REGULATION

ON

SUPERVISION OF MUTUAL FINANCIAL BUSINESS

Regulation on Supervision of Mutual Financial Business

CONTENTS

I.	General Provisions

§1.	Purpose

§2.	Definitions

§3.	Scope of Application

§4.	Methods for Conducting Credit and Loan Business

II.	Sound Management

§5.	Excessive Borrowing of Funds

§5-2	Financial Institutions from which Union may Borrow

§6.	Ceiling on Loans to a Single Borrower

§6-2.	Operation of Surplus funds of the Union

§6-3.	Management of Redemption Reserves

§7.	Special Cases on Surplus Fund Management

§8.	Management Performance Analysis and Evaluation

§9.	Management Disclosure

§10.	Sale of Non-Operational Real Estates

§11.	Standards for Classification of Asset Soundness

§12.	Soundness Ratio

§12-2.	Request for Improvement on Financial Status

§12-3.	Submission of Plan for Financial Status Improvement

§12-4.	Performance Period of Management Improvement Plan

§12-5.	Management Review Committee

§13.	Scope of Union's Operation□Maintenance Expenses

§14.	Division of Accounts

§15.	Diversion of Funds from Credit Business Account

§15-2.	Accounting Standards

§15-3.	Write-off of Insolvent Obligation

§16.	Risk Management System

§16-2.	Risk Management Organization

§16-3.	Risk Management Regulations

III.	Federation

§17.	Accounting Principle of the Federation

§18.	Report on Unions

§18-2.	Classification of Asset Soundness of the Federation

§19.	Organizations for Off-Site Surveillance

§20.	Application

IV.	Mutual-Aid Project

§21.	Authorization of Mutual-Aid Regulation

§21-2.	Contents of Mutual-Aid Regulations

V.	Management Control

§22.	Nomination of Delegate Manager

§23.	Due Diligence of Asset

§24.	Opinions on Management Normalization

§25.	Request for Designation as Insolvent Financial Institutions

§26.	Delegate Managers' Duties, Etc.

§27.	Termination of Management Control

§28.	Action against a Person Violating Laws and Regulations

§29.	Business Performance Report

§30.	Application of Articles of Incorporation of Unions

VI.	Supplementary Clauses

§31.	Consignment of Business

§32.	Detailed Matters

Addenda

Enacted on Oct. 22, 1999

Amended on May 12, 2000

Amended on June 23, 2000

Amended on July 20, 2000. FSC 2000-30

Amended on Oct. 6, 2000. FSC 2000-96

Amended on Dec. 29, 2000 FSC 2000-122

Amended on May 16, 2001. FSC 2001- 34

Amended on Dec. 19, 2001 FSC 2001-162

Amended on May 15, 2002 FSC 2002-29

Amended on September 23, 2002 FSC 2002-59

Amended on January 3, 2003 FSC 2002-91

CHAPTER I.

GENERAL PROVISIONS

§1. Purpose

The purpose of this Regulation is to prescribe details necessary for the enforcement of pertinent matters under the authority of the Financial Supervisory Commission (hereinafter, "the FSC") in respect of the supervision of mutual finance, as articulated under the Credit Union Act (hereinafter, "the Act"), its enforcement decree (hereinafter, "the Decree"), enforcement regulation (hereinafter, "the Regulation"), Act Concerning the Establishment of Financial Supervisory Organizations, its enforcement decree, and any other relevant statutes thereof.

§2. Definitions

The terms used herein this Regulation shall be defined pursuant to the Act unless defined under the following subparagraphs.

1. "Mutual finance" refers to the conducting of credit business and mutual-aid project by union.

2. A "union" is a non-profit corporation conducting the mutual finance.

3. A "federation" is the national federation of union established under the Act, Agricultural Cooperative Union Act, or any other laws or regulations of relevance concerning the mutual finance.

§3. Scope of Application

(1) The supervision of mutual finance shall follow this Regulation unless statue(s) or the FSC articulate separately.

(2) The provisions of Article 5, Article 5-2, Article 6-2, Article 7, Articles 12-2 through 12-4, Article 13, Chapter 4, Chapter 5, and Article 31 shall not be applied to the Agricultural Cooperative Union (referring to regional agricultural cooperative unions and regional livestock cooperative unions established by the Agricultural Cooperative Union Act (including the item union conducting credit businesses), hereinafter as such), Fisheries Cooperative Union (referring to fisheries cooperative unions in each district (including the unions conducting the credit businesses under the provisions of Article 5 of Addenda pertaining to the amended Act in the Fisheries Cooperatives Union Act of the Act No.4820), hereinafter as such). <Amended December 29, 2000; January 3, 2003>

§4. Methods for Conducting Credit and Loan Business

(1) President of the Federation shall determine matters pertaining to  methods for conducting the credit and loan and the deposit and savings businesses (hereinafter in this Article, "methods for conducting credit and loan business") in connection with the credit business of the union.

(2) Methods for conducting credit and loan business shall include matters under the following subparagraphs.

1. Matters concerning types of deposits·savings and loans.

2. Matters concerning rates of interest, methods of settlement and terms of deposits·savings and loans.

3. Matters concerning methods of payment and collection of principal and interest for deposits·savings and loans.

4. Other important matters concerning credit and loan business.

(3) In the event president of the Federation intends to create or modify methods for conducting credit and loan business, he or she shall report to the Governor of the Financial Supervisory Service (hereinafter, "the Governor") in advance.

(4) The Governor shall review methods for conducting credit and loan business reported pursuant to the provisions of paragraph (3). The Governor may also require president of the Federation to change or modify the methods for conducting credit and loan business concerned, when such change or modification is deemed necessary to ensure protection of users of union and maintenance of order in financial transactions, in which event president of the Federation shall comply with the requirement. <Amended on August 1, 2002>

CHAPTER II.

