FINANCIAL SYSTEM IN KOREA

December 2008

Copies of this script are no longer published in printed form, and its
contents are only available on the B.O.K’s website.
(Information; ☎ 82-2-759-4520, Fax 82-2-759-4786)

CONTENTS

Part I

Overview

4Part II

The Bank of Korea

6

Part III

Banking Institutions

21

Part IV

Non-Bank Financial Institutions

27

Part V

Financial Markets

30

Part VI

Recent Changes in the Financial System

33

Part Ⅰ Overview
The foundations of the modern financial system in Korea were laid during theearly 1950s when the central and commercial banking systems were realigned
under the new institutional bases provided by the Bank of Korea Act and the
Banking Act. Specialized banks were established during the 1960s, in order toincrease capital mobilization and to strengthen financial support forunderdeveloped or strategically important sectors.
Most non-bank financial institutions were introduced during the 1970s in order
to diversify financing sources, to promote the development of the money market,
and to attract funds into the organized market.
From the early 1980s, several commercial banks and non-bank financial
institutions were added as part of a series of broad measures to spur financial
liberalization and internationalization. This coincided with a shift from agovernment-orientated stance on economic policy towards a market-orientatedstance.
Since the financial crisis broke out around the end of 1997, the Korean financial
system has been undergoing substantial changes in the course of a comprehensive
financial reform program.
The financial institutions in Korea may be divided into seven categories by
substance and function: (ⅰ) a central bank, which is the Bank of Korea, (ⅱ)
banking institutions including commercial and specialized banks, (ⅲ) non-bankdepository institutions including merchant banking corporations, mutual savingsbanks, credit institutions etc., (ⅳ) insurance institutions, (ⅴ) securities relatedcompanies, (ⅵ) other financial institutions, and (ⅶ) financial auxiliary
institutions.

4Financial Institutions
Central Bank

The Bank of Korea
Commercial banks

Banking institutions
Specialized banks
Merchant banking corporations

Non-bank
depository institutions*Mutual savings banks
Credit institutions, etc.
Life insurance companies

Insurance institutions*Non-life insurance companies
Postal insurance, etc.
Securities companies

Securities relatedcompanies*

Asset management companies
Futures companies
Securities finance companies, etc.

Other financial institutions*Credit specialized financial companies
Venture capital companies, etc.
Financial supervisory service

Financial auxiliary
institutions*Korea Deposit Insurance Corporation
Financial Telecommunications& Clearings Institute, etc.

�Non-bank financial institutions

5

Part Ⅱ The Bank of Korea
General Features
The Bank of Korea was founded on June 12, 1950 under the Bank of Korea Act.
The Bank of Korea was originally established with a capital of 1.5 billion won, allof which was subscribed by the Government, but the revision of the Bank of Korea
Act in 1962 made the Bank a special juridical person having no capital.
The primary purpose of the Bank, as prescribed by the Act, is the pursuit of pricestability. The Bank sets an inflation target in consultation with the Government anddraws up and publishes an operational plan for monetary policy.
In line with the shift in the financial supervision system on April 1, 1998 toward
the integrated supervision of the banking, securities and insurance industries, thebank supervisory function was separated from the Bank and it now has only
indirect and limited supervisory powers.
The Bank performs the typical functions of a central bank: issuing bank notes
and coins, formulating and implementing monetary and credit policy, serving as
the banker’s bank, and the Government’s bank. In addition, the Bank of Korea
undertakes overall management and surveillance of the payment and settlement
systems, and manages the nation’s foreign exchange reserves. It also exercises thelimited bank supervisory functions stipulated in the Bank of Korea Act.

6

Policy objectives
The Bank of Korea Act provides that the sole purpose of the Bank is tocontribute to the sound development of the national economy by pursuing pricestability through the formulation and implementation of efficient monetary andcredit policies. Practically, however, the Bank’s policy objectives involve following
three:(a) Price stability — the Bank conducts monetary policy to pursue pricestability under an inflation targeting regime,(b) Safety and Efficiency of the Payment System — the Bank has the authority
for the comprehensive management and oversight of the payment andsettlement system in Korea, and operates BOK-Wire which is the mainstay
real-time gross-settlement (RTGS) system,(c) Financial stability — the Bank constantly monitors and analyzes financial
institutions’ management status and, if necessary, carries out joint
examinations with Financial Supervisory Service (FSS).

