Policy Direction for Development and Reform in the Financial IndustryJul 14, 2000

At the Tripartite Commission meeting on July 12, FSC Chairman Yong-Keun Lee, who is also a special member of Tripartite Commission, reported “Policy Direction for Development and Reform in the Financial Industry.” The policy direction was based on the government’s view on the request of the Korea Financial Industry Union (KFIU) regarding financial reform.

The details are as follows;

1. Basic directions for financial policy
• The items below will be declared and enacted as an order of the Prime Minister or a decision of the Cabinet Council:
i. Remaining unnecessary or excessive legal regulations that restrict the managerial independence of banks will be abrogated in line with ongoing renovations of the regulatory framework in the nearest future.
ii. Management transparency and responsible management of banks will be guaranteed through the prohibition of outside interference, special favors and undue pressure, while the board of directors at banks in which the government is the majority shareholder will assume responsibility for all major managerial decisions.
iii. Decision-making or enforcement of government policies aimed at stabilizing financial markets will be undertaken through clear and transparent manner and procedures, such as documentation in order to avoid any suspicion or misunderstanding.

2. On the continuous promotion of financial reforms
• The second stage of financial sector reform and restructuring, which is aimed at enhancing the global competitiveness of domestic financial institutions, will be promoted and based upon the following principles:
i. Financial reform will be pursued and promoted based strictly on market principles.
ii. The government will actively provide support for financial reform, including the introduction of the financial holding company system, continuing reform of the financial market infrastructure, preferential treatment in granting licenses, and purchases of subordinated bonds (from financial institutions requiring additional injections of public funds).
iii. Banks into which public funds were not injected will actively pursue and promote rehabilitation efforts on their own.
iv. The government will assume a leading role in the restructuring of banks in which it is a major shareholder, including those into which public funds were injected.
• Specific measures to drive financial reform are as follows:

 Banks that were deemed unable to normalize their operations and management on their own as of end-June 2000, and banks that received direct injections of public funds from the government, will be required to submit revised self-rescue programs by the end of September 2000.

 The Management Evaluation Committee*, which is independent from the government, will assess the feasibility of the plans, and normalization will be pursued according to the evaluation of the committee.
* The designation of the chairman and the selection of the committee’s eight members are to be based upon their level of neutrality and impartiality (to the exclusion of the government’s influence).
i. Banks that were evaluated by the committee as able to clean up bad assets on their own and to survive for themselves will be allowed to rehabilitate according to their submitted plans.
ii. Other less healthy banks are required to take immediate measures to clean up their bad assets, prior to receiving injections of public funds to raise their BIS capital adequacy ratios above 10%. The banks will subsequently complete their rehabilitation efforts by becoming subsidiaries of financial holding companies.

3. There will be no forced mergers initiated by the government during the second stage of financial sector reform.

 The government will abide by the collective bargaining agreement reached between labor and management concerning reductions in organizational size and staff at financial institutions.

4. Concerning the partial deposit insurance system:
• The partial deposit insurance system will be launched according to schedule. However, prior to the introduction of the system, progress towards the completion of financial reform, the stability of financial markets and operations, and uneven distributions or concentrations in deposits among financial institutions will be reviewed.

5. Others
• Accrued losses (related to borrowings of the Korean Deposit Insurance Corporation and Hanarum Merchant Banking Corporation), for which the government is responsible for compensating banks, will be paid in the nearest future.
 Banks in the most urgent need of liquidity support will be paid first, while other banks will be adequately compensated for the payment delays.
• Payment procedures for the portion of bank losses that the government is legally responsible to cover (loans to Russia and guarantees issued by the Korean Export Credit Insurance Corporation) will be decided in the nearest future.

* Please refer to the attached file for details.