SOUND MANAGEMENT

§5. Excessive Borrowing of Funds

(1) The standards prescribed by the FSC under the provisions of Article 41 paragraph (2) subparagraph 1 of the Act shall correspond to any one of the following subparagraphs.

1. Borrowings from financial institutions regulated under Article 5-2 within twice of equity capital; and

2. Borrowings from credit businesses accounting of the Federation within three times of equity capital (excluding the loans from the Federation which are made within the limit of the union's credit deposits at the Federation or the merger supporting funds pursuant to Article 55 paragraph (2) of the Act).

(2) When the Governor approves due to the unavoidable reasons such as deposit withdrawal, a union(s) may borrow in excess of the ceiling under paragraph (1). <Amended on December 29, 2000>

§5-2. Financial Institutions from which Union may Borrow

"Any person(s) or institution(s) designated by the FSC" under Article 41 paragraph (1) of the Act refers to financial institutions under Article 6-2 paragraph (1) subparagraph 1 through subparagraph 11 and the Korea Deposit Insurance Corporation (hereinafter, "the KDIC") established by the Depositor Protection Act.

§6. Ceiling on Loans to a Single Borrower

(1) The ceiling on loans to a single borrower mentioned in Article 42 of the Act shall be based on the amount obtained by subtracting any amount of the following subparagraphs from the total amount of loans or bill discounts to a single borrower (hereinafter, "amount of loans to a single borrower"). <Amended on May 16, 2001>

1. Loans secured by deferred type deposits·accumulative deposits and paid in capital (restricted to the Credit Union only) in borrower's name of the union concerned;

2. Loans secured by paid-in amount of mutual-aid account in borrower's name of the union concerned;

3. Loans guaranteed by the Government·the Bank of Korea·financial institutions established under the Banking Act·the Korea Asset Management Corporation established under the Act Concerning the Effective Disposition of the Insolvent Assets of Financial Institutions and the Establishment of the Korea Asset Management Corporation, and the KDIC established under the Depositor Protection Act, and loans secured by securities issued or guaranteed by the same institutions; and

4. Loans guaranteed by the Agriculture Forestry Fisheries Credit Guarantee Fund or loans guaranteed by the Reserve Fund for Non-performing Loans from the Agricultural Forestry Fisheries Policy Funds (restricted to the Agricultural·Fisheries Cooperatives only).

(2) The president of the Federation may approve loans to a single borrower exceeding their ceiling in the case of any one of the following subparagraphs. <Amended on December 29, 2000 and May 1, 2001>

1. When the union assumes unavoidably the loan payment obligations as a result of the succession of obligations·inheritance·merger and acquisition of business;

2. When the union exceeds the ceiling on loans to a single borrower due to merger or business acquisition of the unions;

3. When necessary for the reservation of claims including the reservation purpose of accident; and

4. When the union exceeds the ceiling on loans to a single borrower by making loans to farmers and fishermen with intention of alleviating their debts based on the Special Act Concerning the Alleviation of Debts to Farmers and Fishermen of the Act No. 6435 (excluding the Credit Union).

(3) The president of the Federation may determine the ceiling on loans to a single borrower within the limit of one hundred million Won for the unions which deal with loans for policy fund (restricted to the Agricultural·Fisheries Cooperative Unions) with 15/100 of their equity capital being less than one hundred million won. <Amended on December 29, 2000>

(4) When a loan(s) already made within the ceiling on loans to a single borrower comes to exceed its ceiling due to a reduction in the union(s)'s equity capital caused by the refund of investments (including revolving funds and membership deposits), occurrence of losses, and other amounts of relevance, the union(s) must adjust the loans to meet the ceiling within three years (or by the maturity date if the maturity of the loans exceeds three years).

(5) For the unions (restricted to the Credit Union·the Forestry Cooperative Union) of which the equity capital falls, due to the refund of paid in capital and occurrence of losses, below the minimum level of total amount of paid in capital pursuant to the provisions of Article 14 paragraph (4) of the Act and Article 4 of the Enforcement Decree for the Forestry Cooperative Union, the ceiling on loans to a single borrower shall be 15/100 of the minimum level of total amount of paid in capital.

§6-2. Operation of Surplus Funds of the Union

(1) Financial institutions in which unions may deposit their surplus funds as prescribed under the provisions of Article 44 subparagraph 2 of the Act, correspond to the following subparagraphs.

1. Authorized financial institutions as under Article 8 and Article 58 of the Banking Act;

2. The Korea Development Bank as under the Korea Development Bank Act;

3. The Korea Industrial Bank as under the Korea Industrial Bank Act;

4. The Export-Import Bank of Korea as under the Act on the Export-Import Bank of Korea;

5. Agricultural cooperative unions or their national federation as under the Agricultural Cooperative Union Act;

6. Fisheries cooperative unions or their national federation as under the Fisheries Cooperative Union Act;

7. [Deleted December 29, 2000];

8. Postal organizations as under the Act Concerning the Postal Savings and Insurance; <Amended on December 29, 2000>

9. Trust companies as under the Trust Business Act;

10. Merchant banks as under the Merchant Bank Act;

11. Mutual Saving and Finance companies as under the Mutual Saving and Finance Company Act;

12. Management companies as under the Securities Investment Trust Business Act; and

13. Securities companies as under the Securities Exchange Act.

(2) Securities (excluding the securities designated by the Governor as having the character of financial support) which can be purchased with union(s)'s surplus funds pursuant to the provisions of Article 44 subparagraph 3 of the Act, correspond to the following subparagraphs. <Amended on December 29, 2000>

1. Securities pursuant to the provisions of Article 2 paragraph (1) subparagraph 1 through subparagraph 3 of the Securities Exchange Act;

2. Corporate bonds (restricted to the corporate bonds guaranteed by the financial institutions under paragraph (1) or the insurance companies of under the Insurance Business Act, or the corporate bonds with the evaluation of investment grade (grade higher than BBB-) given by more than two credit rating organizations (one in the event there are unavoidable reasons such as suspension of business of credit rating organizations) which are designated as credit rating organizations for unwarranted bonds by the Governor.; <Amended on December 29, 2000>

3. Beneficiary certificates issued by the management companies as under the Securities Investment Trust Business Act or the trust companies as under the Trust Business Act. Beneficiary certificates investing in stocks, however, shall be restricted to the certificates with 30/100 or less of the maximum proportion of stock investment as stipulated under the articles of the beneficiary certificates concerned; and

4. Issued stocks of the securities investment companies under the Securities Investment Company Act. This, however, shall be restricted to 30/100 or less of the maximum proportion of stock investment as stipulated under the articles of the securities investment companies concerned.

