Progress in Financial & Corporate Restructing & Future TasksSep 28, 1998

I. Overview

1. Underlying Principles for Financial Restructuring
- In accordance to international standards and procedures, resolution plans for nonviable financial institutions were developed. Others with a clear chance to return to normal operations will be fully supported as a way to strengthen competitiveness thus alleviate the credit crunch situation.

(1) Capital adequacy standards was the basis of identifying financial institutions to be resolved

(2) Required submission of management rehabilitation plans for those financial institutions that fail to satisfy prescribed capital adequacy standards

(3) Evaluation of management rehabilitation plans was conducted by an appraisal committee comprised of experts

(4) The Financial Supervisory Commission determined policies to be implemented after reviewing opinions from the appraisal committee

¡¤ Disapprovals: Resolution was pursued in a way that would minimize inconveniences to customers

¡¤ Conditional approvals: Required the submission of forceful self-rescue plans and implementation plans including replacement of management, after which the FSC closely monitors the satisfactory implementation of such plans

¡¤ Approvals: Support will be provided through the disposal of NPLs as well as other measures

(5) Policy schemes for the facilitation of normalization of financial institutions are formulated

O Business transfer (P&A): The focus was on providing financial support at a level sufficient to prevent the deterioration of the asset quality of the acquiring financial institutions

O Merger (nonviable bank + nonviable bank): The focus is on the swift creation of competitive and efficient leading banks

O Merger (sound bank + nonviable bank): Utilized as a means to resolve nonviable banks. However, the merged bank is provided with sufficient financial support so as to prevent the deterioration of the asset quality of the sound bank

¢¡ To build a climate that is conducive to the soundness of financial institutions, thereby inducing the accelerated restoration of the financial market's intermediary function and competitiveness of the financial industry

2. Underlying Principles for Corporate Restructuring
- Develop 5 major tasks toward solving structural problems and upgrading institutional settings to that of internationally recognized standards


¨ç Enhancement of transparency of corporate management

¨è Dismantling of cross guarantees

¨é Significant improvement of capital structure

¨ê Singling out core businesses and strengthening of cooperative relationship with SMEs

¨ë Enhancement of accountability of controlling shareholders and management
- Nonviable corporates will be subject to exit if it is deemed to lack the capability of making a profit even after the normalization of the credit situation
- Corporate restructuring will be driven by creditor financial institutions
- The workout concept will be at the center of the overall process
- Develop schemes to provide full support to sound SMEs
3. Achievements and Future Plans
- Improvements toward institutional setting for the facilitation of restructuring

O Establishment of prompt corrective actions system toward financial institutions

O Improvement in restructuring climate including streamlining of merger- related procedures and the prohibition of cross guarantees etc.

O Prevention of moral hazard problems and the enhancement of transparency of management, thereby improving market discipline
- Identification and resolution of nonviable corporates and nonviable financial institutions

O Nonviable corporates will be subject to exit if it is deemed to lack the capability to return to normal operations even after the normalization of the credit situation

O Nonviable financial institutions (banks, securities companies, insurance companies etc.) will be subject to exit

O Viable financial institutions will implement self-rescue plans as well as management improvement plans
- Schemes for support toward financial institutions pursuing normalization

O Develop plans toward resolution of NPLs

O Develop support plans for banks pursuing mergers or foreign capital inducement
- Workout programs

O Signing of corporate restructuring agreement (210 financial institutions)

O Installation of corporate restructuring coordination committee

O Utilization of advisory groups
- Future plans

O Continued monitoring of financial institution's normalization programs

O Enhancement of financial soundness through workout programs

O Adoption of global standards
II. Institutional Setting Improvements for Expedited

Restructuring


1. Institutional Setting Improvements Relating to Financial Restructuring
- Improvements in deposit insurance system: Reduction of scope of guaranteed principal amount so as to prevent the risk of moral hazard and to encourage customers to choose financial institutions with discretion

O As for accounts opened or deposits made after August 1, 1998, only the principal amount will be insured for accounts of 20 million won or more per person

O RP issued by banks and securities houses after July 25, 1998 and fidelity/surety insurance policies entered into after August 1, 1998 will not be covered under the deposit insurance system
- Strengthening of bank disclosure system (April, 1998)

O Introduce new disclosure items necessary for judging management conditions including the amount of non-performing loans

O Mandatory disclosure of first half-year preliminary audit results
- Strengthening of prudential regulation of foreign exchange businesses (July, 1998)

O Provisions to maintain mismatch ratio for current assets to current liabilities (90 days to maturity) of at least 70%

O Introduction of a comprehensive risk management system encompassing risks relating to foreign currency denominated loans, payment guarantees, securities, off-shore funding etc.
- Strengthening of loan classification standards and provisioning requirements (July, 1998)

O In accordance to international practices, classify loans in arrears of 3 months or more as substandard and below and loans in arrears of 1 month to 3 months as precautionary loans

O Raise provisioning requirement for precautionary loans from 1% to 2%

O Introduce provisioning requirements for CP, guaranteed bills and privately placed bonds belonging to trust accounts