7

Organization
The Bank of Korea’s organization consists of the Monetary Policy Committee,
the supreme policy-making body; the executive, which carries out the policies
formulated by the Monetary Policy Committee; and the Auditor.
The Monetary Policy Committee as the policy decision-making body, has theright to deliberate and resolve on major matters concerning monetary and credit
policy and the operations of the Bank of Korea.
The Monetary Policy Committee is composed of seven members representing
various groups in the national economy, and includes the Governor and the Senior
Deputy Governor of the Bank as ex officio members. The members are appointed
by the President for four-year terms except the Senior Deputy Governor whoseterm is three years. All members serve on a full-time basis and no member may bedischarged from office against his or her will. The Governor serves concurrently as
the Chairman of the Committee.
The Committee generally convenes on the Thursdays of the second and fourthweeks of each month and holds extraordinary meetings as frequently as needed.
Monetary policy is resolved and announced on the Thursday of the second week of
every month. The minutes of each Committee meeting are announced in the
Bank’s web-site on the first Tuesday after six weeks have passed from a meeting.
Resolutions at a Monetary Policy Committee meeting are adopted by simple
majority when there are at least five members present. Any member may submit a
proposal with the concurrence of at least one other member. The Chairman,
however, can submit a proposal on his or her own motion.
The Bank’s executive officers are the Governor, the Senior Deputy Governor,
and five Deputy Governors. The Governor, who is appointed by the President
following the deliberation of the State Council, administers and directs the8operations of the Bank, and conducts monetary policies as formulated by the
Monetary Policy Committee. The term of the Governor is four years and he or she
may be reappointed only once. The Senior Deputy Governor and Deputy
Governors assist the Governor. The Senior Deputy Governor is also appointed by
the President on the recommendation of the Governor; the Deputy Governors areappointed by the Governor. The terms for these positions are three years.
As for its executive body, the Bank has 14 departments, one center (Economic
Education Center) and one institute (Institute for Monetary & Economic Research)
in its head office in Seoul. The Bank also has 16 branches in major cities
throughout the country. In addition, the Bank has five overseas representative
offices in principal international financial centers. The total number of employees
was about 2,200 as of June 2008.
The Auditor is appointed by the President on the recommendation of the
Minister of Strategy and Finance for a three-year term. The Auditor inspects theoperations of the Bank of Korea and reports the results to the Monetary Policy
Committee and the Government.

9Organization of the Bank of Korea(As of the end of June 2008)

Monetary Policy Committee
�Governor (Chairman)
�Senior Deputy Governor
�Five members* appointed by the President

Governor
Senior Deputy
Governor

AuditorDeputyGovernors (5)Departments in Head
Offices** (13)Institute (1)Center (1)Domestic
Branches (16)

Audit
Department

�� Recommended by① The Minister of Strategy and Finance② The Governor of the Bank of Korea③ The Chairman of the Financial Services Commission④ The Chairman of the Korea Chamber of Commerce and Industry⑤ The Chairman of the Korea Federation of Banks�� International Department includes five overseas representative offices.

10

Functions
1. Issuing Bank Notes and CoinsThe Bank of Korea has the exclusive right to issue bank notes and coins in the
Republic of Korea. It may, with the approval of the government, issue them in any
size, shape and denomination as determined by the Monetary Policy Committee.
The Bank is not required to maintain any prescribed minimum ratio of gold or
foreign exchange against its bank notes and coins issue, nor is any maximum limit
imposed on the issue. The issue of bank notes and coins relies ultimately on
decisions made by the Bank of Korea in line with its monetary policy.
Currently, the Bank issues bank notes in three denominations : ＼1,000,＼5,000, ＼10,000; and coins in six: ＼1, ＼5, ＼10, ＼50, ＼100, ＼500.
Additionally, it plans to issue higher-value notes in 2009.