(3) The maximum ceiling for the purchase of securities regulated under paragraph (2) subparagraph 3 p or subparagraph 4 must be within 100/100 of the equity capital of the union(s) as of the end of the business year. <Amended on December 29, 2000 and May 16, 2001>

§6-3. Management of Redemption Reserves

(1) The redemption reserves deposited at the Federation pursuant to the provisions of Article 43 paragraph (2) of the Act shall be managed by the methods corresponding to any one of the following subparagraphs.

1. Loans to union(s);

2. Deposit into financial institutions pursuant to Article 6-2 paragraph (1);

3. Purchase of securities pursuant to Article 6-2 paragraph (2); and

4. Loans to the KDIC as under the Depositor Protection Act.

(2) The Federation may dispose of the profits from the management of the redemption reserves by any one of the following methods.

1. Payment of the interest on the redemption reserves;

2. Payment of management expenses for the redemption reserves; and

3. Any other methods decided on by the general meeting of the Federation.

§7. Special Cases on Surplus Fund Management

(1) In the event a union intends to acquire beneficiary certificates of a securities investment trust or stocks of a securities investment company for the purposes of entrusting a trustee company established under the Securities Investment Trust Act or an asset management company established under the Securities Investment Company Act (hereinafter, "the asset manager") with asset management, each of the following standards shall be complied with.

1. That is shall be a securities investment trust company established under Article 33 paragraph (2) of the Securities Investment Trust Act, or a securities investment company established under Article 79 paragraph (1) of the Securities Investment Company Act, whose beneficiary or shareholder shall each be a single merchant bank, securities investment trust, or a securities investment company (hereinafter, "the privately placed single fund");

2. That the asset management guidelines specifying the purpose of asset management, operating strategy such as major investment targets, investment restrictions, performance assessment, and termination of contract, among others, shall be observed;

3. That the following items shall be included in the internal regulations or guidelines under Article 16-3;

a. Matters pertaining to the appointment and dismissal of the asset manager;

b. Matters pertaining tot he asset manager's asset management performance and results; and

c. Matters needed for building organization and systems in connection with other surplus fund management.

(2) In the event the union holds "the privately placed single fund's beneficiary certificates or stocks," the assets of the privately placed single fund in question shall provide the basis for the application of the provisions of Article 6-2 paragraph (2).  The same shall apply with respect to the union reaching any specific monetary trust agreement with a trust company established under the Trust Business Act in accordance with Article 3 paragraph (2) subparagraph (1) of the Enforcement Decree of the Trust Business Act.

(3) With respect to a securities investment trust or a securities investment company other than the privately placed single fund, whose beneficiary or shareholder is a single union (hereinafter, "the publicly placed single fund"), the provisions of paragraph (1) subparagraphs 2 and 3 and paragraph (2) shall be applied mutatis mutandis. <Added January 3, 2003>

§8. Management Performance Analysis and Evaluation

(1) The Governor and the president of the Federation must analyze the management performance of a union and thereby supervise the soundness of management practice. <Amended on December 29, 2000>

(2) The president of the Federation may evaluate the management performance through the examination(s) of a union, and reflect the result(s) thereof in his supervisory and examining functions.

(3) The management performance evaluation(s) under paragraph (2) must be undertaken in respect of union(s) subject to the evaluation on the date of the examination under the categories of capital adequacy, asset soundness, management capacity, profitability, and liquidity, and the comprehensive evaluation(s) shall be undertaken by integrating the category-wise evaluation results. <Amended on December 29, 2000>

(4) Both category-wise and overall evaluations under paragraph (3) shall be classified into five ratings as 1st grade (excellent), 2nd grade (good), 3rd grade (mediocre), 4th grade (weak), and 5th grade (risky).

(5) The president of the Federation may report the management performance analysis·evaluation results under the provisions of paragraph (1) and (2) to the union(s) concerned.

(6) The chairman of a union, when notified of the management performance analysis·evaluation results under the provisions of paragraph (5), must report the notification to the Board of Directors.

(7) The president of the Federation shall mandate the detailed matters for the management performance evaluation pursuant to paragraph (2). In this case, the president of the Federation must have a prior consultation with the Governor. <Amended on December 29, 2000>

(8) The president of the Federation must submit the contents of the management performance evaluation under paragraph (2) to the Governor. <Amended on December 29, 2000>

§9. Management Disclosure

(1) A union must disclose the matters prescribed by each of the following subparagraphs within three months from the settlement date, pursuant to the provisions of Article 83-2 of the Act. When performing the first half year settlement, the union must disclose within two months from the settlement date of the first half year. <Amended on December 29, 2000>

1. Matters on organizations and manpower;

2. Matters on finance, and profits and losses;

3. Matters on supply and use of funds;

4. Matters on management indicators regarding soundness, profitability, and productivity and etc;

5. Matters significantly influencing management such as management policy, and risk management that are separately required by the Governor or the president of the Federation.

(2) The specifics of items and methods for the disclosure of matters prescribed under paragraph (1) shall be complied with the Uniform Management Disclosure Standards of Unions determined by the president of the Federation.

