Abstract: Banking Sector Reform in South Korea started after the financial crisis in 1997. Several attempts had been made by the government to combat the crisis and drive the economic growth. In this paper, we will focus about the steps taken by the Korean government to implement reform.
Banking Sector Reform in South Korea had been adopted in the late 1997 to restructure the country's financial system. The government also aimed to achieve macroeconomic stability and to enhance the economic growth.
Reasons Behind Reform:
South Korea witnessed a financial crisis in 1997 for which, for the first time after 1980, the government had to seek for an aid of 57 million US dollars from the International Monetary Fund.
The management systems of the banking sector was not efficient. The capital market was not open for the foreign investors.
The banks had been forced to lend money to the small and medium scale companies which created a lot of risk for the banks regarding the return.
The government's intervention into the banking sector had been continuing, that is, certain decisions like setting the rate of interest, limit of loan amount were taken by the government mostly.
The percentage of return on assets were decreasing. During 1992 - 96, the Korean banks' return on asset declined by 0.41%.
Reform Process:
The Korean government announced a public fund injection of 4.4 billion dollars for the banking sector.
Some small banks were merged to form a new and efficient bank. The government also provided public fund injection for this newly created banks.
Within December 1998, the government spent 13.2 trillion KRW for re capitalizing the banks. The Korean Bank and Seoul Bank also got the same amount of fund from the government.
The Korean government formed a Financial Supervisory Commission to enhance the process of bank supervision. Several attempts had been made to guarantee the capital adequacy and to minimize the risk factors.
The government introduced privatization in the banking sector and the foreign banks were encouraged to enter into this sector.
The Bank of Korea took the responsibility to improve the management system of twelve commercial banks, namely, Kookmin Bank, Kyongnam Bank, Boram Bank, Kwangjoo Bank etc.
The government sold 51% share of the Korean First Bank to the Newbridge Capital of United States.
