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Dec 15, 1998
- Strengthening Prudential Supervision & Regulations
- Ⅰ. Introduction1. Since the 1980s, while financial activities have become more complex and diverse at home and abroad under financial liberalization and globalization, uncertainty in financial markets has rapidly increased. Financial institutions became widely exposed to risks such as credit risk on which they had already begun to focus concern, including interest rate risk, foreign exchange risk, market risk and country risk. At the same time, as the volume of financial derivative transactions has sharply increased mainly due to the development of information technology, they have assumed even further risk.2. As we have seen through the example of the Barings case, the stability of the financial industry as a whole has deteriorated due to derivative transactions and their contagion effect. To cope with this instability, financial institutions have taken care to develop various advanced financial commodities, to establish the consolidated risk management system on the basis of market risk, and to employ elaborate risk management techniques, including Value at Risk (VAR).3. As advanced financial supervisory authorities such as the Office of the Comptroller of the Currency in the United States and the Financial Services Authority in the United Kingdom have changed their supervisory policies into "risk-focused supervision", many authorities in other countries are following suit. International organizations such as the Bank for International Settlements (BIS), the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS) are trying to establish and employ international standards related to risk management to secure the soundness of financial institutions. Perhaps the best example is the Core Principles for Effective Banking Supervision of the BIS.4. The need for stronger financial supervision is clear. Although Korean financial institutions have been able to continue to pursue high growth volume-orie
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Dec 11, 1998
- Reform of Accounting Standards in Korea
- 1. BackgroundSince the financial crisis evolved in 1997, there have been numerous demands for the reform of accounting and auditing practices in Korea. Among others, the IMF and World Bank required the Korean government to upgrade accounting standards and disclosure rules to meet international practices. To respond to these calls, in March 1998 the Financial Supervisory Commission (FSC) organized the Special Committee and charged it with the responsibility of reviewing current accounting and auditing systems and engineering the measures to reform the systems. After thorough reviews of the current systems and surveys of comments and suggestions of foreign institutions which have keen interests in Korean economy, the Special Committee recommended several reform measures including upgrading financial accounting standards to the level of international standards.Based on the Special Committee's recommendations and the agreements between the Korean government and the World bank, the FSC has undertaken the reform of accounting standards since May 1998. The reform process has been proceeded in several areas: (1) revision of financial accounting standards that are primary sources of Korean generally accepted accounting principles, (2) establishment of accounting standards for financial institutions, and (3) establishment of accounting standards for combined financial statements.In the reform process, the FSC’s primary goal was to achieve transparency, credibility and international comparability of Korean accounting standards. Hence, the FSC set as benchmarks the International Accounting Standards (hereafter "IAS") established by the International Accounting Standards Committee. The IAS, however, do not address all the accounting issues. Therefore, the US accounting standards were used as an alternative benchmark where the IAS do not exist or are not sufficient to address particular accounting issues. Employing the IAS or US standards as benchmarks made the revised financia
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Dec 07, 1998
- Agreement for the Restructuring of the Top 5 Chaebol
- Premise1. Ever since the outbreak of the economic crisis of a year ago, our economy concentrated its heart and soul toward quickly pulling itself out of the turmoil. Special attention was devoted to fixing the fundamental causes that brought about the economic crisis, which called for the overhaul of financial, corporate, labor and public sectors as well as implementation of relevant deregulation and foreign investment liberalization measures.Owing to the facilitated and bold implementation of financial sector restructuring, the financial market has been stabilized. On top of this, we now have a more harmonized labor-management relationship backed by a more flexible labor market, a more reliable social safety net, and with the privatization of the public sector as well as management improvement, public sector reform has also come a long way.2. Building on the 5 major principles for corporate restructuring agreed upon between president-elect Kim Dae-Jung and representatives of the 5 leading chaebol on January 13, 1998, corporate restructuring has also been pursued continuously. Legislative measures toward enhancing transparency of corporate management, unwinding of cross guarantees, strengthening of accountability of controlling shareholders and management have been completed.Furthermore, by lifting tax impediments, introducing the foreign investment inducement law, and fully opening the MA market to foreigners, the necessary institutional framework to facilitate restructuring is in place. 3. Riding on such institutional support, a large number of corporates were sold-off, exited, or reborn as new corporates. However, unfortunate to us all, in many instances existing management had to be replaced and unemployment rose significantly, causing economic players to suffer tremendous pain along the way. The top 5 chaebol are commended for their efforts toward pushing corporate restructuring. Especially they have derived voluntary business restructuring plan for 7 indus