(3) A union(s) must disclose the relevant contents when corresponding to any one of the following subparagraphs. <Amended on December 29, 2000>

1. When a new bad loan exceeds the amount equivalent to 5/100 of the equity capital of the union(s) as of the end of the preceding month. However, the case where the amount of new bad loan is less than one hundred million Won shall be excluded;

2. When the loss amounts, due to financial accident, to more than 5/100 of the equity capital of the union(s) as of the end of the preceding month or when the occurrence of such loss is anticipated. However, the case where the amount of loss is less than one hundred million Won shall be excluded;

3. When the loss amounts to more than 5/100 of the equity capital of the union(s) as of the end of the preceding month by the reasons including a lost civil lawsuit. However, the case where the amount of loss is less than one hundred million Won shall be excluded;

4. When a union received the improvement requirement regarding the employees of the union(s) from the Governor or the president of the Federation; and

5. When the occurrence of large loss or financial accident leads to the detriment of sound management or any foreseeable detriment thereof.

(4) A union(s) must disclose the matters determined by the Governor promptly after the reasons for disclosure occur pursuant to paragraph (3) in such ways as posting in the public hall for more than one month. <Amended on December 29, 2000>

(5) In the event a union makes disclosure of matters prescribed under paragraphs (1) through (4) without due diligence through false statement(s) or omission(s) of material facts or informations, the Governor or the president of the Federation may require the union or re-disclosure(s) or correction(s).

§10. Sale of Non-Operational Real Estates

(1) Non-operational real estate unavoidably acquired by a union(s) to be exempted from its debts following the provisions of Article 45 of the Act, must be sold by the ways including the consignment of sale to the Korea Asset Management Corporation or the open competitive bid within one year. <Amended on December 29, 2000>

(2) In the event the non-operational real estates are not sold by performing the open competitive bid under paragraph (1) more than once or an interested party requests of their sale, the union(s) may sell them by a private contract in accordance with the procedures determined by the president of the Federation.

§11. Standards for Classification of Asset Soundness

(1) A union(s) must classify the soundness of its holding assets under the following subparagraphs pursuant to the provisions of Article 83-3 of the Act based on the standards determined by the Governor at the end of every quarter (the evaluation on the securities shall be carried out on the regular basis of every month in principle, and the closing price of the evaluation date shall be applied.). The union(s) shall, however, follow the Governor and the president of the Federation when they request otherwise. <Amended on December 29, 2000>

1. Suspense payments (hereinafter, "suspense payments in nature of credit") made to draw the loans and discounts on bills (hereinafter, "loans") of the following items and the loans concerned;

(a) Mutual finance loans;

(b) Policy fund loans; and

(c) Mutual-aid loans.

2. Securities;

3. Suspense payments;

4. Credit card advances; and

5. Amount receivables.

(2) The asset soundness under the following subparagraphs  of the paragraph (1) shall be classified into the five different categories of "normal", "precautionary", "substandard", "doubtful", and "estimated loss", while the securities shall exclude the category of "substandard" and the suspense payments (exclusive of the suspense payments in nature of credit) shall exclude the category of "precautionary" and "substandard".

(3) "A bad loan" under the provisions of Article 2 subparagraph 5 item (b) of the Act refers to a loan classified as doubtful and estimated loss, and to the suspense payments in nature of credit.

(4) The loans prescribed under paragraph (1) subparagraph 1 should be classified on the basis of aggregated loans per debtor in principle. However, the loans can be classified in separation from the aggregated loans per debtor in the event the Governor independently determines the categories with a consideration of various matters including financial status, cash flow, profitability, and transaction history of the clients. <Amended on December 29, 2000>

(5) The assets determined under paragraph (1) subparagraph 2 through subparagraph 5, shall be classified according to their dealing standards. <new provision December 29, 2000>

(6) The Governor and the president of the Federation may examine the adequacy of asset soundness classification and loan loss provisioning accumulation and require the corrections thereof when determining their inadequacy .

§12. Soundness Ratio

(1) Pursuant to the provisions of Article 83-3 of the Act, a union(s) must maintain the soundness ratio determined under the following subparagraphs. <Amended on December 29, 2000>

1. Ratio of net capital to gross assets: 2/100 or more

2. Ratio of loan loss reserves: 100/100 or more; and

3. Ratio of reserve for retirement allowances: 100/100 or more.

(2) The criteria on the calculation of ratios under paragraph (1) shall be determined by the Governor.

§12-2. Request for Improvement of Financial Status

(1) Where a union is applicable under any one of the following subparagraphs, president of the Federation shall request for improvement measures for financial status such as recommendation for merger, disposition of holding assets, and reduction of organization  (hereinafter, "improvement measures for financial status") concerning the union concerned pursuant to the provisions of Article 89 paragraph (4) of the Act.

1. When the ratio of the net capital to the gross assets determined under Article 12 paragraph (1) subparagraph 1 is adjudged to be 0/100 or below; <Amended on December 29, 2000>

2. When the overall rating grade under the provisions of Article 8 after the management performance analysis·evaluation, is adjudged to be the 4th grade (weak) or below;

3. When the overall rating under the provisions of Article 8 is the 3rd grade (mediocre) or above and the capital adequacy or the asset soundness rating is adjudged to be the 4th grade (weak) or below; and

4. When it deems obvious that a union(s) shall fall below the standards under subparagraph 1 due to the occurrence of large amount of financial accident or bad loans.

(2) The measures for the improvement on financial status refer to the measures corresponding to a part or all of the following subparagraphs.

