Press Release 2009 FSC Report to the President

Press Release 2009 FSC Report to the President Overcoming Financial Difficulties and Laying the Foundation for Financial Advancement

I. Development of and Countermeasures to Financial Difficulties Contents II. Measures to Overcome Difficulties III. Policy Efforts for Economic Recovery 1

Development of and Countermeasures to Financial Difficulties I. 2

1. Development of and Countermeasures to Financial Difficulties Globalization of finance § Sub-prime mortgage crisis in U. S. Global financial crisis and economic recession Sep’ 08~late Oct ’ 08~present Projection post ’ 09 Scenario 1: U-shape Progress of Financial Difficulties Foreign currency liquidity issue caused by global credit crunch • Banks’ foreign currency Countermeasure Policies ð debt guarantee • FX liquidity injection • Korea-U. S. foreign currency swap Credit risk and KRW liquidity issues in the real economy • Liquidity injection and key interest rate cut by BOK • Formation of Bond Market Stabilization Fund • Response to potentially risky sectors such as construction Market fears realization of Scenario 2 → Need for preemptive measures 3 Early market recovery Financial market stabilization Scenario 2: L-shape Long-term recession Reformation in real and financial sectors • Drastic support to the real economy and restructuring • Increased soundness of financial sector

II. Measures to Overcome Difficulties 4

1. Framework to Overcome Financial Difficulties 「 Overcoming Financial Difficulties」 「 & Move towards Economic Recovery」 Supply Funds to Corporations Supply funds through commercial and policy financing institutions Bolster Capital Strength of Financial Institutions Reforms to alleviate corporate burden Measures to complement the current corporate restructuring system 5 Measures to ease debt burden Measures to bolster capital of secondary financial institutions Support direct financing (Bond Market Stabilization Fund, Capital Market) Measures to support the financially marginalized Bank Capital Expansion Fund Preemptive measures in response to potential insolvencies in areas such as PF Support for Low-income Households and the Financially Marginalized Bolster capital strength of banks Corporate Restructuring Measures for job creation

2. Corporate Funding: (1) Expansion of Policy Banking Role Percentage of loans to large companies n Provide support to corporation through expanded budget of KRW 3. 1 trn and help set the foundation for economic recovery. State-owned Banks (KDB, IBK) n Expand loan extension by KRW 14 trn through capital injection of KRW 1. 4 trn (KRW trn. ) 68 Direct Lending Support 54 In 2009, the utmost policy-oriented KDB IBK 27 2008 32 IBK 36 27 support will be provided for KDB the SMEs through loan extension 2009 Credit Guarantee Institutions (KODIT, KIBO) n Expand credit guarantee support by KRW 11. 7 trn through additional capital injection of KRW 1. 1 trn 25. 2 (KRW trn. ) Guarantee Support 13. 5 Intensify inspection of loan extension KODIT KIBO 7 6 9. 5 4. 0 2008 KODIT KIBO 19. 5 5. 7 2009

2. Corporate Funding: (1) Expansion of Banks’ Role n Increase corporate lending capacity by improving financial soundness of banks n Total supply of KRW 50 trn to SMEs by means of Fast- track program and MOU inspection B/S of Banking Industry Assets (Total risky assets) KRW 771 trillion KRW 7 trn Mortgage Loans Securitize by KHFC KRW 3 trn NPL Approx. KRW 5 trn / month Approx. KRW 4 trn / month Liabilities Shareholder’s Equity KRW 82 trn ’ 09 1/4 3. 8 2. 6 Inject Capital through Bank Capital Expansion Fund Enhance banks' capacity to support corporate funding 8 7 ‘ 04 4/4 5. 7 (Unit: KRW trillion) 0. 5 Approx. KRW 3. 5 trn / month 3/4 2/4 Purchase through KAMCO Improve soundness of banks’ assets Net increase of SMEs loan GDP growth rate 2. 9 3. 4 4. 3 1 ‘ 05 ‘ 06 ‘ 07 ‘ 08. 8 Sept. Oct. Concentrate supply of funds in the first half of 2009 when the economy is expected to suffer the most Nov.

