The sequence and consequences of bank restructuring in South Korea, 1998-2006: Too fast to adjust

Asian Survey

Volumn 49, Issue 2, 2009, Pages 243-267

  Kang, Myung Koo ^a  

^a CLAREMONT MCKENNA COLLEGE   (United States)

Author keywords

Asian financial crisis; Bank recapitalization; Financial restructuring; Non performing loan (NPL); State intervention

Indexed keywords

BANKING; CAPITAL FLOW; FINANCIAL CRISIS; FINANCIAL SYSTEM; INDUSTRIAL INVESTMENT; INDUSTRIAL RESTRUCTURING; PRIVATIZATION; STATE-BUSINESS RELATIONS;

ASIA; EURASIA; FAR EAST; KOREA; SOUTH KOREA;

EID: 65649134801     PISSN: 00044687     EISSN: 1533838X     Source Type: Journal    
DOI: 10.1525/as.2009.49.2.243     Document Type: Article

References (66)

1. Public Fund Oversight Committee (PFOC), , accessed July 17, 2007.
2. A nonperforming loan is a loan that is in default or close to being in default. Standards of defining loans as nonperforming have varied: Before the financial crisis in 1997, loans in default more than six months were classified as nonperforming loans, but after the crisis, loans in default more than three months are now classified as nonperforming loans.
3. Financial Supervisory Service (FSS), Monthly Financial Statistics Bulletin, various issues.
4. For example, Japan's NPL ratio to GDP was less than 6%, and the NPL ratio to total bank loans was 6.3% in March 1998, after the successive banking crises in 1997-98. But it took more than seven years to reduce the NPL ratio below 4% of total loans.
5. See Stanley Fischer, IMF Essays from a Time of Crisis: The International Financial System, Stabilization, and Development (Cambridge, Mass.: MIT Press, 2004).
6. For critiques on the contractionary policy prescriptions by the IMF, see Martin Feldstein, "Refocusing the IMF," Foreign Affairs 77:3 (March/April 1998), pp. 20-33
7. and Joseph E. Stiglitz, Globalization and Its Discontents (New York: W. W. Norton, 2002), especially ch. 4.
8. See Timothy Lane et al., "IMF-Supported Programs in Indonesia, Korea, and Thailand: A Preliminary Assessment," IMF Occasional Paper 178 (1999);
9. Asia Development Bank (ADB), Asian Development Outlook, 2004 (New York: Oxford University Press, 2004), pp. 31-38.
10. Central Europe displays the largest growth of foreign ownership in the banking sector during the 1990s, from less than 10% to over 50% between 1994 and 1999. Likewise, foreign ownership rapidly increased in Latin American countries during the 1990s. In regard to the economic analysis on the positive impacts of foreign entry in the banking sector, see Asli Demirguc-Kunt, Stijn Claessens, and Harry P. Huizinga, "How Does Foreign Entry Affect Domestic Banking Markets?" Journal of Banking and Finance 25:5 (May 2001), pp. 891-911
11. James R. Barth, Gerard Caprio, Jr., and Ross Levine, "Bank Regulation and Supervision: What Works Best?" NBER Working Paper Series 9323 (November 2002);
12. Heather Montgomery, "The Role of Foreign Banks in Post-Crisis Asia: The Importance of Method of Entry," ADB Institute Research Paper Series 51 (January 2003).
13. The BIS ratio originates from the agreement among the governors of the Group of 10 central banks in July 1988 in Basel, Switzerland, where the headquarters of the Bank of International Settlements is located, to apply a common minimum level of capital standards for regulatory supervision of internationally active banks.
14. Daedong Bank, Dongnam Bank, Dongwha Bank, Choongchung Bank, and Kyunggi Bank.
15. Cho Hung Bank, Hanil Bank, Commercial Bank of Korea, Korea Exchange Bank, Peace Bank, Kangwon Bank, and Chungbuk Bank.
16. Korea First Bank and Seoul Bank.
17. OECD, OECD Economic Surveys: Korea, 1998 (Paris: OECD, 1999).
18. Ibid., p. 77.
19. The FSC was established in April 1998, and it serves as a consolidated policymaking body for all matters pertaining to supervision of the financial industry as a whole. The primary function of the FSC is deliberating and resolution of important financial issues concerning the advancement of financial industry, the stability of financial markets, and the promotion of a sound credit system and fair trading practices.
20. The staff of the PFOC were mostly recruited from the MOFE, and they thought of the MOFE as their home organization to which they would return at some later time. Therefore, in practice, the MOFE makes decisions regarding the sale of public funds-injected financial institutions. Interview by author with a staff member of PFOC, tape recording, November 20, 2002.
21. OECD, OECD Economic Surveys: Korea, 1998, p. 78.
22. In the case of Finland (1991-93), the fiscal cost share of the GDP was 8%; in Norway (1987-89), 3%-4%; in the United States (1984-91), 2% -5%; and in Mexico (1995-97), 14%. For more detail, see OECD, OECD Economic Outlook 63 (Paris, June 1998), Box 1.7.
23. For detail, see KAMCO's Annual Reports, .
24. The funding sources of NPA bonds were composed of contributions from financial institutions, borrowed funds from the Korea Development Bank, and the issuance of KAMCO bonds.
25. KAMCO, Annual Report, 2002, p. 17.
26. Changyong Rhee, Corporate Restructuring Market in Korea: Past, Present, and Future, paper presented at the international forum on the Non-Performing Asset Fund, April 3, 2007, Seoul, Korea.
27. Jae-Ryong Chung and Eun-Joo Hong, Busil Chaekwon Jungli [Resolution of nonperforming loans] (Seoul: Samsung Economic Research Institute, 2003).
28. Ibid., pp. 99-102.
29. Ibid., pp. 91-98.
30. KAMCO, Annual Report, 2005, p. 12.
