Financial Sector Reform in South Korea

Financial Sector Reform was introduced in South Korea after the country experienced a financial crisis in 1998. Through this reform, the South Korean government aimed to reduce the debt and restructure the corporate governance of the banks.
Financial Sector Reform in South Korea had been adopted in 1999 as a part of their economic reforms. President Kim Dae-jung initiated the financial reform in that country after the financial crisis in 1998.

Reasons Behind Reform:
The corporate debt was increasing and so was the budget deficit.
The domestic financial organizations had compensated the deficits by borrowing from the foreign banks, which increased the external debts.
A huge pressure for repayment by the foreign banks had led the country towards a currency crisis.
The increasing debt of the chabeols caused administrative failure of the shareholders and creditor financial institutions.
The chabeols liberalized the ownership of the non banks which was one of the main cause for massive indebtedness and investment.

Reform Process:
Firstly, the South Korean Government made several attempts so that it could overcome the on going financial crisis. For the banks, the government announced a fiscal fund, that was equal to 30% of the Gross Domestic Product, and also provided some other facilities like, non-performing loan purchases, capital injections and depositor protections. The indisposed banks were closed, but their depositors had been kept under protection.

The government started to invite the foreign investors for re capitalizing the banks and strengthening its governance.
Public funds had been injected into the banks to decrease their debts. This process had the following features:
The existing managers were forced to resign and capital had been reduced.
The government had taken over the banks’ management and set some numerical targets.
The government was organizing the public funds by selling the nationalized bank’s shares to the private investors.
The Asset Management Company(AMC) bought the non performing loans, valued 20% of the Gross Domestic Product, at market price and disposed them of through direct sales and asset backed securities. The AMC was enticing the banks to sell their non performing loans so that it could form a market for the non performing loans.

Impact of Reform:
Because of the reform, the banks of South Korea were able to reduce their debts and expenditures.
The financial condition of the banks had been improved, and therefore, the banks were able to restructure their corporate governance.
The tendency of lending money from the chaebols by the banks had been reduced.
The service sector in South Korea started to increase their profits.
The government was able to make the labor market more flexible.


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Last Updated on : 26th June 2013


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