2. Corporate Funding: (3) Liquidity Through Bond Market Stabilization Fund n Support companies facing temporary liquidity shortage such as constructors and credit finance companies Investors KDB Target Investments and market size 1) KRW Corporate bonds 2 trn Banks KRW 6 trn Insurers n KRW 1. 5 tr Securities Companies ð First . 5 trn 0 KRW SME P-CBO KODIT guarantee (KRW 2. 4 trn) PF-ABCP A 2 and above (KRW 1. 7 trn) Credit Finance Bonds Bond Market Stabilization Fund (KRW 10 trn) BBB+ and above (KRW 7 trn) A- and above (KRW 7 trn) KRW 5 trn fund was launched on Dec. 17 - The total size of the fund is set at KRW 10 trn, but when necessary, it will be expanded via injection of public fund. 1) Based on the amount of bonds maturing in 1 H 09 8

2. Corporate Funding: (4) Supply of Funds Through Direct Financing n Companies fail to secure enough liquidity via direct financing amid stock price and interest rate fluctuations Adopt measures to vitalize stock and bond markets Stock Market Bond Market Decrease in capital raising via IPO and rights issue Decrease in fund inflows to corp. bond market Market Situation (unit: KRW trn) Rights issue 14. 9 IPO 2. 3 end of 07 Countermeasures - (unit: KRW trn) 7. 3 Rights issue 3. 7 IPO 0. 7 end of Nov 08 end of 07 end of Nov 08 -Introduce new systems and products to bond market (short-term bond, etc) Increase demand via stock market stabilization fund *KRW 515 bn by the end of Mar 09 - 8. 5 Ease disclosure burdens to encourage issuance of stocks * exempt well-known seasoned issuer(WKSI) from submitting individual issuance report for every capital increase, ease time restraint and eliminate frequency limit on issuance 9 -Expand investment in long-term corp. bond investment fund (inc. financial debentures) -Increase MMF’s investment in bonds and CP

2. Corporate Funding: (5) Reduction of Burden for Corporation (1) Ease accounting burdens stemming from extreme volatility in global markets Effects from Exchange Rate Increase Exchange rate increase Possible Changes in Accounting Standards Allow re-evaluation of asset Currency exchange loss Approve dollar-based accounting Decrease net income Recognize gain on F/C translations as capital Reduce financial soundness Decrease loans by Banks Allow companies to choose a specific date for translation of F/C assets and liabilities 1) Ensure Investor Protection measures (mention critical information in foot notes) Strengthen International Coordination & Converge with International Accounting Standards 1) applicable to unlisted SMEs (2) Boost foreign currency liquidity via exceptional approvals of credit ceiling provision on banks’ trade financing. 10

3. Corporate Restructuring: (1) Restructuring Mechanism n Rigorous restructuring on unviable companies is necessary to provide enough fund to healthy/viable companies, securing future economic growth engine. Underlying Principles Institutions in Charge Financial Support & Restructuring Led by Creditors Mediation Committee for Credit Financial Institutions coordination Liquidity Risk Financial Support Corporate Restructuring Coordination Committee Fine-tune detail guidelines Signs of Insolvency Restructuring cooperation Corporate Restructuring Support Div. Unable to Recover Liquidation Actively fulfill its missions Financial Services Commission (coordination, policy response) report 11 Enhance workforce

3. Corporate Restructuring: (2) Potential Vulnerable Sectors including PF Total PF Volume: KRW 99. 7 trn Progress Solution Savings Banks (KRW 12. 6 trn) Inspect all 899 Savings Banks (Completed on Dec. 3, Purchase of Non. Performing Loans through KAMCO Banks (KRW 49. 8 trn) Others (KRW 19. 3 trn) Securitization (KRW 18 trn) 08) Inspect all 1, 384 Institutions Aid Viable Companies via PFV (Jan. 09) Promote Workout Programs Monitor ABCP Market 12 Utilize Bond Market Stabilization Fund