1. Recommendation for merger;

2. Restriction on holding risky assets and disposition of assets;

3. Downsizing the organizations and reduction of employees;

4. Closure·merger or the restriction on new establishment of branch offices;

5. Restriction on interest rates of deposits;

6. Request for the replacement of the executive staff;

7. Curtailment of operating expenses;

8. Reduction of paid in capital and new increases

9. Restriction on the dividends.

(3) The president of the Federation, as a result of the analysis·evaluation under the provisions of Article 8, may recommend merger to the union(s) corresponding to any one of the following subparagraphs within a specified period of time. For the subparagraph 2, the asset size shall be evaluated as of the end of the previous month to the date of merger recommendation. <Amended on December 29, 2000>

1. A union(s) whose gross assets (excluding borrowings) decrease and losses accumulate for three consecutive business years;

2. A regional union(s) (with total assets worth five billion Won or less) and an institutional union(s) (with total assets worth three billion Won or less) in operation for more than five years, recognized as that a normal business operation is deemed difficult due to a petty asset size; and

3. A regional union(s) whose sound business operation is deemed difficult because its jurisdiction overlaps with or is too close to other unions based in the same city (without ward offices underin), county, or ward, placing the regional union(s) concerned in excessive competition with its or their competitors.

(4) Where a union temporarily failing to meet requirements under any one of the subparagraphs of paragraph (1) is deemed capable of fulfilling the requirements within a short period of time, or in light of satisfying circumstances otherwise, president of the Federation may suspend improvement measures for financial status, which shall not exceed one year period.

(5) The president of the Federation may terminate the fund support from the Federation or withdraw any previous fund support from a union(s) when the union(s) does not, upon the request to take such measures, take the measures for the improvement on financial status under paragraph (1) faithfully, and in the event normal management of the union(s) deems difficult, the president of the Federation may propose the management control process in accordance with the provisions of Article 86 paragraph (1) subparagraph 4 of the Act. <Amended on August 1, 2002>

§12-3. Submission of Plan for Financial Status Improvement

(1) A union(s) must submit a plan reflecting the contents including the financial status improvement (hereinafter, "plan for the financial status improvement") to the president of the Federation with an agreement from the Board of Directors within one month after the receipt of request of the measures for the financial status improvement under the provisions of Article 12 paragraph (2) subparagraph 1. <Amended on December 29, 2000>

(2) The president of the Federation may conduct the management status investigation with respect to the union(s) concerned for the purposes of reviewing the feasibility of the financial status improvement plan. <Amended on December 29, 2000>

(3) In the event a union(s) on the request of measures for financial status improvement does not submit the financial status improvement plan or submits an inadequate financial status improvement plan, the president of the Federation may request the union(s) concerned to perform a part or all of the measures prescribed under Article 12-2 paragraph (2) within a specified period of time. <Amended on December 29, 2000>

(4) A union(s) which has submitted the financial status improvement plan under the provisions of paragraph (1), must submit a biannual performance report of the plan to the president of the Federation by the tenth day of the month following the end of the half-year term, and the president of the Federation may take necessary measures after the examination of its or their performance report. In case that the union(s) on the request of measures for financial status improvement has not performed the significant matters as in their financial status improvement plan, the president of the Federation shall urge the union(s) concerned to implement the plan within a specified period of time.

§12-4. Performance Period of Management Improvement Plan

(1) In the event a union is requested to take the measures for financial improvement, the performance period for its financial status improvement plan shall be within three years from the submission date of the plan.

(2) In the event a union upon request of the measures for financial status improvement, makes a substantial improvement in its financial conditions through an early achievement of the important matters in its financial status improvement plan such as increase of capital base or resolution of bad asset, the president of the Federation may lighten or exempt the contents of the improvement measures thereof.

(3) When it is recognized that a union upon request of the measures for financial status improvement has made a sufficient improvement in its financial conditions after the expiration of the implementation period of a financial status improvement plan, the president of the Federation must notify the union of the completion of the measures concerned.

§12-5. Management Review Committee

(1) Prior to making management recommendations pursuant to the provisions of Article 86 paragraph (1) subparagraph 4 of the Act or deciding on the feasibility of the capital structure improvement plans submitted pursuant to Article 12-3 paragraph 1, president of the Federation shall undergo the review by the Management Review Committee comprised of outside professionals, unless an emergency requires to do so otherwise.

(2) Specifics pertinent to the review, composition and the operation of the Management Review Committee under paragraph (1) shall be decided by the president of the Federation. <Added September 23, 2002>

§13. Scope of Union's Operation·Maintenance Expenses

"Liabilities recognized by the FSC as necessary for a union's operation·maintenance of a union" pursuant to the provisions of Article 21-5 paragraph (1) subparagraph 3 of the Decree correspond to any one of the following subparagraphs.

1. Expenses for application of provisional attachment and for a lawsuit inevitably paid for the measures of preservation of claims.

2. Other unavoidable expenses for a smooth operation of business such as cost for due diligence.

§14. Division of Accounts

(1) The accounts of union(s) shall be divided into the general account and the special account.

(2) The general account shall be divided into the credit business account and the non-credit business account.

(3) A union shall divide and calculate the following subparagraphs by the credit business account.

1. Fixed assets such as buildings·furniture used for credit business.

2. Common expenses such as building maintenance costs, reserves, and miscellaneous expenses related to the credit business.

§15. Diversion of Funds from Credit Business Account

When a union diverts the surplus funds of the credit business account into the non-credit business account including economic business and guidance business, the appropriate interest rate shall be applied to the diverted funds.

§15-2. Accounting Standards

(1) A union must make the accounting and financial statements adequately in accordance with this Regulation and the Standards for the Accounting of the Credit Business of the Mutual Finance Companies set by FSC.

(2) The matters not determined under this Regulation and the Standards for the Accounting of the Credit Business of the Mutual Finance Companies shall follow the terms mandated by the president of the Federation.

§15-3. Write-off of Insolvent Obligation

(1) When a union intends to write off the existing insolvent obligation, it must apply for the recognition of the insolvent obligation to the president of the Federation by two months before the end of every quarter.

(2) The president of the Federation must report to the Governor the result of recognition of the insolvent obligation applied for under paragraph (1), by the twentieth day of the following month after the end of each fiscal year.

(3) A union must indicate the balance of the insolvent obligation written-off under paragraph (1) in the footnote of the balance sheet as written-off obligation.

