South Korean Covered Bonds

1 Who is the issuer?
  • Universal credit institution
  Comments: Banks licensed under the Bank Act, Industrial Bank of Korea, Korea Development Bank, NH Bank, National Federation of Fisheries Cooperative - Credit Business Division each of which with equity capital of not less than KRW 100 billion and BIS ratio of not less than 10%, Korea Housing Finance Corporation and Korea Finance Corporation
2 Does the bondholder have recourse to the credit institution?
  • Yes, direct
  Comments: Covered Bond holders, derivative counterparties related to Covered Bonds, other priority creditors including those with fees due shall have a priority right of payment on the registered Cover Pool over third parties. In case of bankruptcy of an issuer, the Cover Pool shall not be subject to bankruptcy proceeding, including compulsory execution, preservative measure and stay order with respect to such issuer. If the issuer becomes insolvent prior to repaying all of the principal of the Covered Bonds outstanding, the priority creditors have the right to participate in the bankruptcy proceedings of the issuers alongside other unsecured creditors of the issuer.
3 Who owns the cover assets?
  • The issuer directly
4 Is the issuer the originator of the assets?
  • Yes
1 Are the bonds governed by a special covered bond Legislation?
  • Yes
  Comments: The Covered Bond Act was passed by the National Assembly of Korea on December 19, 2013 and will come into effect 3 months after it is promulgated
2 What is the legal framework for bankruptcy of the issuer of covered bonds?
  • Specific legal framework superseding the general insolvency law
  Comments: The Covered Bond Act stipulates that the cover pools of the issuers which are registered with the Financial Supervisory Service will not be subject to insolvency proceedings of the issuers
1 What types of assets may be included in cover pools?
  • Exposures to public sector entities
  • Mortgage loans (Mortgage loans for the purpose of this question are taken to include guaranteed real-estate loans.)
  • Group originated Senior MBS
  • Senior MBS issued by third parties
  • Ship loans
  • Aircraft loans
  • Exposures to credit institutions
  Comments: Cover Pool: residential mortgages, debts issued by public sector with LTV of less than 70%, vessel mortgages and aircraft mortgages with LTV of less than 70%

Liquid Assets: liquid assets such as cash, Certificate of Deposits issued by other financial institutions with maturity shorter than 100 days