4. Bolster Capital Strengths of Financial Institutions: (1) Banking Sector Capital Expansion n (Domestic Banks) BIS Ratio of 10. 86% as of the end of Sep. , 2008 (Tier 1 Capital: 8. 33%) n (Advanced Countries) Britain: Injection of government-created fund using 9% of Tier 1 Capital as the base, the United States: 8. 76% of Tier 1 Capital as of the end of June, 2008 Phase 1 : Voluntary Capital Expansion Issuing subordinated bonds and hybrid bonds Phase 2 : Creation of Bank Capital Expansion Fund (within Jan. , 2009) BOK (KRW 10 trn) Institutional and general investors (KRW 8 trn) ABS guaranteed by KODIT and KIBO Capital expansion by holding companies, shareholders Capital expansion in state-owned banks as a precaution Loan KDB (KRW 2 trn) Subordinated ABS Bank Capital Expansion Fund (provisional name) Purchase of hybrid bonds, preferred stocks, subordinated bonds, etc. A Bank B Bank C Bank D Bank n Help applied banks to lower their financing cost, using the loans extended by the BOK - As for investors, investment stability is enhanced with the guarantees by KODIT and KIBO, and KDB’s acquisition of subordinated bonds * Currently, the BOK is considering measures of providing financial support for the fund (a matter to be resolved by the Monetary Board) n An injection of KRW 20 trn into the banking sector would raise the overall BIS ratio by about 2. 6% (estimate) 13

4. Bolster Capital Strengths of Financial Institutions: (2) Non-Monetary Institution Capital Expansion Countermeasures in Case of Insolvency Current Status § Worsening financial soundness and liquidity of § Different responses depending on business certain financial institutions § Promoting capital expansion through the major shareholders Insurance company characteristics - Support must be made in parallel with self rescue efforts. Retain existing contracts and protect policy-holders Preventive capital expansion (targeting companies whose payment reserve ratio is lower than 150%) * Using M&A and contract transfer, etc. Promote restructuring, M&A and Liquidation Securities company Liquidity through KSFC and BOK Savings bank Promotion of capital expansion by major shareholder and voluntary restructuring Credit Finance (credit cards, etc. ) * No loss for clients as client deposit money is separately deposited Promoting active M&A by providing incentives * (Ex) Create “Ailing Savings Bank Normalization Fund” Proactive response to liquidity Difficulty in raising capital for credit and leasing companies * Supporting bond purchases through the Bond Market Stabilization Fund 14

5. Support for the Low-Income Households and the Financially Marginalized: (1) Support for the Financially Marginalized Easing debt repayment burden of household loans and residential mortgages Welfare project expansion of micro credit financial institutions n At the maximum of KRW 100 mil is guaranteed for low- and-middle income households whose collateralized houses suffer decline in price (total support of KRW 500 bn in 2009) Small-sized Those under credit recovery process merchants Micro credit financial institutions Social enterprise KRW 500 mil Insufficient collateral due to KRW 400 mil house price (KRW 300 mil in (KRW 300 mil drop (KRW 60 mil) loans) in loans) * LTV 60% as Guarantee support at base Single parent household Support Size the maximum of KRW 100 mil 48% rise n Extend maturity and grace period for residential mortgage holders KRW 27 bn 2008 * Extending maturity by 30~35 years and grace period by 5~10 years n If a debtor with a floating-rate debt wants to switch into a fix-rate one, prepayment fee shall be exempt, easing interest burden 15 KRW 40 bn 2009 Devising measures utilize dormant bank deposit in order to expand micro credit businesses

5. Support for the Low-Income Households and the Financially Marginalized: (1) Support for the Financially Marginalized Protection Enhancement of Micro Credit Users Expansion of Credit Recovery Fund Projects Financial Debt Defaulters Those paying high interest rates Amendment of Consumer Finance Act Enactment of Fair Debt Collection Act Strengthen supervision on consumer Finance companies Tighten regulation on false and exaggerated advertisement Debt Readjustment Expansion of the scope of collection prohibition deeds and punishment enhancement Make it mandatory to use ‘loaning‘ in trademark Make it mandatory to check debtor’s repayment ability in case the size of loan exceeds a certain amount Transfer Loan Target people (10, 000) Target debt (KRW trn. ) 46 take training course Tighten audit on large loaning companies through direct inspection by FSS 2. 2 2009 2008 Make it mandatory to write in handwriting as for important parts of a contract Make it mandatory to explain at the time of signing a loan contract Make it mandatory for loaners to 7. 3 72 2008 Strengthen protection of micro credit users 2009 16

