 to 5 scale. It is then aggregated with other components for the insurance company’s composite rating on a 1 to 5 numerical scale with three levels (+, 0, or -) for each numerical scale, meaning a total of 15 possible composite rating assignments.

Financial Holding Companies

LOPECMㅡlead subsidiary, other subsidiary, parent company, consolidated earnings, capital adequacy, and managementㅡwhich had been used for financial holding companies, was replaced by RFIㅡrisk management, financial condition, and impactㅡin January 2008.