Other assets: recoveries from Cover Pool or Liquid Assets, derivative instruments etc.
The following liquid assets may be registered as Cover Pool up to a limit of 10% of total value of the Cover Pool.
1. Cash
2. Certificates of Deposit issued by other financial institutions with maturity shorter than 100 days
3. Deposits, overdraft facilities, discounted bills, credit card receivables etc with maturity shorter than 3 months
4. Debt issued by central or local governments of OECD member countries or the Kingdom of Saudi Arabia
5. Financial instruments similar to certificate of deposit with maturity shorter than 100 days which have been issued by central banks, commercial banks, investment banks, securities companies etc with an international credit rating of 'A' or above from either an OECD member country or the Kingdom of Saudi Arabia
2 What is the geographical scope for public sector assets?
  • Domestic
3 What is the geographical scope for mortgage assets?
  • Domestic
4 Are regular covered bond specific disclosure requirements to the public mandatory?
  • Yes
  Comments: The issuer and the Cover Pool monitor are required to submit quarterly reports to the financial regulatory authority using the form of report setting out details relating to Covered Bonds and Cover Pool. The issuer is required to publish such information on the relevant website and must include such details as notes to the annual report of such issuer.
1 LTV is calculated using which valuation?[4]
  • Mortgage lending value
2 Are there any special LTV limits used solely for calculating collateralisation rates for the cover pool (if yes, specify)?
  Comments: No
3 Do bondholders get the benefit of that portion of the loan which exceeds the LTV cap?
  • Yes
  Comments: Portion of the assets which exceed the required LTV shall not be eligible cover asset but shall be treated as being part of the Cover Pool unless the Cover Pool registration with respect to such portion of assets are cancelled. The right of priority shall also not be affected.
4a Is there an LTV cap which makes the entire loan ineligible to be put in the cover pool (if yes, specify)?
  • Residential      
  • Ships      
  • Aircraft      
  Comments: In all cases 70%
4b Is there an LTV cap which would require a loan to be removed from the cover pool?
  • Residential      
  • Ships      
  • Aircraft      
  Comments: Assets which do not satisfy the LTV requirement will be non-eligible assets and must be replaced with assets which satisfy the eligibility criteria including the LTV ratio and the minimum coverage ratio should be maintained.
5 Is there any additional LTV limit on a portfolio basis?
  • No
Exposure to market risk
1 Is exposure to market risk (e.g. interest rate, currency risks) required to be mitigated by law or contract?
  • Yes
  Comments: The total value of Cover Pool is greater than or equal to 105% of the nominal value of the Covered Bonds outstanding
2 What is the primary method for the mitigation of market risk?
  • “Natural” matching (matching without the use of off-balance sheet instruments) and stress testing
  Comments: Where the currency of the Covered Bonds is different from the currency of the cover pool, the spot exchange rate prevailing on the calculation date shall be used to make the relevant calculations. Where the issuer has hedged its currency risk through derivative transactions, the exchange rate set out in such derivative contract may be utilised and the derivative counterparty will also be treated as a priority creditor under the Covered Bond Act.
3 If the answer to the above question on market risk mitigation is “Use of derivative hedge instruments”, please specify whether those instruments are entered into:
4 What type of coverage test is applied?
  • Present value cover
  Comments: Where the cover pool consists of mortgages, any mortgages in arrears will be calculated by applying certain ratios and the other assets shall be valued using market values. Any assets which are not eligible assets and any derivative instruments entered into for hedging purposes shall be valued at '0'.
5 What is the frequency of coverage calculations?
  • Daily
6 What types of stress scenarios are applied?
  • Not relevant
7 What is the frequency of stress test calculations?
  • Not relevant
Exposure to liquidity risk
8 Is exposure to liquidity risk required to be mitigated by law or contract?
  • Yes
  Comments: There are no separate provisions dealing with liquidity risk in the Covered Bond Act. There are no precedents as the Covered Bond Act has not yet come into effect but the covered bonds issued pursuant to the Korea Housing Finance Corporation Act requires the issuer to make contractual provisions for interest payments, commissions and fees payable for a certain period of time and it is expected that the covered bonds issued under the Covered Bond Act will also likely stipulate such reserve requirements to mitigate liquidity risk by way of contractual provisions.
9 What is the primary method for the mitigation of liquidity risk on interest payments?
  • Contractual arrangements, e.g. a requirement to establish a reserve fund
10 What is the primary method for the mitigation of liquidity risk on principal payments?
  • Contractual arrangements, e.g. maturity extension or prematurity test
11 Is there any grace period in case of a breach of liquidity risk mitigants?
12 What is the consequence of not fixing a breach of liquidity risk mitigants?
Monitoring of exposures to market and liquidity risk
13 Who monitors the maintenance of coverage tests?
  • Trustee/cover pool monitor
14 Are there any regular public reporting requirements for market and liquidity risk?
  • No
Overcollateralisation
15 Is mandatory minimum overcollateralisation required?
  • By legislation/regulation
16 What is the level of minimum mandatory overcollateralisation?
  • 105%
  Comments: The total value of Cover Pool (public valuation) is greater than or equal to 105% of the Covered Bonds outstanding.
17 If mandatory overcollateralisation is required, are the amounts above the minimum OC level protected?
  • Yes
18 Is there any grace period in case of a breach of the coverage test?
  • No
19 What is the consequence of not fixing a breach of the coverage test?
  • Other regulatory or rule-based actions
1 Is a special license required for the issuing of covered bonds?
  • No, but with additional requirements
2 Are there special reporting duties of the covered bond issuer to the supervision authority concerning covered bonds and the cover pool, which go beyond the regular banking supervision?
  • Periodic reporting required
3 What is the role of the banking supervision regarding covered bonds?
  • To check whether eligibility criteria are fulfilled and documented
  • Monitoring of exposure to market risk and liquidity risk
  • Evaluation of operational risk
  • To check minimum mandatory overcollateralisation requirements
4 Is there a special role of banking supervision in crisis regarding covered bonds?
  • Safeguarding ongoing management of the cover pool directly or via a special administrator
  • Involvement in transfer of cover assets and covered bonds to another credit institution
5 Is there a cover pool monitor independent from the issuer?
  • Yes
  Comments: It must be an entity who was not a 'special relation person' of the issuer in the preceding 3 years
6 If there is an independent cover pool monitor, what are its duties?
  • Performing audits of the cover pool
  • Reporting duties to the supervision authority
  • Verification of coverage tests
  • Other, please specify:      
  Comments: 1. Monitor and evaluate the issuer's issue plans and compliance with the relevant laws and regulations
2. Require compliance of the issuer
3. direct and supervise the trustee's operations
4. any legal or non-legal actions related to managing and disposing of primary assets for the priority creditors
1 Do covered bonds automatically accelerate when the credit institution goes insolvent?
  • No
2 What is the cover pool?
  • All assets on the cover register
3 How are the covered bondholders protected against claims from other creditors in case of insolvency of the issuer?
  • Preferential claim by law
4 Is there recourse to the credit institution’s insolvency estate upon a cover pool default?
  • Yes, pari passu with unsecured creditors
5 Are there provisions that require derivatives to continue in case of insolvency of the credit institution?
  • No
  Comments: It is expected that derivative contracts may be required to continue by way of contractual provisions as the derivative counterparty is also a priority creditor under the Covered Bond Act
6 If derivatives are permitted in the cover pool, what is their ranking?
  • Pari passu to covered bond holders
1 Does the covered bond fulfil the criteria of UCITS 52(4)?
  • No
2 For further information regarding the compliance to the criteria of Article 129 of the Capital Requirements Regulation (CRR), please see the following links: http://ecbc.hypo.org/Content/default.asp?PageID=504#position https://www.coveredbondlabel.com
  • No
3 Are listed covered bonds eligible in repo transactions with the national central bank?
  • No
4 Are there any special investment regulations regarding covered bonds?
  • No
1 Link to National Association representing covered bond interests
  • Association
2 Link to national regulators and supervisors
  • List


  Comments: The structured covered bonds were issued by Kookmin Bank pursuant to the Asset Backed Securities Act in May 2009 and the Korea Housing Finance Corporation issued statutory covered bonds pursuant to the Korea Housing Finance Corporation Act in July 2010 with subsequent issues of both cross border and domestic statutory covered bonds.
3 Fact Book Country Chapter
  • Chapter
 
4 Hypostat Country Chapter
  • Chapter