Bad Credit Equilibria with the Abnormally Utilized Commerical

The Paper shows why and how the excessive use of commercial paper by financial institutions and corporations contributed to the vulnerability of the Korean economy to external shocks. We review the unfolding process of the Korean currency crisis,focusing on the role of the commercial paper. We examine how the excessive utilization of commercial paper led to bad credit equilibria in both financial and corporate sectors. We investigate the underlying institutional and market factors leading to the abnormal utilization of commercial paper before the Korean currency crisis erupted in November 1997. The factors identified are: interest rate differentials between the commercial and merchant banking sectors; relatively lax regulation in the commercial paper market; corporations' preference of debt financing over equity financing due to the concerns of ownership, tax subsidies and sluggish equity market; and equity market; and lack of good credit rating agencies.Korean currency crisis, commercial paper, merchant banks

Korea: Blanket Guarantee, 1997

Korea entered the Asian Financial Crisis in August 1997 with highly leveraged firms and a banking system inexperienced in managing systemic risk. Korea faced a currency crisis and a banking crisis, as foreign banks froze credit to Korean commercial banks and merchant banks. On August 25, 1997, the Ministry of Economy and Finance (MOEF) announced that it would guarantee all Korean financial institutions’ foreign debt—both existing debt and new borrowings. Nonetheless, foreign lenders continued to withdraw credit from Korean financial institutions. On November 19, 1997, a newly appointed MOEF minister announced a suite of measures to promote foreign creditors’ confidence and bring US dollars back to Korean financial markets. Additionally, to facilitate the closure or mergers of troubled commercial banks and merchant banks, the minister said that the Korea Deposit Insurance Corporation (KDIC) would fully guarantee all deposits (principal and interest) of financial institutions until December 31, 2000. On November 27, 1997, the MOEF said that the government also would guarantee collateralized commercial paper to ease pressure on troubled merchant banks; it lifted this guarantee the following October. The blanket deposit guarantee reverted to a limited deposit insurance scheme as scheduled on January 1, 2001, covering up to 50 million Korean Republic won (KRW; USD 40,000) per depositor. The KDIC continued to guarantee 100% of non-interest-bearing settlement deposits until December 31, 2003. The Korean government ultimately guaranteed USD 22.1 billion in foreign debt, and all foreign liabilities were completely repaid by the end of the program on April 9, 2001. Through end-2000, the blanket deposit guarantee covered KRW 68.8 trillion in deposits. The KDIC ultimately paid KRW 19.2 trillion to depositors at a total of 236 financial institutions that failed, predominantly merchant banks

Financial intermediary distress in the Republic of Korea - Small is beautiful?

Taking the Korean experience as a laboratory experiment in systemic financial crises, the authors analyze distress in individual institutions among two groups of financial intermediaries. They pool together a group of large financial intermediaries (commercial banks, merchant banking corporations) and another group of tiny mutual savings and finance companies. Both the too-big-to-fail doctrine and the credit channel approach suggest that the probability of distress would be greater for small intermediaries. But the authors find that proportionately fewer small intermediaries were distressed than were large intermediaries. They offer two hypothetical explanations for this unexpected result: 1) Exchange rate exposure - a major shock to Korean intermediaries - was presumably negligible for the small financial intermediaries. 2) Small financial intermediaries allocated loans better, because of the"peer monitoring"natural to their mutual nature and deep local roots. Available data did not allow the authors to test the first hypothesis, but they did find support for the second one. Estimating a logit model, they find that the probability of distress was systematically smaller for the mutual savings and finance companies that stayed closer to their origins (for example, collecting many deposits as"credit mutual installment savings") and for those with a longer history of doing business in their local community.Payment Systems&Infrastructure,Banks&Banking Reform,Financial Intermediation,International Terrorism&Counterterrorism,Financial Crisis Management&Restructuring,Financial Crisis Management&Restructuring,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Financial Intermediation

Korea: Bank Recapitalization Fund

Following the collapse of Lehman Brothers on September 15, 2008, a number of foreign governments enacted stabilization measures to protect their domestic economies in the wake of the global credit crunch. The Bank Recapitalization Fund (the Fund), announced by the South Korean government on December 18, 2008, and implemented on February 15, 2009, was one such intervention intended to assist Korean commercial banks in strengthening their capital bases and thus restore normal lending practices between banks and nonfinancial institutions. Invoking its authority under Article 65, Section 3 (“Emergency Credit to Financial Institutions”), of Chapter IV of the Bank of Korea Act, the government committed up to KRW 20.0 trillion for the purchase of preferred shares, hybrid securities, or subordinated debt from participating banks. Each bank wishing to utilize the fund was required to sign with the Korean government a Memorandum of Understanding (MoU) stating its commitment to using the funds gained from the sales to support the real economy. Continued individual usage, interest rates, and restrictions were determined based on the institution’s adherence to the MoU terms. On March 31, 2009, the Fund purchased approximately KRW 4.0 trillion in hybrid securities and subordinated debt from eight Korean banks and financial institutions. By December 2011, the government had recovered KRW 2.8 trillion through bond sales and bank buyback arrangements. The remaining KRW 1.2 trillion was repaid to the government by August 2016, at which point the Fund ceased operations

