Table of Contents
Executive Summary
Korea’s securitisation market did not evolve gradually through market experimentation, as in the United States or Australia. Instead, it emerged rapidly and deliberately in response to systemic crisis. Before 1997, securitisation was virtually absent from the domestic Korean financial system. Within a few years after the Asian Financial Crisis, it became one of the country’s most important financial restructuring tools.
This article traces the unique, crisis-driven development of Korean securitisation—from its near non-existence prior to 1997, through the enactment of the Asset-Backed Securitization Act (ABS Act) in 1998, to its role in balance-sheet repair, non-performing loan (NPL) disposal, and capital-market deepening in the 2000s.
1. Korea Before 1997: Why Securitisation Barely Existed
Prior to the Asian Financial Crisis, Korea had almost no domestic securitisation market. With the exception of a handful of offshore transactions involving foreign-currency assets, securitisation was effectively impractical under Korean law.
Structural Barriers
Several legal and institutional constraints prevented securitisation from developing:
- Commercial Code restrictions limited bond issuance by corporations to four times net assets, making special-purpose vehicles economically unviable.
- Trust law ambiguity allowed beneficial certificates only when trust assets were cash, creating uncertainty for asset-backed issuance.
- Foreign exchange controls made offshore SPV structures difficult or impossible for most originators.
- Assignment and perfection rules required individual obligor notice or consent, which was infeasible for large loan pools.
In short, securitisation was theoretically possible but economically irrational and legally risky.
2. The 1997 Asian Financial Crisis: Catalyst for Change
The Asian Financial Crisis exposed deep vulnerabilities in Korea’s financial system:
- Over-leveraged conglomerates (chaebol)
- Banks burdened with non-performing loans
- Severe liquidity shortages
- Loss of investor confidence
Policymakers urgently needed mechanisms to:
- Remove bad assets from bank balance sheets
- Restore credit flows
- Rebuild confidence in capital markets
Securitisation—largely absent before—was re-evaluated as a systemic solution rather than a niche financing technique.
3. The ABS Act of 1998: A Legal Reset
In September 1998, Korea enacted the Act Concerning Asset-Backed Securitization (the “ABS Act”), marking a clean legal break from the pre-crisis regime.
What Made the ABS Act Transformational
The ABS Act did not merely clarify existing law—it overrode major legal barriers:
- Exempted securitisation SPVs from Commercial Code bond-issuance limits
- Allowed trusts to issue beneficial certificates backed by any asset type
- Simplified assignment and perfection of receivables through regulatory registration
- Introduced statutory true-sale safe-harbour principles
- Provided tax exemptions and reductions critical to economic viability
Unlike common-law jurisdictions, Korea defined securitisation statutorily, rather than allowing it to evolve purely through market practice.
4. A Crisis-First Market: NPLs and Public Policy
Korea’s securitisation market initially focused on non-performing assets, not prime consumer loans.
Key Originators
The ABS Act limited securitisation eligibility to:
- Financial institutions
- Government-linked entities such as KAMCO
- FSC-approved large corporations
This design reflected policymakers’ intent to control risk and prevent abuse while accelerating financial restructuring.
Securitisation became a state-supported balance-sheet repair mechanism, not merely a funding tool.
5. Structural Features: How Korean Securitisation Works
Securitisation Vehicles
The ABS Act permits three structures:
- ABS Special Purpose Companies (SPCs) – passive, bankruptcy-remote conduits
- Trust structures – issuing beneficial certificates
- Offshore SPCs – tightly regulated and functionally constrained
SPCs are deliberately limited:
- No employees
- No branches (domestic SPCs)
- No business beyond the securitisation plan
This ensured investors were exposed only to asset cash flows, not corporate risk.
6. Legal Innovations: Assignment, True Sale, and Insolvency Protection
One of Korea’s most important contributions to global securitisation law lies in statutory solutions to legal friction.
Assignment Simplification
- Registration with the Financial Supervisory Commission substitutes for obligor notice
- Assigned assets are protected from originator creditors once registered
True Sale Safe Harbour
If statutory requirements are met:
- Transfers are deemed sales, not secured loans
- Assets are isolated from originator insolvency risk
While courts retain ultimate authority, regulatory registration strongly influences insolvency outcomes
7. Tax Policy as Market Architecture
Tax treatment was decisive in Korea’s securitisation take-off.
Key incentives included:
- Corporate-tax deductions for ≥90% profit distribution
- Acquisition and registration tax exemptions for real estate
- Capital-gains tax reductions for restructuring assets
Without these measures, two-layer taxation would have rendered securitisation uneconomic—particularly for equity-like tranches.
8. Market Expansion in the 2000s: From Crisis Tool to Finance Technique
Once legal certainty was established, securitisation expanded beyond NPLs into:
- Mortgage loans
- Future receivables
- Infrastructure-related cash flows
- Corporate restructuring assets
Unlike the U.S., Korea’s market did not progress gradually from simple to complex structures. It leapt directly into advanced structured finance, guided by statute rather than precedent.
9. Conclusion: A Deliberate Market by Design
Korea’s securitisation market is best understood not as financial engineering imported from abroad, but as a policy instrument forged in crisis.
By:
- Rewriting commercial, trust, tax, and insolvency rules
- Embedding true-sale and bankruptcy remoteness in statute
- Aligning securitisation with national restructuring goals
Korea transformed securitisation into a foundational capital-market mechanism in less than a decade.
This experience demonstrates how legal architecture can accelerate financial innovation when market forces alone are insufficient—a lesson with enduring relevance for emerging and reforming financial systems.
