U.K. Request Shows Mistrust of Korean Credit Rating System

The U.K. Financial Service Authority (FSA) on Wednesday asked Korea’s Financial Supervisory Service to allow FSA-designated credit rating agencies to assess the credit ratings of SC First Bank Korea, Standard Chartered’s subsidiary company, saying that it cannot accept Korea’s financial credit rating assessment.

Experts say that the demand is a humiliation to Korean financial authorities as it means that the U.K. does not trust Korea’s credit rating system.

According to the Korean financial community yesterday, the FSA said in August that it is hard to accept the reliability of three Korean credit rating agencies designated by the FSS as agencies which meet global standards: Korea Ratings; Korea Information Service; and National Information and Credit Evaluation.

The U.K. authorities want to use global credit rating agencies, such as Standard & Poor’s, Moody’s and Fitch Rating, for U.K.-invested financial institutions from January 2008 when the revised global capital measurement system “Basel II” is introduced in Korea.

Experts say that such a request reflects Standard Chartered’s concern that its headquarters in the U.K. could suffer damage if credit rating assessment is left to Korean agencies, which are less reliable than global agencies, and might fail to identify bad loans or companies with high risk of bankruptcy.

Considering that financial institutions doing business overseas are mostly rated by agencies that host country financial authorities designate, the FSA’s request is very unusual.

Regarding this issue, the FSS convened an emergency meeting of executives at the three Korean agencies and SC First Bank in late August and decided to allow global agencies to assess credit ratings in Korea.

If the decision is confirmed, SC First Bank can use S&P or Moody’s, rather than Korean agencies. That means that the FSS will have acceded to the U.K.’s demands.

The FSS is requesting the FSA allow Korean credit rating agencies to do business in the U.K. as well, but it is uncertain whether U.K. authorities will accept the request. The prevailing view is that chances are slim that British financial institutions or corporations would use Korean agencies for their credit rating assessments, even if the request is accepted.

The Korean financial community is concerned that the FSS’ decision might serve as a precedent and that other foreign financial institutions may commission assessment of their loans or credit ratings to global agencies, rather than to Korean agencies.

Experts say that the FSA’s request is a testament to the underlying mistrust of Korea’s financial sector of the global market.

Korea Development Institution researcher Lim Gyeong-muk said, “The fact that the FSA raised question about the level of major Korean credit rating agencies means that it does not trust Korea’s financial authorities. As it is hard to reverse a decision to allow global credit rating agencies to do business in Korea, the FSS should have a careful consultation with the FSA.”

legman@donga.com