2. Formulating and Implementing Monetary and Credit Policy
The Bank conducts monetary policy with an emphasis on price stability, but witheconomic growth, financial and asset market conditions also being taken into
consideration. The Bank introduced an inflation targeting regime after the 1997
foreign currency crisis, and changed the monetary aggregate-oriented operationalframework to an interest rate-oriented framework in which the Bank of Korea Base
Rate (reference rate applied in transactions between the BOK and finantial
institutions) forms its policy rate and operational target.

The Bank’s monetary and credit policy is implemented principally through threeorthodox instruments, open market operations, lending and deposit facilities andreserve requirements, which affect the availability and cost of banking institutions’11reserves, and thereby influence overall monetary and credit conditions.
In addition to these instruments, the Bank has the authority to set maximum
interest rates on deposits and loans of banking institutions and to control thevolume of bank credit directly in periods of pronounced monetary expansion.

12

Functions of the Bank of Korea ( I )■ Issuing Bank Notes and Coinso Bank notes in three denominations : ＼1,000, ＼5,000, ＼10,000
o Coins in six denominations : ＼1, ＼5, ＼10, ＼50, ＼100, ＼500

■ Formulating and Implementing Monetary and Credit Policy
o Pursuit of the objective of price stability∙ Sets an inflation target in consultation with the government∙ Formulates and promulgates an operational plan for monetary and credit policies

o Indirect instruments∙ Open market operations∙ Lending and deposit facilities∙ Reserve requirementso Other instruments∙ Maximum interest rates of banks∙ Imposing ceilings on bank credits in periods of pronounced monetary

expansion.

13

3. Acting as the Banker’s Bank
The Bank of Korea makes loans to and receives deposits from banks, thus
serving as the banker to the banking sector.
It maintains checking accounts for banking institutions. Reserve deposits kept inthese checking accounts are used to clear checks and settle inter-bank balances,including those arising from the use of BOK-Wire, the Bank’s real-time grosssettlement system.
The Bank conducts credit operations with banks by rediscounting commercial
bills or by extending loans against eligible collateral with maturities of up to one
year.
As the lender of last resort, the Bank may extend exceptional loans to banking
institutions, in periods of serious emergency when monetary and banking stability
is directly threatened.

4. Serving as the Government’s Bank
As the fiscal agent of the Government of the Republic of Korea, the Bank of
Korea carries out various kinds of business for the Government in accordance with
the Bank of Korea Act and other relevant laws.
The Bank handles the receipt of national revenues and the disbursement of
national expenditures as the depository of the Government.
The Bank may extend loans to the Government, and may directly subscribe toGovernment bond issues. It may also grant loans to government agencies whichcarry out projects or functions of a public character, and handle business related tothe issue, sale, or redemption of securities representing obligations of theGovernment.

14

5. Operating and Managing Payment Systems
The Bank was given the authority for the overall management and oversight ofthe payment and settlement system in Korea by the revised Bank of Korea Act of2003. Even before the revision of the Bank of Korea Act, the Bank had alreadybeen involved in various functions aimed at ensuring the safety and efficiency ofthe payment system.
It provides settlement facilities to financial intermediaries by use of their current
accounts with the Bank for final settlement purposes. Net settlement arising frombill clearing, giro, the interbank funds transfer system, and the interbank CD/ATM
network is made through these current accounts with the Bank.
To ensure safe and efficient settlement for large-value interbank fund transfers,
the Bank operates a real-time gross-settlement system, termed BOK-Wire, which
was launched in mid-December 1994.

