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The Role of Credit Guarantee
In Capital Relief under New Basel Accords
Korea Credit Guarantee Fund (KODIT)
11 May 2016
Contents
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01. Credit Risk
Mitigation
02. Prime Operational
Factors
01 :
Credit Risk Mitigation
About us
As of the end of Yr 2015
Basel Ⅲ
Basel Ⅲ
Key principles
•
Capital requirements
requirements
•
•
𝐶𝑜𝑚𝑚𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦 𝑡𝑖𝑒𝑟 1
𝑅𝑖𝑠𝑘−𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠
𝑇𝑖𝑒𝑟 1 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝑅𝑖𝑠𝑘−𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝑅𝑖𝑠𝑘−𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠
𝑇𝑖𝑒𝑟 1 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝑇𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑜𝑠𝑢𝑟𝑒
≥ 4.5%
≥ 6%
≥ 8%
Leverage ratio
•
Liquidity requirements
requirements
• 𝐿𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦 𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 =
≥ 3%
𝐻𝑖𝑔ℎ 𝑞𝑢𝑖𝑎𝑙𝑖𝑡𝑦 𝑙𝑖𝑞𝑢𝑖𝑑 𝑎𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝑛𝑒𝑡 𝑙𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦 𝑜𝑢𝑡𝑓𝑙𝑜𝑤𝑠 𝑜𝑣𝑒𝑟 30 𝑑𝑎𝑦𝑠
• 𝑁𝑒𝑡 𝑆𝑡𝑎𝑏𝑙𝑒 𝐹𝑢𝑛𝑑𝑖𝑛𝑔 𝑅𝑎𝑖𝑜 ≥ 100%
≥ 100%
Risk Weight
The key risk weight
Type
•
Sovereigns
Risk Weight (Basel Ⅱ standardized approach)
−
0 ~ 150% (differentiated by credit rate)
* Republic of Korea : 0%
−
Equals to that of the government (if the loss is
covered)
20 ~ 150% (if the loss is not covered by the
government)
•
Public Institutions
•
•
Banks
−
Securities Companies
20 ~ 150% (differentiated by credit rate)
•
Corporates
−
20 ~ 150% (differentiated by credit rate)
•
Cash
−
0%
−
•
Secured by
commercial real −
estate
100%
Legal Support
Legal support for coverage of loss
Korea Credit Guarantee Fund Act Article
41 (Coverage of Loss)
① In case where any profits are made in the closing, those
profits shall be reserved in full.
② In case where any losses are incurred in the closing, they
shall be covered by the reserve under Paragragh ①, and if the
reserves are insufficient, the Government may cover them.
Risk Weight
Conditions of guarantee to fulfill
Basel requirement
Irrevocabl
e payment
Unconditio
nal
payment
Explicit &
documented
obligation
Effect of Credit
Guarantee
Effect on capital adequacy ratio
Direct Effect
Loan to SMEs which would
not be eligible without CG
Credit
Supply
Increase
Indirect Effect
Supplying additional credit
by Improving capital
adequacy ratio
Effect of Credit
Guarantee
Path of indirect effect
Step
1
Reducing risk
weight of the loan
secured by credit
guarantee
Increasing
Capital adequacy ratio
of banks
Step
2
Step
3
Banks get the effect of
increase in equity
without actual input of
capital
Supply additional
credit to the
market up to 12.5x
of the increased
capital
Step
4
Effect of Credit
Guarantee
Empirical research result
Outstanding guarantee
Average coverage
ratio
1 USD = 1,140
KRW
Loan secured by
guarantee
$ 26.3 B
87.0 %
$ 30.3 B
Equity increase effect
Minimum CAR
Available amount
of additional
credit
$ 2.4 B
8 %
$ 30.6 B
Direct effect
Indirect effect
Total amount of additional credit supply
$ 60.9 B
02 :
Prime Operational
Factors
to ensure commitment of its liabilities
Integrated System for
Soundness
Four major criteria
Legal Support &
Supervision
Legal support
Korea Credit Guarantee