31. Considering the fact that KAMCO recovered more value with those purchased assets, it seems fair to say that KAMCO's rapid purchasing strategy was rational, even at high prices.
32. Asset-backed securities is a method of liquidating assets by issuing securities based on the future cash flow of underlying assets, and securitization is the process by which loans or other credit exposures are pooled and reconstituted into securities, with one or more classes or positions that may be sold.
33. Chung and Hong, Busil Chaekwon Jungli, pp. 219-56.
34. Rhee, Corporate Restructuring Market in Korea, p. 18.
35. KAMCO, Annual Report, 2002, pp. 18-19.
36. CRCs play a role like vulture funds, and KAMCO established three CRCs: KAMCO SG Investor Inc., KAMCO-LB Investor, and KAMCO-MS Investor. In 1999, only 16 CRCs existed, and KAMCO's CRCs made up more than 90% of the total investments of CRCs. However, the number of CRCs rapidly increased; 90 existed in 2001, and 103 in 2002. For details, see Chung and Hong, Busil Chaekwon Jungli, pp. 280-84.
37. A CRV is a paper company that collects NPLs held by creditor banks and workout companies, and normalizes the operations of companies subject to reorganization by entrusting the management of assets to a professional asset management company. The first joint venture CRV was established in July 2001.
38. Chung and Hong, Busil Chaekwon Jungli, p. 83.
39. Ibid., p. 128.
40. For more detail on NPL resolution methods adopted by KAMCO, see KAMCO's Annual Reports,
41. He Dong "The Role of KAMCO in Resolving Nonperforming Loans in the Republic of Korea," IMF Working Paper, Wp04/172 (Washington, D.C., 2004);
42. Chung and Hong, Busil Chaekwon Jungli, especially pp. 106-15.
43. Chung & Hong, Busil Chaekwon Jungli, p. 276.
44. Claims on the domestic real nonfinancial sector by monetary deposit banks as a share of GDP.
45. Claims on the domestic real nonfinancial sector by other financial institutions as a share of GDP.
46. Value of shares listed to the GDP.
47. Private domestic debt securities issued by financial institutions and corporations as a share of GDP.
48. See Franklin Allen and Douglas Gale, Comparing Financial Systems (Cambridge, Mass.: MIT Press, 2000).
49. For a cross-country empirical comparison, see Asl Demirgèuoc-Kunt and Ross Levine, Bank-based and Market-based Financial Systems: Cross-country Comparisons (Washington, D.C.: World Bank Development Research Group Finance, 1999).
50. See Masahiko Aoki and Hugh T. Patrick, The Japanese Main Bank System: Its Relevance for Developing and Transforming Economies (New York: Oxford University Press, 1994);
51. Takeo Hoshi, Anil Kashyap, and David Scharfstein, "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," Quarterly Journal of Economics 106:1 (1991), pp. 33-60
52. Joseph E. Stiglitz, "Credit Markets and the Control of Capital," Journal of Money, Credit, and Banking 17:2 (1985), pp. 133-52.
53. Joseph A. Schumpeter's term. Schumpeter used the term to describe the dynamic nature of the industrial mutation process in capitalism in which new consumers, new goods, new markets, and new forms of industrial organization "incessantly revolutionize the economic structure from within, incessantly destroying the old one, incessantly creating a new one." Joseph A. Schumpeter, Capitalism, Socialism, and Democracy 3rd ed. (New York: Harper Perennial, 1962), p. 83.
54. See Ekkehard Wegner and Christoph Kaserer, "The German System of Corporate Governance: A Model which Should Not Be Imitated," in Stanley W. Black and Mathias Moersch, eds., Competition and Convergence in Financial Markets: The German and Anglo-American Models (New York: Elsevier Science & Techno, 1998);
55. David E. Weinstein and Yishay Yafeh, "On the Costs of a Bank-Centered Financial System: Evidence from the Changing Main Bank Relations in Japan," Journal of Finance 53:2 (1998), pp. 635-72.
56. The Bank of Korea home page of statistics, , accessed July 18, 2007.
57. The FSS was established as an executive arm of the FSC in January 1999. The primary function of the FSS is examination and supervision of financial institutions, but it can extend to other oversight and enforcement functions as charged by the FSC.
58. The FSS home page is .
59. The Bank of Korea, Sample Survey on Household Loans (in Korean), April 2002, .
60. See Bank of Korea statistics homepage (), accessed July 18, 2007.
61. It remains controversial in Korea whether it was a wise choice to sell those nationalized banks to foreign vulture funds. In fact, many initial buyers of Korean banks who purchased them at discounted prices sold them to other foreign financial institutions within three years, after management was normalized.
62. The ceiling on shareholding by foreign investors was fully liberalized in May 1998, only after several months of the crisis. In May 1997, the ceiling was 6% for individual foreign investors, and total foreign investment could not exceed 23%.
63. As of December 2006, the share of foreign investors in major commercial banks are as follows: Kookmin bank (82.7%), Shinhan financial holding company (58.9%), Hana financing holdings (80.2%), Woori financial holdings (9.5%), Korea Foreign Exchange (76.9%), Korea Citi (Hanmi) bank (99.9%), SC Jeil bank (100%).
64. Bank of Korea, Foreign Participation in Domestic Banking Industry and Policy Implications (in Korean) (2004), .
65. He expressed that the crisis could be a "disguised blessing" for the Korean economy. See the speech delivered by President Kim at the International Conference on Democracy, Market Economy, and Development, February 26, 1999, Seoul, Korea.
66. This requires further future research.