Bank Loan-Loss Provisions: A study of Korean Commercial Banks

This paper studies the bank loan-loss provisioning behaviour of 16 Korean commercial banks over the 2006Q2-2011Q2 period using both bank-specific and macroeconomic variables. Two regression methods: Generalised Least Squares- Random Effects model and the Dynamic Panel Data Arellano-Bond model are applied. The empirical analysis on LLPs of Korean banks in this paper mainly focus on the following issues: 1) whether LLP is influenced by the income smoothing practice; 2) the relationship between LLP practice and the economic cycle; 3) whether Korean banks use provisions to manage their capital given the minimum regulatory capital requirements; 4) whether LLP level in Korean banks are affected by their provision level of the last period. Evidence of income smoothing practice, procyclicality is present but there is no evidence of capital management. The result also suggests Korean banks adjust provision level based on that of the previous year

Bank Loan-Loss Provisions: A study of Korean Commercial Banks

This paper studies the bank loan-loss provisioning behaviour of 16 Korean commercial banks over the 2006Q2-2011Q2 period using both bank-specific and macroeconomic variables. Two regression methods: Generalised Least Squares- Random Effects model and the Dynamic Panel Data Arellano-Bond model are applied. The empirical analysis on LLPs of Korean banks in this paper mainly focus on the following issues: 1) whether LLP is influenced by the income smoothing practice; 2) the relationship between LLP practice and the economic cycle; 3) whether Korean banks use provisions to manage their capital given the minimum regulatory capital requirements; 4) whether LLP level in Korean banks are affected by their provision level of the last period. Evidence of income smoothing practice, procyclicality is present but there is no evidence of capital management. The result also suggests Korean banks adjust provision level based on that of the previous year

Korean bank regulation and supervision: crisis and reform (a critical evaluation with recommendations).

PhDThis thesis presents a critical analysis and evaluation of the current Korean banking regulatory and supervisory system. The objective is to identif' continuing structural weaknesses of the Korean banking system and to suggest areas of regulatory and supervisory system reform. The focus of this analysis and evaluation is centred around the following three questions: (1) Who should be the regulator? (2) What substantive standards of supervision should be applied? and (3) Administratively, in what manner should these standarus be applied? Finally, the causes, responses, and implications for reform as to the recent Korean financial crisis are discussed. The Korean banking system has been characterised as a "governmental control system" for credit allocation. This system, with lax prudential regulation and supervision, creates inevitable problems for the banks. For example, Korean banks have been largely precluded from true market and commercially oriented practices and have been exposed to significant credit and other risks due to governmental policy directed lending and other non-commercially induced banking practices. The main theme of this thesis is that Korea's reformed and restructured regulatory and supervisory system should be structurally removed from undue governmental and political interference; that is, should be sufficiently divorced and protected from governmental economic policy objectives and, more generally, from objectives that are inconsistent with "safety and soundness" based banking regulatory and supervisory objectives and with market oriented practices. Balancing this structural independence and market orientation, a reformed and restructured system should provide a high degree of transparency and accountability. Reform should aim not only at establishing effective supervisory standards, but also at ensuring effective monitoring and enforcement. A first step to the reform is for the government to define and adhere to a primary policy objective of banking policy, i.e. "financial stability" through sound and effective Korean banking regulation and supervision. To achieve such financial stability, Korea will need to implement appropriate measures that can ensure that the banking system is "safe and sound", consistently with evolving international standards; that banks are free from undue governmental and political interference and control; and that the banking system operates within a competitive and commercially driven market environment. The financial crisis in 1997 has demonstrated many of the current weaknesses of the Korean financial system. The need for certainty of process, for a clear, realistic and transparent timetable for restructuring, and for an effective exit policy for troubled commercial banks, are some of the lessons to be learned from this crisis

Deregulation and efficiency: the case of private Korean banks

This paper examines the productive efficiency of a sample of private Korean banks over the 1985 to 1995 time period. The goal of the analysis is to identify the key determinants of Korean bank efficiency (inefficiency) following the program of deregulation initiated by the government in the early 1980s and augmented in the early 1990s. Using the stochastic frontier cost function approach, efficiency scores were determined for each bank in the sample. A second stage efficiency regression was then estimated to identify the key determinants of operating efficiency. In general, the results show that banks with higher rates of asset growth, fewer employees per million won of assets, larger amounts of core deposits, and lower expense ratios were more efficient. In addition, banks which branched nationwide were found to be more efficient. The financial deregulation of 1991 was found to have had little or no significant effect on the level of sample bank efficiency.Banks and banking - Korea ; Korea