This study includes plans that the Ministry of Finance and Economy implemented and announced on November 19th, 1997, in order to prevent sudden chaos on the financial market in the aftermath of the foreign exchange crisis (IMF crisis).
At the time, these plans were implemented to deal with the deterioration of the financial structure of indebted financial institutions that was caused by the continuous bankruptcy of large companies. The financial market was caught in a vicious cycle because the financial institutions faced difficulties with the supply and demand of currency funds, and hence they failed to supply foreign currencies to domestic companies in a timely manner.
The government injected funds in order to stabilize the financial market early on and proceeded with its restructuring. At the same time, it tried to improve the market function of exchange rates and stabilize the supply and demand of foreign currencies by liberalizing the capital market.
As the real economy was fortunately sound and the trade balance had improved, they expected that the financial market would be stabilized and the vicious cycle would be transformed into a virtuous one by recovering international creditworthiness, which would prepare our economy for a new takeoff.
They began by settling financial institutions’ bad debts as soon as possible and implementing strong restructuring plans such as the acquisition and merger of financial institutions. For this, the government increased the funding size of the adjustment corporations’ bad debts from the initial 3.5 trillion Korean Won to 10 trillion Korean Won. Also, the government increased investment in kind to the industrial bank from 0.5 trillion Korean Won to 2.5 trillion Korean Won. The base rate of the funding bonds was matched with the market interest rate. It was agreed that the adjustment corporation would collect as many bad debts as possible from banks and merchant banks first and perform post-settlements. Thanks to the government’s efforts, only 30% of the purchasing price could be paid in cash and the rest could be covered by bonds.
Insolvent merchant banks were induced to go through a merger or a restructuring and, in this case, all foreign assets and debts were to be transferred as a bulk. Issuing asset-backed securities was allowed as well.
In order to encourage autonomous mergers between financial institutions as much as possible, they allowed a third party to participate in the merger. To increase the predictability and transparency of each merger, they presented in advance the permissible range of mergers, acceptable processes and standards.
For the merger between a local bank and a securities company, they allowed the local bank to take over all businesses except for consignment sales on securities. Merchant banks that merged were allowed to open new branches.
To prevent any disadvantages to the customers during the process of the financial industry’s restructuring, they ensured that savings, principals and interests were fully guaranteed, established early liquidity supply tools and effectively operated financial supervisory systems.
Furthermore, they controlled the daily fluctuation of exchange rates, opened bond markets and started businesses that converted foreign currencies to Korean Won. Finally, they came up with various plans such as expanding the foreign borrowing of large public companies such as POSCO and Korea Gas Corporation and increasing the credit of export companies.
금융시장 안정 및 금융산업구조조정을 위한 종합대책(A comprehensive plan for financial market stability and financial industry’s restructuring)
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Financial Policy|
|Holding||재정경제원; 한국개발연구원 국제정책연구원|