5. Support for the Low-Income Households and the Financially Marginalized: (2) Creation of Jobs 일자리 support and guarantee provision for 자 Financial 창출효과가 큰 산업에 대한 industries with significant job creation effect Promotion of internships in the financial sector 금지원 및 보증 제공 n Hiring interns as many as 4% of their fixed n Financial support through government- number of employees by financial public organizations controlled banks - KDB: KRW 7 trn for facility loans * 19, 000 employees in 18 financial public organizations under the FSC - IBK: creation of funds to support job creating companies → Hiring about 760 interns n Guarantee provision through guarantee * KRW 8 bn has already been reflected on the budget of 6 financial public organizations - KODIT: KRW 7. 5 trn for start-up companies → Hiring about 500 interns - KIBO: KRW 4. 8 trn for technology-based start-up companies IBK Measure for Creating『 Creating Company Support Job Fund』 IBK Cost Cut Fund creation (KRW 30 trn) interest, fee benefit n Inducing commercial banks to follow suit - Hiring interns as many as 2% of their fixed number of employees Promote hiring of about 2, 500 interns in the financial sector SMEs 17

Ⅲ. Beyond Crisis: Preparation for Economic Recovery 18

1. Focus on Legislative Financial Reform n Now in Process of Legislation of 21 Financial Reformation Acts n Rationalize restriction on acquiring shares of banking institutions and establish improved regulation relating to Core National Administrative Subjects financial holding companies (Financial Holding Companies Act, Banking Act) n Privatize the Korean Development Bank, establish Korea Policy Finance Corporation (Korean Development Bank Act, Korea Policy Finance Corporation Act) n Strengthen consumer protection on credit card holders and enhance supervision of unfair sales by credit card Acts Concerning Public Welfare Increase Capacity for Financing Support companies (Specialized Credit Financial Business Act) n Strengthen protection on privacy (Use and Protection of Credit Information Act) n In the case of mortgage crisis, Korea Housing Finance Corporation to immediately support liquidity (Korea Housing Finance Corporation Act) n Introduce guarantee system for SPC, build legal ground to invest in SMEs (Credit Guarantee Fund Act, Korea Technology Guarantee Fund Act) n Strengthen management and supervision of the credit business, extend deadline on interest rate ceiling policy (Act on Registration of Credit Business and Protection Financial Users) Reduce Legislative Gap due to n Reformation Transfer provisions of financial exemption law for listed corporations, reflect revised items to the consolidation law (Capital Market Consolidation Act) 19

2. Advancement of Regulation on Financial Derivatives Derivative Market Trend Problematic Points Increased Systematic Risk Complicated Structure of Transaction Potential Risks to Investors Through Incomplete Sale Increasing Number of Individual Investors 1 st half of 2009. 2 Action Schedule Suggested Reformation Strengthen market monitoring Enhance risk management system & Internal Control Rearrange supervision & SROs Provide supporting mechanism suited for each specific type of products and investors 2 nd half of 2009 Strengthen Role of SROs Enhance Related Systems 20 Build DB

3. Prevention & Solution of Incomplete Sale of Financial Products § Potential Incomplete Sale Existent in ‘Ask no questions’ & ‘Crowding’ Effects in Investment Style Existing Response: System Reformation Thorough Product Explanation Occurrence of Financial Difficulties Insufficient Settlement of System Thorough Supervision & Strict Punishment Strengthen Consumer Protection Introduction of ‘Strike-out’ System Strengthen Restriction on False Advertisement Future Response Unprecedented Adverse Criticism on Incomplete Sale 21 Reflect Incomplete Sale on Bank Evaluation

4. Promote G-20 Action Plan (47) / Authorities Enhance Transparency & Responsibility of Financial Market (8) Financial Supervision & Restriction Reformation (20) Improve Financial Market Credibility (6) International Cooperation (4) International Financial Body Reformation (9) FSC FSC MOSF Establish Structural Plan (~08. 12) Implement Short 09. 3월 Term Plan [~09. 3. 31] Join in WG 09. 1월 Discussion [09. 1~] 22 Implement Mid. Term Plan & Report Progress [09. 4~]

Discussion Points 23

Disclaimer This English Version is provided for reference purpose only. At no time it shall be regarded as official translation. The original Korean Text is the only official version. 24