Korean finance reforms praised

Business Asia, May 17, 1999

Korea is well on its way to restructuring its troubled financial sector, with the Kim Dae Jung Government making unprecedented sacrifices to fast-track the process, a new study has found.

A new report by the East Asia Analytical Unit in Canberra found that Korea's government had drastically restructured the financial sector since the Asian financial crisis began.

The unit's executive director, Dr Frances Perkins, said the government's commitment was exemplified in the recent sale of two state-owned banks, a situation that would not have been considered pre-crisis.

"The sale of Korea First and Seoul Banks to US firm Newbridge Capital and the Hong Kong Shanghai Banking Corporation is a real sign of change," Dr Perkins said.

The report found the reforms would result in uncertain times for Korea's banks, with not all expected to survive.

It predicted the reforms would lead to mergers, with three or four universal super banks dominating the sector early in the next century.

In December 1997, the government introduced a range of reforms, including the establishment of a new Financial Supervisory Commission, implementing a freely floating exchange rate and abolishing interest rate ceilings.

Other key financial sector reforms introduced by the government from December 1997 to ensure the crisis did not occur again included:

* restructuring and merging unsound financial institutions, with seven banks sold or merged by April this year;

* allocating 74 trillion won (A$96 billion) to purchase non-performing loans at 40 to 50 percent of their value, with most already spent;

* recapitalising banks to improve capital adequacy ratios;

* improving financial market prudential supervision by raising banks' capital adequacy ratios, non-performing loan definitions and corrective action procedures to Bank of International Settlement standards; and

* introducing new international accounting standards and increasing the rights of majority shareholders.

The report stated that while much had been done to reform Korea's financial sector, the changes needed to be extended to non-bank financial institutions.

Fixing Korea's Banks Post-crisis status of Korea's bank and non-bank financial institutions

                        Share of
                         total
                         assets        Total
                        end 1997    institutions
                       (per cent)     end 1997

Commercial banks           54            26(a)
Merchant banks              9            30
Insurance companies        12            50
Securities companies        4            34
Investment trust           11             8
 companies
Leasing companies           4            25
Mutual savings              4           230
Credit unions               2          1653

                         Resolution

                                Merged
                                 with
                       Closed   closure

Commercial banks          5        3
Merchant banks           16       na
Insurance companies       4        1
Securities companies      6       na
Investment trust          3       na
 companies
Leasing companies        10       na
Mutual savings           18       na
Credit unions            40       na

                                      Institutions
                           Told         currently
                       institutions       under
                         end 1998     rehabilitation

Commercial banks           18(b)            7
Merchant banks             14              14
Insurance companies        45              16
Securities companies       28               2
Investment trust            5               5
 companies
Leasing companies          15              15
Mutual savings            230              31
Credit unions            1613              na

NOTE:

(a) Excludes trust accounts.

(b) Four of these banks have been nationalised. Seoul Bank, Korea first, Hanvit Bank and Chohung Bank.

Source: Financial Supervisory Commission, 1999a.