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Dec 04, 1998
- Corporate Restructuring : Performance and Future Plan
- I. Underlying Principles and Direction1. Underlying Principles1.1 Complete Implementation of Five Major Tasksi On January 13, 1998 then President-elect Kim Dae-Jung together with major chaebol owners announced the implementation of five major tasks for corporate restructuring. These goals have been pushed forward aggressively with the aim to enhance transparency of corporate business practices to bring them into compliance with international best practices, thereby enhancing the global competitiveness of the Korean corporate sector.* The Five Underlying TasksÀ Enhancement of management transparency Á Elimination of cross guarantees Improvement of capital structure à Selection of core competenceÄ Strengthening of accountability of controlling shareholders and management1.2 Corporate Restructuring to Be Driven by Financial Institutionsi Major creditors financial institutions will take the leading role in implementing corporate restructuring policy.* For this purpose, the creditors and debtors, i.e., the lead creditor banks (LBs) and the largest sixty-four chaebol, signed capital structure improvement plans (CSIPs).1.3 Establishment of Fair Loss Sharing Practices· The Top Five chaebol (Hyundai, Samsung, Daewoo, LG, and SK) which have the capacity to absorb losses arising during the course of restructuring are expected to bear the associated costs which restructuring entails. Small and Medium Enterprises (SMEs) which are much too weak financially to take on such a burden will be supported by the creditor financial institutions with which they are affiliated.· The government will help improve banks’ capacity to push forward corporate restructuring efforts through various measures intended to facilitate restructuring within the financial institutions themselves, such as the disposal of non-performing loans (NPLs) as well as through support for mergers and acquisitions of financial institutions.1.4 Adoption of Workout Concept as Core Principle· In pursuing corpo
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Dec 04, 1998
- Progress and Prospects of Economic Reform in Korea
- Mr. Chairman,Distinguished Guests,Ladies and Gentlemen:It is my honor and pleasure to have this opportunity to share my thoughts on what Korea has accomplished since the crisis and remaining tasks for reforming our economy.About a year has passed since the crisis broke out in Korea, but the situation in Korea is already quite different. Usable foreign reserves have significantly increased to over 45 billion dollars and the composition of foreign debts has improved as well.Recently, the international community including IMF and the World Bank, praised impressive progress that Korea has made and foreign investors are coming back.Although I fully understand that there remains a lot more work to be done, let me very cautiously mention three major points which led such a remarkable progress.First, the reform has been driven by new leadership which is free from previous misconduct. The newly elected president Kim Dae Jung pledged full commitment to the market principle and made series of crucial decisions on how to react, what to do and what to not do.The newly organized Financial Supervisory Commission, headed by reform minded persons who are well equipped with theories and practices of both financial and corporate sectors but nothing to do with previous misbehavior, took charge of the whole process.Second, the restructuring program has been based upon internationally well recognized criteria and procedures. The problem faced and still facing is not cyclical but structural.Hence, we strictly excluded case by case approach but pursue full-scale fundamental reform.Moreover, we targeted the core of the problem first. For example, resolution of ailing banks was our top priority.Another example of sticking to the principle is the confirmation of the government not to handover Seoul and Korea First Bank to domestic chaebols, although it may restrict the eligibility for potential bidders and make the sale process more difficult.Finally and most importantly, the national consens
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Dec 01, 1998
- Bank Nonperforming Loans at end-September.1998
- As of end-September, 1998, total nonperforming loans (loans classified as either substandard, doubtful or estimated loss) of 22 commercial banks stood at 22.42 trillion won, representing a drop of 6.65 trillion won, or 22.9%, compared to total NPL of 29.77 trillion won at end-June, 1998. This leaves the NPL ratio at end-September, 1998 at 7.1%, a 1.5%p drop from the 8.6% recorded as of end-June, 1998. Total loans amounted to 314.54 trillion won at end-September, 1998.In the 3rd quarter of 1998, 2.62 trillion won worth of loans were reclassified as nonperforming owing to strengthening of loan classification standards (refer to [ Strengthening of Loan Classification Standards and Provisioning Requirements] below), whereas 4.45 trillion won were newly classified as nonperforming. Nonetheless, total NPL dropped during this period due to sale of NPLs worth 13.28 trillion won to the Korea Asset Management Corporation.* Please refer to the attached file for details.