(4) Detailed matters necessary for the recognition of union's insolvent obligation and the Federation's write-off procedure of insolvent obligation shall be determined by the Governor.

§16. Risk Management System

(1) For prevention and efficient management of risks along with various business operation, a union shall build and operate a comprehensive risk management system, which can recognize, assess, monitor, and control the corresponding risk.

(2) For efficient risk management, a union shall set up and operate an adequate risk-bearing ceiling and transaction limit by departments or transactions.

§16-2. Risk Management Organization

(1) The board of directors of a union shall deliberate and decide on the matters necessary for risk management, such as approval of policies and strategies on risk management, and establishment and revision or regulations on risk management.

(2) For efficient performance of the approvals and decisions on risk management, a union shall establish and operate the risk management committee (hereinafter, "the committee"), which shall conduct the business under any of the following subparagraphs.

1. Establishment of policies and strategies on risk management.

2. Decision on bearable risk levels

3. Determination of risk ceilings and approval of exceeding the ceilings.

4. Report to the board of directors on the matters approved or decided by the committee.

(3) A union shall set up a risk management unit for comprehensive management of the risks which may occur in its business and support of the board of directors As for a working union and the union with the total assets of less than 300 trillion won, however, existing unit(s) or person(s) in charge may undertake this duties.

§16-3. Risk Management Regulations

Unions must establish and execute the internal regulations or the guidelines on risk management suitable for their own circumstances, including the basic policies, organization and procedures, ceiling management, internal control, and risk assessment and control.

CHAPTER III.

FEDERATION

§17. Accounting Principle of the Federation

The accounting of the Federation shall be made on the basis of the corporate accounting standards.

§18. Report on Unions

(1) President of the Federation shall submit a report on the business and assets of unions pursuant to the provisions of Article 83 paragraph (3) of the Act to the Governor.

(2) The Governor shall determine specific matters pertaining to the standards and procedures provided under paragraph (1).

§18-2. Classification of Asset Soundness of the Federation

The provisions of Article 11 shall be applied to the Federation. The soundness of loans (excluding a loan secured by credit deposits), extended to a union rated fourth grade or below in the management performance evaluation under the measurable indicator conducted every quarter, however, shall not be classified as "normal". <Amended on December 29, 2000>

§19. Organizations for Off-Site Surveillance

The president of the Federation shall exert efforts for the sound management of unions by establishing an organization for off-site surveillance to identify any problematic unions or any weaknesses in unions' management, through an analysis of a report on unions' management performance and financial status, and the quantitative evaluation on management performance, and thereafter take any other timely measures necessary for the sound management.

§20. Application

The provisions of Article 7, Article 12 paragraph (1) subparagraphs 2 and 3, Article 14 paragraph (1)·paragraph (3), Article 15, Article 15-2, Article 15-3 paragraphs (1), (3) and (4), Article 16, Article 16-2, and Article 16-3 shall apply with respect to the Federation mutatis mutandis, whereby "a union" shall be "the Federation" and "president of the Federation" shall be "the Governor". <Amended December 29, 2000; May 15, 2002; January 3, 2003>

CHAPTER IV.

MUTUAL-AID PROJECT

§21. Authorization of Mutual-Aid Regulation

(1) When intending to amend, modify or dispose the mutual-aid regulations (including instructions for mutual-aid project, mutual-aid provisions, mutual-aid fees and guidelines for calculating reserve funds) pursuant to the provisions of Article 97 of the Act, unions or the Federation must submit the application for authorization to the FSC.

(2) The detailed matters including the paper format of application documents for authorization under the provisions of paragraph (1) shall be determined by the Governor.

(3) Notwithstanding the provisions of paragraph (1), if the unions or the Federation amend the mutual-aid regulations to conform with the Regulation on the Supervision of Insurance Business, the mutual-aid regulations are viewed to have been authorized in accordance with paragraph (1). In this case, the specifications of the amendment must be reported in accordance with the terms mandated by the Governor. <Amended on December 29, 2000>

(4) In the event the mutual-aid regulations, reported under the second clause of paragraph (3), are adjudged to be inappropriate, the Governor may request the unions or the Federation to take corrective or complementary actions. <newly set on December 29, 2000>

§21-2. Contents of Mutual-Aid Regulations

(1) The mutual-aid regulations under the provisions of Article 97 paragraph (1) of the Act must include the matters under the following subparagraphs.

1. Matters concerning the operation of mutual-aid project

a. Types and scope of the mutual-aid project;

b. Procedure of concluding a mutual-aid agreement;

c. Matters concerning the parties related to mutual-aid agreement such as the operator and the subscriber of the mutual-aid project; and

d. Matters concerning the receipt and return of mutual-aid fees, and the payment of mutual-aid shares.

2. Matters concerning the mutual-aid agreement

a. Conclusion and validity of the mutual-aid agreement;

b. Reasons for paying the mutual-aid shares;

c. Repel, cancellation, and nullification of the mutual-aid agreement;

d. Reasons for immunity of mutual-aid project operator; and

e. Matters concerning mutual-aid clauses.

3. Matters concerning the mutual-aid fees

a. Calculation of mutual-aid fees;

b. Scope of calculating outstanding fees; and

c. Calculation of cancel returns.

4. Matters concerning mandatory reserves and other reserves

a. Deposits of mutual-aid fees·payment reserves, dividend reserves and other reserves of relevance; and

b. Special risk reserves.

5. Matters concerning mutual-aid welfare funds

CHAPTER V.

MANAGEMENT CONTROL

§22. Nomination of Delegate Manager

(1) When nominating the persons other than the employees or officers of the KDIC as delegate manager for the conduct of management control under the provisions of Article 86 paragraph (1) of the Act , the Governor must select a person(s) from one of the following subparagraphs.