15

Functions of the Bank of Korea ( II )■ Acting as the Banker’s Banko Extending loans and rediscounts to bankso Receiving deposits from bankso Conducting temporary credit operations in periods of serious
emergency as the lender of last resort■ Serving as the Government’s Banko Receipt and disbursement of Treasury funds
o Loans to governmento Issue, sale, or redemption of securities representing government
obligations■ Operating and Managing Payment Systems
o Responsible for the overall management and oversight of thepayment and settlement systemo Operating a real-time gross-settlement system (BOK-Wire)

16

6. Managing Official Foreign Exchange Reserves
The Bank holds and manages Korea’s official foreign exchange reserves. Its
principal objectives in their management are to safeguard the value of the reserves
and to meet the nation’s demand for foreign exchange.
The Bank conducts certain foreign currency operations in the foreign exchange
market. Their main aim is generally to counter disorderly market conditions. The
exchange rate of the Korean won against U.S. dollar is determined by market
forces, namely foreign exchange demand and supply in the domestic market.
Exceptionally, however, if there is a large discrepancy between demand and supply
that disrupts the regular operation of the foreign exchange market, the Bank canparticipate in it as a buyer or seller.
In addition, the Bank acts as an agent for the Government in managing theForeign Exchange Equalization Fund, which was founded in 1967 with the objectof stabilizing the foreign exchange market. The Bank represents the Government inall dealings and transactions with international financial institutions of which theRepublic of Korea is a member.

7. Exercising Certain Bank Supervisory Functions
The Bank of Korea exercises certain bank supervisory functions as stipulated in
the Bank of Korea Act. The Bank may request materials from banks, and frominstitutions engaged in financial business which enter into agreements to holdchecking account with it, when the Bank deems this desirable for implementing
monetary policy effectively and checking destabilizing factors within the financial
system preemptively.
The Bank may also request the Financial Supervisory Service to examine
banking institutions within a determined specific range. It may also require the17Financial Supervisory Service to have members of staff of the Bank of Korea
participate on a joint basis in the examination of banking institutions.
The Bank may request the Financial Supervisory Service to submit to it thefindings of examinations and on the basis of these findings to order corrective
action to the banking institutions concerned.
In addition, the Bank may, at its own initiative, check and confirm the operationand status of the assets of banks and those for-profit enterprises to which the Bank
extends emergency loans.

8. Compiling Statistics and Conducting Economic Research
The Bank of Korea collects and compiles statistics, and conducts economic
research.
The Bank compiles statistics which are essential to developing the appropriate
economic policies. They include money and banking statistics, GDP statistics, theproducer price index, the balance of payments, the flow of funds account, inputoutput tables, etc.
The Bank carries out research on national and world-wide economic activities inorder to formulate monetary policy effectively, enabling it to advise theGovernment on various economic policy options.
It also publishes various periodicals, such as the Annual Report and the Monthly
Bulletin, to provide accurate and up-to-date information to the public on theeconomy.

18

9. Carrying out Economic Education
The Bank of Korea undertakes diverse activities to boost public awareness about
the economics and Korean economy.
The Bank conducts economic education activities for youth, led by ‘Economic
Lecture for Youth’ programs. It also holds economic lectures on request foruniversities, the military and police services, and non-government organizations.
The Bank also runs a weekly ‘BOK Friday Lecture’ program for the generalpublic. In addition, the Bank holds an annual ‘Monetary Policy Challenge’ forcollege students to promote greater understanding of the Bank’s role in formulating
and implementing monetary policy.
At the same time, the Bank publishes various educational materials. The Bank
started to put out leaflets and cartoons covering basic economic concepts from1988. In March 2005, the Bank published four versions (for primary, middle, andhigh school students, and for the general public) of ‘BOK’s Easy Economic Story,’a standard set of economic education materials.
Moreover, the Bank has operated a special website (www.bokeducation. or.kr)
providing online economic education since September 2006. The website iscomposed of three sub-sites for children, youths and adults. It contains articles on
the economy and finance, e-learning programs, flash animations, games andquizzes, audiovisual materials, etc. In addition, the Bank runs ‘Bank of Korea
Museum’, which displays various Korean and foreign currencies, to provide
visitors with a hands-on economic education experience.