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Oct 28, 1998
- Luncheon address by FSC chairman H.J.Lee
- President Werner D. Graessle of the EU Chamber of Commerce, President Jeffrey Jones of AmCham, Distinguished Guests, and Ladies and Gentlemen:I am glad to have this unique opportunity to talk about the progress in financial and corporate restructuring and future tasks.It is less than a year since the crisis broke out in Korea, but the situation in this country is already quite different, although difficulties are not yet over. Recently the international community including IMF and the World Bank highly praised the impressive progress Korea has achieved and foreign investors are coming back to Korea.After the outbreak of the crisis last December, the Government had to make crucial decisions on how to react, what to do and what not to do. Let me mention four points. First, the Government will not bail out non-viable financial institutions. Fiscal support will be provided to viable institutions only as a way to expedite their rehabilitation, but conditional upon the institutions' comprehensive self-rescue efforts and accountable loss-sharing to prevent moral hazard.Second, institutional settings including prudential regulation and accounting rules have to be strengthened by fully incorporating global standards. Whatever the ultimate causes are, there is no denying that the magnitude of current crisis was amplified by capacity-driven policy, loose market discipline and lack of transparency. Also, before the crisis, the scope of regulations for financial institutions was not adequate and the degree of its implementation did not comply with international standards. Third, corporate restructuring has to be pursued in tandem with financial restructuring. The NPL burden at financial institutions will not be lessened and sound management cannot be secured, unless the problem of corporate failures is solved. Therefore, non-viable corporates that are not able to make profits even under normal financial conditions are to be exited. On the other hand, viable corporates will recei
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Oct 26, 1998
- Standards for the combined financial statements
- 1. Introduction of the Combined Financial StatementsThe Korean accounting standards require firms that have subsidiaries to prepare consolidated financial statements. However, because of the unique chaebol ownership structure in Korea, several consolidated financial statements are issued within the same chaebol. Further, a parent-subsidiary relationship exists when a company as the largest shareholder directly or indirectly owns more than 30% of another companys voting interest. In contrast, an affiliate is any company that belongs to a chaebol regardless of the ownership relation. Therefore, an affiliate that is not a subsidiary of another affiliate is excluded from consolidated financial statements although it is under the common control of the chaebol. In order to address these issues, the Korean Congress passed a bill that requires combined financial statements for chaebols for fiscal years starting from January 1, 1999. The objectives of combined financial statements are to present financial positions, operating results, and cash flows of chaebols as a whole under the assumption that chaebol-affiliated companies constitute a single economic entity (the difference between consolidated financial statements and combined financial statements is depicted in figure 1).2. Due ProcessThe Standards for the combined financial statements has been promulgated after several deliberations of the Korea Financial Accounting Standards Committee (KFASC) and solicitations of opinions from interested parties. The KFASC comprising 11 members from academia, businesses, accountants, and government deliberated on the standard at each step of the following due process.- KFASC's deliberation on an action plan : January 1998- Discussion memorandum drafted: May 1998A Steering Committee was formed as an advisory committee in the process of drafting the discussion memorandum.- KFASC's deliberation on the discussion memorandum: end of May 1998- Exposure Draft released for public comments: Au
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Oct 26, 1998
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Oct 26, 1998
- Financial Support Schemes for SMEs
- The Banking Supervisory Authority (BSA) laid out detailed schemes concerning workout of small-and-medium enterprises (SMEs) on August 7th after which each bank was directed to identify financing needs, such as new loans, maturity extensions and debt-equity swaps, of both priority support SMEs as well as conditional support SMEs.As of end-September, financial support schemes for a total of 11,815 SMEs have been approved and these SMEs will be provided financial support in accordance to prescribed terms. Workout plans will be devised for SMEs that are identified as workout targets upon consultation with given SME.With financial support schemes as well as workout of SMEs being pushed forward on a timely schedule, liquidity and management problems faced by SMEs are expected to be resolved in a speedy manner.BSA will continue to monitor bank’s implementation of SME support schemes and will induce banks to swiftly devise schemes for those SMEs that are still without support schemes.STATISTICSCategorization of SMEsㅇ As of end-September, 1998, a total of 22,760 SMEs were categorized into the following 3 types- Priority support SMEs : 7,370 (decrease of 476 from end-June, 1998)- Conditional support SMEs : 13,985 (increase of 1,054 from end-June, 1998)- Others : 1,405 (decrease of 17 from end-June, 1998) SME Financial Support Schemesㅇ As of end-September, 1998, 12,930 SMEs, that is 60.5% of the total number of priority and conditional support SMEs, expressed desire to receive financial support- priority support SMEs : 5,477 out of total 7,370 (74.3%)- conditional support SMEs : 7,453 out of total 13,895 (52.3%)ㅇ Summary of financing needs submitted by SMEs- New loans : 7,195 SMEs involving 5.8 trillion won- Maturity extensions of loans or conversion to medium-long-term (3-5 yrs) loans : 6,190 SMEs involving 8.8 trillion won- Debt-equity swap : 22 SMEs involving 30 billion wonㅇ Summary of approved SME financial support schemes ; as of end-September, 1998 among 12,9