Fund Act
Legal Basis
Mandate
Credit guarantee and
relevant services
Fund(no shareholder or
ownership)
Type of Entity
Government
Support
Liquidity risk is covered
by the government(by law)
Legal Support &
Supervision
Sound governance
Budget
planning
The Board of Policy
Operation
supervision
The Board of
Directors
Capital
contribution
Financial Stability
Sources of fund
Government (irregular)
Subject to yearly budget of the government
Banks (regular)
Mandatory donation in proportion to monthly balance
of outstanding corporate loans of commercial banks
Others (irregular)
Occasional contributions from banks or large
enterprises
Guarantee Fee
SMEs pay 0.5 ~ 3.0% of annual guarantee fee
(upfront)
Average fee rate : 1.27%(as of 2014)
Financial Stability
Sources of fund
Government (irregular)
Subject to yearly budget of the government
Banks (regular)
Mandatory donation in proportion to monthly balance
of outstanding corporate loans of commercial banks
Korea Credit Guarantee Fund Act Article 6
①The equity fund of KODIT shall be built up with resources falling under
the followings:
1.Contributions from the government;
2.Contributions from financial institutions;
3.Contributions from enterprises;
③Financial institutions shall make contributions to KODIT such amount by
the rate as prescribed in the Ordinance of the Prime Ministry, within the
scope of not exceeding 3/1000 per annum of their loans.
Financial Stability
Source of fund
Government (irregular)
Subject to yearly budget of the government
Banks (regular)
Mandatory donation in proportion to monthly balance
of outstanding corporate loans of commercial banks
Others (irregular)
Occasional contributions from banks or large
enterprises
Guarantee Fee
SMEs pay 0.5 ~ 3.0% of annual guarantee fee
(upfront)
Average fee rate : 1.27%(as of 2014)
Operational Mechanism
Guarantee procedure
Step 01
Step 02
Step 03
Step 04
Apply &
Interview
Credit Analysis
&
On-site Visit
Evaluation &
Approval
Issuance of
Guarantee Letter
• SME’s application
• Eligibility check-up
by interview with
owner
• Document submitted &
reviewed
• Credit rating &
Evaluation
• Contract & Paying
fee
• Analyst’s on-site
visit
• Guarantee approval
• Issue of guarantee
Operational Mechanism
Eligibility, ceiling & coverage
Risk Management
Optimal enterprise risk management
system
Credit Risk
Liquidity Risk
Operational
Risk
Exposure
Default rate
Internal audit
Risk taking ratio
Leverage ratio
Monitoring
Portfolio management
system
Risk Management
CCRS(Corporate Credit Rating System)
Financial Model
Scores from
Financial Factors
Quantitative Model
Scores from
Quantitative Factors
Credit
Investigation
Qualitative Model
Scores from
Qualitative
Factors
Owner’s
CB rating
Combination of Model
(Combined Score)
Pre-Rating
Filtering
CCRS Rating (Final)
Rating
Median
PD(%)
KR1
KR2
KR3
•
•
•
KR15
0.10
0.30
0.60
•
•
•
30.0
Leverage Ratio
Outstanding guarantees &
Leverage ratio
50.0
45.0
10.0
41.5
39.9
39.9
41.6
42.5
9.0
40.0
9.0
35.0
8.5
8.0
8.0
30.0
25.0
43.1
7.3
20.0
6.9
7.0
7.2
6.0
15.0
10.0
5.0
5.0
0.0
4.0
2010
2011
2012
2013
2014
2015
(1 USD =
1,140KRW)
Default Rate
Consistent Default Rate
8.0
7.2
7.0
6.2
6.4
6.7
6.2
6.0
5.2
5.1
5.0
4.0
4.9
4.7
5.0
4.6
4.2
4.8
4.2
4.7
4.1
4.0
2.9
2.8
4.0
4.0
3.6
3.0
2.0
4.8
2.3
3.3
2.6
2.3
1.0
0.3
0.0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Thank you