19

Functions of the Bank of Korea ( III )■ Managing Official Foreign Exchange Reserves
o Conducting certain foreign currency operations to counter disorderly
market conditions■ Exercising Certain Bank Supervisory Functions
o Request for on-site examination of banking institutions by Financial
Supervisory Service (FSS) or joint examination with FSS■ Compiling Statistics and Conducting Economic Researcho Compilation of statistics such as money and banking statistics, GDPstatistics, the producer price index, the balance of payments, etc.
o Research on national and world-wide economic activities■ Carrying Out Economic Educationo Conducting various economic lectureso Operating a economic education website (www.bokeducation.or.kr)
o Running ‘Bank of Korea Museum’

20

Part Ⅲ Banking Institutions
Commercial Banks
1. General Features
As of the end of June 2008, commercial banks consisted of seven nationwide
commercial banks, six local banks, and 39 foreign bank branches. Commercial
banks have adopted the branch banking system with a nationwide or province-wide
network. The total number of domestic branches of commercial banks amounted toabout 4,900 as of the end of June 2008.
Since business demarcation is still quite strict, commercial banks can engage invery limited securities business, and had not been allowed to engage in insurance
business until August 2003. However, since then, bancassurance has been
introduced to permit commercial banks to sell insurance products.
The ownership of a commercial bank’s stocks by a single holder has been
restricted since 1982, except in the case of a joint bank, a local bank, or where they
are held by the government. This limit was set at 8 percent in 1982 and wastightened to a 4 percent ceiling in 1994. In 2002, the single shareholder ceiling wasraised to 10 percent.
Foreign bank branches carry on their business under almost identical conditions
to Korean banks nowadays as preferential treatment has been reduced anddiscriminatory business regulations lightened.

21

Commercial Banks(As of the end of June 2007)

Nationwide
Commercial Banks(7)*

Local Banks(6)**

Foreign Bank
Branches (36)○ Branch banking system throughout the country○ Handling of long-term financing in addition toshort-term financing○ Branch banking system within a province○ Business oriented to regional small andmedium enterprises○ Wholesale banking○ Retail banking recently strengthened��� Woori Bank, SC First Bank, Hana Bank, Korea Exchange Bank, Shinhan Bank, Citi Bank Korea,
Kookmin Bank��� Daegu Bank, Pusan Bank, Kwangju Bank, Jeju Bank, Jeonbuk Bank, Kyongnam Bank

22

2. Sources and Uses of Funds
Nationwide commercial banks held total assets amounting to about 983.0 trillion
won as of the end of June 2008, representing a 90.7 percent share in the total assetsof commercial banks.
Their principal sources of funds are deposits in domestic currency. At the end ofJune 2008, deposits and bonds payable in domestic currency accounted for 45.8
percent and 12.1 percent of total sources, respectively. As for uses of funds,
nationwide commercial banks operated the largest proportion of their funds, 58.2
percent, as loans and discounts in won. The share of securities investment in total
assets was 14.2 percent.
The financial structure of local banks is largely similar to that of the nationwide
commercial banks, but their reliance on domestic currency deposits and securities
investment is higher. At the end of June 2008, deposits in domestic currency
accounted for 49.2 percent of total sources. And the share of securities investmentin their total assets was 19.1 percent.
Foreign bank branches’ most important source of funds is, typically, call money
which, as of the end of June 2008, represented 17.4 percent of their total sources
followed by inter-office account (15.9%) while deposits in domestic currency
constituted only 3.4 percent. As to uses of funds, securities investment accounted
for the largest proportion, at 26.7 percent. Loans to Korean banks in foreign
currencies accounted for 5.3 percent and loans in domestic currency represented
2.5 percent.

23

Sources and Uses of Funds(As of the end of June 2008)
Unit: trillion won, %Commercial Bank