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Oct 26, 1998
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Oct 15, 1998
- FSC`s view on Moody`s review on the Korean banking industry
- - In a recent review on the outlook on the Korean banking system, Moody's cited that despite of earnest efforts undertaken by the government, due to external conditions, corporate bankruptcies, rising unemployment, uncertainties in assets value, credit crunch and high interest rates, there is concern for deterioration of asset quality of Korean banks and concluded that it continues to maintain a negative outlook on its ratings.- However, such content has overlooked most recent efforts including fiscal support extended to troubled banks and near-term prospects toward enhanced liquidity and lower interest rates. Also noteworthy is the statement referring to the possibility of sharp upward adjustment in the size of non-performing loans as a result of the introduction of revised loan classification standards effective July 1, 1998. This statement leads us to believe that the review was based on outdated information and is not in line with underlying circumstances.- As of end-June, 1998, total non-performing loans at financial institutions (banks and non-bank financial institutions) amounted to 63.5 trillion won, 10.2% of total loans. Taking into account revised loan classification standards, which define non-performing loans as loans overdue for a period of 3 months or more, total non-performing loans will increase by a maximum of 7 trillion won to a total of 70.5 trillion won, representing 11.3% of total loans. As such, estimates given in the review do not reflect an accurate representation of actual facts.- In sum, the recent review comes in conflict with the upbeat commentaries received from the IMF and other international institutions with regards to progress made toward Korea's restructuring program, subsequent to a recent series of presentations on the Korean economy in Washington, D.C. and New York.- On October 14th Mr. J. Dodsworth, Senior Resident Representative of IMF Seoul office pointed out at a Korea-EU Business Council meeting that the recent Moody's negat
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Oct 02, 1998
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Sep 28, 1998
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Sep 26, 1998
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Sep 19, 1998
- Merger of the Korea and the Hankuk Guarantee Insurance Co.
- Corporates, large and small, as well as individuals were hit hard by the stagnant domestic economy owing to the current financial turmoil. As a result, Korea Guarantee Insurance Company and Hankuk Fidelity Surety Company have been confronted with the worst management crisis ever since the start of operations.As a way to resolve serious management problems at the two companies and to return to normal operations in a timely manner, the two fidelity/surety insurance companies have decided to merge, aiming at the early recovery of the fidelity/surety insurance function and financial market stabilization.These two companies have decided to join together on an equal basis on November 25, 1998 and will install a merger steering committee to draw up other details and related work plans. On September 12, 1998, Korea and Hankuk had already submitted to the Insurance Supervisory Board a revised rehabilitation plan. It indicates not only merger plan, but also details on liquidity enhancement measures and self-rescue plans that include downsizing of staff and organizational structure, wage-cuts etc.This merger is to be pursued to accomplish the following,o to secure sufficient level of liquidity·uncollected claims will be sold to KAMCO, thereby providing the two companies with the opportunity to secure a sufficient level of liquidity, allowing operations to improve eventually and start recording surplus within the next two years·in several years the merged fidelity/surety insurance company will be able to attain solvencyo to restore public confidence and to continue to provide fidelity/surety insurance services to customers· with the recovery of public confidence, SMEs and individuals especially those lacking the ability to put up collateral will be supported as the merged company will be able to extend new policies to customers and to renew existing policies as usual.o to maximize management efficiency· by merging the two companies, unnecessary competition and an overlap of
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Sep 15, 1998
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Sep 11, 1998
- Merger between the Kookmin & the Korea Long Term Credit bank