O Introduce asset quality classification standards based on a forward looking approach starting from January 1, 1999
- Strengthening of prompt corrective actions system

¡¤ Bank: BIS capital adequacy ratio

¡¤ Securities companies: Operational net capital ratio

¡¤ Insurance companies: Solvency margin ratio

O Improvement of accuracy of assessment of capital adequacy through upgrading asset classification standards, provisioning requirement standards and accounting principles to international standards

O Preclude judgement-making of the regulatory bodies and instead activate prompt corrective actions as a mechanical procedure based on objective and clear-cut conditions
2. Institutional Setting Improvements relating to Corporate Restructuring
- Enhancement of transparency of corporate management

O Early introduction of combined financial statements (advanced by 1 year, 2000 ¡æ 1999) (Feb. 24, 1998)

O Mandate the introduction of a nominating committee for outside auditors at large corporates (Feb. 24, 1998)

O Strengthening of disciplinary measures toward outside auditors and persons involved in accounting-related issues (Feb. 24, 1998)
- Prohibition of cross guarantees

O Prohibition of new debt guarantees among affiliated companies within chaebols and the dismantling of existing debt guarantees by the end of March, 2000 (Feb. 24, 1998)

O Prohibition of bank's request for cross guarantees (April 1, 1998)
- Improvement of capital structure

O Relaxation of the ceilings on securities holdings at financial institutions to facilitate debt-equity swap (Sept. 14, 1998)

O Introduction of framework that will allow the establishment of mutual funds including corporate restructuring fund (Sept. 16, 1998)

O Introduction of limit on CP and privately placed bond holdings at financial institutions to prevent monopolization of funds by chaebols
- Identification of core business

O Incorporate restructuring plans, such as the mergers and acquisitions of affiliated companies, in the contents of the capital structure improvement agreement
- Strengthening of accountability of controlling shareholders and management

O Easing of preconditions to be satisfied for minority shareholder class action suits (Feb. 24 & May 25, 1998)

O Easing of preconditions concerning voting rights of equity stakes held by institutional investors (Sept. 16, 1998)

O Mandatory appointment of outside director at listed companies (Feb. 20, 1998)

O Appointment of outside directors and auditors as well as the registration of owner of business group as CEO of core business unit
- Improvement of corporate exit related regulations

O Amendment of bankruptcy and foreclosure related legislation including Corporate Reorganization Act etc. (Feb. 24, 1998)

O Abrogation of mandatory tender offer system (Feb. 24, 1998)

O Easing of restrictions on M&As undertaken by foreigners (Feb. 24, 1998)

O Exemption of special tax on disposition of assets for restructuring purposes (Feb. 24 & Sept. 16, 1998)


Financial Sector Restructuring


1. Fiscal Support


- The Korean government has emphasized that financial restructuring should in principle be funded by the financial institutions themselves. In practice, however, it is impossible to deny assistance to financial institutions. Given the current economic difficulties, turmoil in financial markets could trigger a crisis in all sectors of the economy. Also, it is extremely difficult for the financial institutions to raise funds in the bearish stock and properties markets. On the other hand, the government is fully aware that granting financial support creates a moral hazard problem on the part of financial institutions.
- The government's basic position, therefore, is that it will not financially support the financial institutions unless they undertake individual efforts to reduce costs and recapitalize through foreign investment. Banks are also required to write-down capitals of existing shareholders, while their management should take responsibility for their misdeeds. In return, the Korean government will make sure that financial support is sufficient enough to return solvency to the troubled financial institutions.
- The Korean government is planning to spend a total of 64 trillion won (including 14 trillion won already spent) to facilitate financial restructuring, of which 32.5 trillion won (including 7.5 trillion won already spent) will be used to finance the purchase of non-performing loans, while 31.5 trillion won (including 6.5 trillion won already spent) will be spent on recapitalization and deposit payment.
a. Purchase of Non-Performing Loans
- Eligible Financial Institutions: The Korean government will facilitate the disposal of non-performing loans for those financial institutions planning a merger or those whose rehabilitation plans have been approved by the Financial Supervisory Commission(FSC). Financial institutions falling under these categories are;
¡¤ Resolved and acquiring banks (5 pairs)

¡¤ Merged banks (4)

¡¤ Banks under rehabilitation plans (9)

¡¤ Fidelity/surety insurance companies under merger (2)


- Eligible Bad Loans
O All bad loans that fall into category of "Substandard Loans (those whose interest payments are more than three months in arrears) and below", will be purchased by KAMCO, in principle. Small loans of 10 million won or below, and bad loans held by offshore branches of Korean banks will be excluded. By doing so, the government will dispose of all the non-performing loans held by problem banks and 50% of non-performing loans held by sound banks.

- Purchase Price
O In the case of collateralized loans, KAMCO will pay 45% of the appraisal value of the collateral, excluding claims on wage and advanced lease payment. In the case of uncollateralized loans, KAMCO will pay 3% of book value. Long-term loans will be purchased at a discount rate of 45%, while the discount rate will be settled by the net present value method after the court decides the terms of repayment.

* Please refer to the attached file for details.