1. officer(s) of the FSS;

2. officer(s) of the Federation; and

3. person(s) engaged in the finance·law or accounting business with deep knowledge and experience about the union(s) and other entities of relevance.

(2) In the event the number of nominated delegate managers under the provisions of paragraph (1) is two or more, the Governor may determine the scope of duties for each delegate manager.

§23. Due diligence of Asset

(1) The standards for the due diligence of asset under Article 86 paragraph (2) of the Act (hereinafter the Standard) shall be mandated by the Governor, and must include the matters under the following subparagraphs.

1. Asset evaluation standards such as loans, suspense payments, securities and fixed assets; and

2. Accounting standards such as adjustments of profit and loss.

(2) Delegate mangers shall evaluate the assets of unions following the Standards and make an adjusted balance sheet on the basis of its result.

(3) Delegate mangers must report the results of the due diligence of asset such as the adjusted balance sheet to the Governor pursuant to the provisions of paragraph (2).

§24. Opinions on Management Normalization

The Governor shall report the unions in excess of debts as a result of the due diligence of asset to the Federation, and he or she must hear the opinions from the president of the Federation on the possibilities of management normalization through the unions' merger or the Federation's loans.

§25. Request for Designation as Insolvent Financial Institutions

The Governor may, if necessary after the due diligence of asset, request the FSC or the KDIC of deciding on the designation of the relevant unions in excess of debts as insolvent financial institutions or financial institutions subject to insolvency under Article 2 subparagraph 5 or the provisions of Article 2 subparagraph 5-2 of the Depositor Protection Act.

§26 Delegate Managers' Duties, Etc.

(1) Where applicable under any one of the following subparagraphs, Delegate Managers shall submit statements of opinion to the Governor.

1. Submission of management normalization plan or disposition plan for illegal·insolvent loans;

2. Application for fund supports·borrowings;

3. Extension of management control period;

4. Termination of management control pursuant to the provisions of Article 27 paragraph (1) subparagraphs 1 and 3; and

5. Any other matters required by the Governor.

(2) Delegate Managers may require officers of union including chairman of plans for management rehabilitation by specifying a period of between two weeks and one month for the purposes of developing management rehabilitation plans pursuant to the provisions of paragraph (1) subparagraph 1. <Amended on August 1, 2002>

§27. Termination of Management Control

(1) The Governor must terminate the management control without delay when a union(s) corresponds to any one of the following subparagraphs.

1. When the amount of insolvent loans does not exceed the greater amount of equity capital or paid in capital, thus the requirements for management control have been eliminated;

2. When the union(s) becomes extinct after merger;

3. When processing the management normalization after successfully receiving loans from the Federation;

4. When the business license has been suspended pursuant to the provisions of Article 85 paragraph (2) of the Act;

5. When a bankruptcy decision is made on a union(s);

6. When the debt payment suspension towards the union(s) has been withdrawn pursuant to the provisions of Article 21-5 paragraph (2) of the Decree ; and <Amended on December 29, 2000>

7. When the Governor recognizes the necessity of the termination of management control.

§28. Action against a Person Violating Laws and Regulations

(1) In the event some actions, such as investigation into personal assets and prohibition of exits to foreign countries, are needed against employee(s)·officer(s) incurring losses to the union(s) and a person(s) violating laws and regulations after the due diligence of asset, the delegate manager(s) must propose this to the Governor.

(2) Delegate Managers must take measures for preservation of claims such as provisional attachment after conducting the investigation into personal assets of a person(s) violating laws and regulations in order to secure the obligations for illegal·insolvent loans, and must, when necessary, take any ex post measures.

(3) Delegate Managers may bring a lawsuit or lay a formal complaint before the prosecution against a person(s) violating laws and regulations in accordance with the standards for ex post measures on the result of examinations as determined by the FSS.

§29. Business Performance Report

Delegate Managers must report union(s)'s business performance to the Governor in accordance with the terms as mandated by him or her.

§30. Application of Articles of Incorporation of Unions

(1) The articles of incorporation of unions or the internal regulations shall be applied, when guiding·executing the unions' business or managing·disposing the assets, in respect of the matters not determined by the statutes, the FSC or the Governor. This, however, shall not apply when its application is illegal or inappropriate.

(2) Matters concerning the management control, not prescribed under paragraph (1), shall be subject to the terms mandated separately by the Governor.

CHAPTER VI.

SUPPLEMENTARY CLAUSES

§31. Consignment of Business

The holding of public hearings, at the time of unions' business license suspension, pursuant to the provisions of Article 98 of the Act or the requirement of correction regarding the amendment·modification·abrogation of the standard articles of incorporation or standard regulations pursuant to the provisions of Article 75 paragraph (2) of the Act, shall be consigned to the Governor.

§32. Detailed Matters

The Governor may prescribe the detailed matters necessary for enforcing this Regulation.

Addenda

(November 1, 1999)

§1. Effective Date

This Regulation shall be effective on November 1. 1999. However, Articles 14 and 15 shall be applicable from the business year started after January 1. 2000.

§2. Repealed Regulations

The regulation on supervision of the Credit Union shall be repealed.

§3. Interim Measures for Previous Dispositions and Actions

As of the enforcement of this Regulation, the actions previously performed by the FSC, the Governor or the president of the Federation pursuant to the regulation on supervision of the Credit Union shall, if the corresponding provisions are found in this Act, be deemed to have been imposed or performed by the FSC, Governor or the president of the Federation pursuant to this Regulation.

§4. Interim Measures for Ceiling on Loans to a Single Borrower

(1) Notwithstanding the provisions under Article 6 paragraph (3), the president of the National Livestock Cooperatives Federation may determine the ceiling on loans to a single borrower, separately for the Livestock Cooperative Union with the equity capital less than two billion won, within the limit of two hundred million won.

(2) The ceiling on loans to a single borrower pursuant to paragraph (1) shall be applicable by June 30, 2000.