- 1. The Highlight of the MergerKookmin Bank (“Kookmin”) and Korea Long Term Credit Bank (“KLB”) exchanged the Memorandum of Understanding and formally announced to proceed with the merger of the two banks at the convention center in the Korea Federation of Banks building on September 11, 1998.Mr. Dal-Ho Song, the President of Kookmin, and Mr. Sei Jong Oh, the President of KLB announced that the two banks have agreed on a voluntary merger to become a “super bank” which will overcome the adverse changes in the current environment surrounding Korean banking industry as well as play a pivotal role in the future economy of Korea.Kookmin and KLB have been taking up a leading position in retail consumer banking and wholesale corporate banking, respectively. Therefore, no other domestic consolidation could bring about greater synergy effect than the merger between these two banks.The two banks made a statement that, even after the merger, they will continue their efforts to seek for a strategic alliance with foreign partners in order not only to solidify their capital base but to enhance their operations system to an advanced one. They also stated that they will endeavor to minimize the government’s financial assistance for the financial restructuring by maximizing the size of the foreign capital inducement.2. A New Model of ConsolidationThe merger between Kookmin and KLB, both of which are regarded as the best in their respective fields, is the accouplement of a retail specialist and a corporate professional. This type of merger is unprecedented in the history of Korea’s banking industry. Unlike the other merger cases which mostly aimed for achieving a cost effectiveness, the combination of Kookmin and KLB is targeted to accomplish the amalgamation of each client base and the diversification of financial products.This merger will open a new era in the history of Korean banking foretelling the birth of a super sound bank that will lead the banking industry in
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Sep 09, 1998
- Meger between the Hana Bank & the Boram Bank
- On September 8, 1998, Hana Bank ranked 11th in terms of total assets, and Boram Bank, ranked 13th, have exchanged a Memorandum of Understanding for a merger between the two banks.The merger represents birth of a leading nationwide commercial bank with a competitive position in the international banking operations. The combination of Hana Bank's top ranking profitability and Boram Bank's top ranking customer satisfaction will allow the merged bank to provide quality services to its customers with an optimal level of satisfaction by equipping the combined network of approximately 250 branches nationwide with advanced financial products and services.To effectively meet the needs of middle to high income individual customers and small to medium sized corporates, the merged bank aims to become a Financial Services Group by the year 2002 with total assets of over KRW 100 trillion and total capital of over KRW 4 trillion by setting up businesses specializing in insurance, mortgage lending, mutual fund management, discount brokerage, asset management and investment banking either through MAs or establishment of subsidiaries.During the merger process, the government will extend its full and direct support to the two banks by means of purchasing much of its bad assets, thus improving both profitability and asset quality of the merged bank. Based on this combined profitability and asset quality, the Banks will consider promotion of an additional MA, increase of capital and acquisition of foreign capitals. Not only the merged bank will further increase its capital in addition to the recent acquisition of a foreign capital from an internationally reputable institution, IFC who has become the second largest shareholder of Hana Bank, but also will effectively utilize an overall risk management procedures adopted through IFC.In line with raising its profitability, the merged bank will adopt a system in which the corporate structure will be reorganized into independent business unit
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Sep 02, 1998
- Financial Restucturing in Korea
- The government will finalize core tasks relating to financial restructuring, including the extension of fiscal support, by the end of September and starting from October will implement measures to alleviate credit crunch and pursue normalization of intermediary function of the financial market.I. Bank Restructuring Plan1. 5 Resolved Banks- Assets/Liabilities due diligence, currently under progress, will be completed by September 25, whereas financial support will be provided to banks by the end of September.o About 2,800 employees, approximately 32% of acquired bank's total employees amounting to 8,950 (a total of 10,260 including temporary employees) will be taken over by the acquiring banks.¡¤ As of August 31, 1,517 employees of the acquired banks have signed employment contracts with acquiring banks.2. 7 Conditionally Approved Banks- Commercial Bank of Korea, Hanil Banko These 2 banks have submitted a merger application to FSC on August 25 and upon conclusion of related procedures, including announcement on request for creditors' discontent application, a shareholders' general meeting will be held for approval of merger on September 30.o Fiscal support will be provided for in order to prevent existing problems carrying over to the merged bank and to maximize synergy effect.¡¤ Management improvement measures which will have the effect of bringing productivity and earning potential of the merged bank up to that of advanced countries' banks will be required as a condition for fiscal support (productivity parameter represented by operational revenue per employee is to be utilized when setting level of layoffs required).- Cho Hung Bank, Korea Exchange Banko 2 banks are required to submit revised implementation plans including more detailed recapitalization and merger plans by August 31.o The bank(s) will be required to submit a memorandum indicating intention of dismissal of all bank management in the event foreign capital inducement or merger plans are not realiz