(3) In the event the loans to a single borrower with the approval of the president of the Federation prior to the effective date of this Regulation, come to exceed the ceiling on loans to a single borrower after enforcing this Regulation, such loans exceeding their ceiling must be withdrawn by the maturity date.

§5. Interim Measures for Management Performance Evaluation

The management performance evaluation for the Credit Union through the examination set under Article 8 paragraph (2) shall be applicable from January 1, 2000, and that for the unions under the provisions of Article 95 paragraph (1) of the Act shall be applicable from January 1, 2001.

§6. Interim Measures for Soundness Ratio

(1) The ratio of the Credit Union under Article 12 paragraph (1) subparagraph 2 shall be 40/100 or more by the end of 1999, 70/100 or more by the end of 2000, and 100/100 or more by the end of 2001, and the ratio of the unions regulated under Article 95 paragraph (1) of the Act shall be 50/100 or more by the end of 2000, 75/100 or more by the end of 2001, and 100/100 or more by the end of 2002. <Amended on December 29, 2000>

(2) The ratio of the Credit Union under Article 12 paragraph (1) subparagraph 2 shall be 90/100 or more by the end of 1999 and 100/100 or more by the end of 2000, and the ratio of the unions under the provisions of Article 95 paragraph (1) shall be 90/100 or more by the end of 2000 and 100/100 or more by the end of 2001.

Addenda

(May 12, 2000)

§1. Effective Date

This Regulation shall be effective on May 12, 2000.

§2. Interim Measures for Ceiling on the Purchase of Beneficiary Certificates

In the event a union resells the beneficiary certificates with Daewoo corporate bonds included in its portfolio as of August 12, 1999, and then purchases the beneficiary certificates which invest in stocks, those purchased certificates in question shall be excluded when calculating the purchase ceiling determined under Article 6-2 paragraph (2) subparagraph 3 p until the date of maturity.

Addenda

(June 23, 2000)

§1. Effective Date

This Regulation shall be effective on June 27, 2000.

§2. Interim Measures for Net Capital Ratio

(1) The net capital ratio under Article 12 paragraph (1) subparagraph 1 of the unions established prior to the effective date of this Regulation shall be 0/100 or more by the end of 2000, 1/100 or more by the end of 2001, and 2/100 or more by the end of 2002.

(2) The net capital ratio under Article 12-2 paragraph (1) subparagraph 1 shall not be applied, for three years after the establishment date (merging date), to the unions established after the effective date of this Regulation (including the merged unions).

§3. Exceptions to the Operation of Surplus Funds of Unions

Notwithstanding the provisions under Article 6-2 paragraph (2) subparagraph 2, when reselling the beneficiary certificates with Daewoo corporate bonds included in its portfolio as of August 12, 1999, the unions may, with the corresponding amount to the re-sale of certificates, purchase the subordinated bonds issued by the securities companies that repurchase the beneficiary certificates concerned.

§4. Exceptions to the Application of Interim Measures for Soundness Ratio

The provisions of Article 6 of the Addenda in this Regulation enacted by the FSC on October 22, 1999 shall not apply to the Federation.

Addendum

(October 6, 2000)

§1. Effective Date

This Regulation shall be effective on the date of promulgation.

Addenda

(December 29, 2000)

§1. Effective Date

This Regulation shall be effective on January 1, 2001.

§2. Repealed Regulations.

At the same time as this Regulation becomes effective, "the Regulations on the Mutual Finance Business (enacted by the FSC on August 6, 1999)" shall be repealed.

§3. Interim Regulations Relating the Operation of Union's Surplus Funds on Securities

Notwithstanding the revised provisions of Article 6-2 paragraph (2), the securities in nature of financial support purchased as unions' surplus funds following the previous provisions, may be reserved until the maturity date of the same securities.

Addenda

(May 16, 2001)

§1. Effective Date

This Regulation shall be effective on the date of promulgation.

§2. Interim Measures for Ceiling on Loans to a Single Borrower

Notwithstanding the revised provisions of Article 6 paragraph (1), the policy loans extended before the effective date of this Regulation shall be excluded when calculating the ceiling on loans to a single borrower until the maturity date.

§3. Interim Measures for Ceiling on Purchase of Beneficiary Certificates and Stocks Issued by Securities Investment Companies.

In the event the unions hold the securities in excess of the purchase ceiling prescribed under Article 6-2 paragraph (3) at the time of enforcing this Regulation, they must not purchase any additional securities until the excess is disposed of.

Addenda

(December 19, 2001)

§1. Effective Date

This Regulation shall be effective on the date of promulgation. The amended provisions of Article 4, however, shall be effective on the date when president of the Federation determines methods for conducting credit and loan business.

§2. Creating Methods for Conducting Credit and Loan Business

President of the Federation shall report on methods for conducting credit and loan business pursuant to the amended provisions of Article 4 within three months from the date of amendment of this Regulation.

Addendum

(May 15, 2002)

This Regulation shall be effective on the date of promulgation

Addenda

(September 13, 2002)

§1. Enforcement Date

This Regulation shall be effective on the date of promulgation.

§2. Interim Measures Following the Establishment of the Management Review Committee

President of the Federation shall establish the Management Review Committee pursuant to the amended provisions of Article 12-5 by September 30, 2002.

Addenda

(January 3, 2003)

§1. Enforcement Date

This Regulation shall be effective on the date of promulgation.

§2. Applicable Cases

With respect to the application of the amended provisions of Article 7 to the privately or publicly placed single funds established prior to the enforcement of this Regulation, Article 7 paragraph (1) subparagraph 2 shall apply with respect to the acquisition of beneficiary certificates or stocks of the privately or publicly placed single funds following the enforcement of this Regulation.

§3. Interim Measures for Special Cases on the Surplus Fund Management

The union in excess of the investment ceilings stipulated under the amended provisions of Article 7 paragraph (2) upon the enforcement of this Regulation shall ensure that the ceilings are observed within 3 months from the enforcement.