Major
Sources

Major
Uses

Local Bank

AmountRatio

AmountRatio

AmountRatio

Total Assets

1083.6

100.0

983.0

100.0

100.6

100.0

Deposits

632.1

58.3

569.4

57.9

62.7

62.3

Deposits in Won

499.5

46.1

450.0

45.8

49.5

49.2

CDs

107.3

9.9

94.6

9.6

12.7

12.6

Borrowings

256.5

24.9

233.7

23.8

22.8

22.6

Borrowings
in Foreign
Currency

54.6

5.0

49.6

5.1

5.0

4.9

Bonds
Payablein Won

127.8

11.8

119.2

12.1

8.5

8.5

Securities

159.0

14.7

139.8

14.2

19.2

19.1

Loans

768.4

70.9

701.1

71.3

67.3

66.9

Loans &
Discounts
in Won

632.0

58.3

571.8

58.2

60.2

59.9

Loans inForeign
Currency

45.2

4.2

42.8

4.4

2.4

2.4

Note: Foreign bank branches are not included

24

Nationwide Bank

Specialized Banks
As of the end of June 2008, there were five specialized banks:∙The Korea Development Bank for the financing of key industries for thedevelopment of industries and national economy,∙The Export-Import Bank of Korea for financial support for export and importtransactions, overseas investment projects, and the development of natural
resources abroad,∙The Industrial Bank of Korea for the financing of small and medium-sized
firms,∙The credit and banking sector of the National Agricultural Cooperative
Federation for agricultural, forestry, and livestock loans,∙The credit and banking sector of the National Federation of Fisheries
Cooperatives for fishery loans.
Specialized banks share the following main characteristics. First, they were
established to provide funds to particular sectors whose supply of funds throughcommercial banks was insufficient due to limited availability or low profitability.
With subsequent changes in the financial environment, however, they have
expanded their business into commercial banking areas, although their share offunds allocation to their relevant sectors is still relatively high. Now most
specialized banks have, by and large, the same pattern of business as commercial
banks.
Second, they rely heavily on deposits from the public for their sources of funds
in addition to the issue of debentures and borrowing from the government.
Therefore, they compete with commercial banks in acquiring deposits.

25

Specialized Bankso The Korea Development Banko The Export-import Bank of Korea
o The Industrial Bank of Korea
o The National Agricultural Cooperative Federation*o The National Federation of Fisheries Cooperatives*� Credit and Banking Sector�
Main Characteristics
o Funds allocation to particular sectors specifically defined by the relevant
legislationo Heavy reliance on deposits as a source of funds

26

Part Ⅳ Non-Bank Financial Institutions
Non-bank financial institutions can be broadly classified into five categories
according to their business activities: that is non-bank depository institutions,insurance institutions, securities related companies, other financial institutions, andfinancial auxiliary institutions.
Non-bank depository institutions consist of merchant banking corporations,mutual savings banks, credit institutions, and the postal savings system. Merchantbanking corporations can engage in almost all financial businesses except
insurance business. Mutual savings banks specialize in taking deposits and lending
for populace and small enterprises. Credit institutions such as credit unions, mutual
credit facilities, and community credit cooperatives operate for mutual aid between
members by taking deposits and lending. The postal savings system, which
operates through post offices nationwide, is a public financial institution.
Insurance institutions consist of life insurance companies, non-life insurancecompanies, postal life insurance, and pensions.
The Act on the Business of Operating Indirect Investment and Assets enteredinto force from January 5, 2004; under its provisions both securities investment
trust companies and asset management companies, which had been regulated
respectively by the Securities Investment Trust Companies Act and the Securities
Investment Company Act, were converted into asset management companies. The
main business of such asset management companies is investing capital raised
from investors in stocks and bonds and distributing the earnings on suchinvestments. Securities companies engage in the stock and bond markets either as
dealers or brokers. There are futures companies, securities finance company (theKorea Securities Finance Corporation), investment advisory companies which also
operate as securities related companies.
In addition to the financial institutions just mentioned, there are other financial
institutions such as credit specialized financial companies, venture capital

27

companies, and trust companies. Also there are financial auxiliary institutions
including, financial supervisory service, deposit insurance institution (the Korea
Deposit Insurance Corporation), financial telecommunications & clearings
institute, credit guarantee institutions, credit rating companies, etc.
These non-bank financial institutions, unlike banks, have no special limits onownership, and some are affiliated companies of other financial institutions such as
banks and securities companies.

28

Non-Bank Financial Institutions*(As of the end of June 2008)o Merchant banking corporations

Non-bank
depository
institutions

Insurance
institutions

Securities relatedcompanies

Other financial
institutions

Financial
auxiliary
institutions(2)

o Mutual savings bankso Credit institutions(107)(3,948)o Postal Savings(1)o Life insurance companies(22)**o Non-life insurance companies(30)**o Postal Life Insurance(1)o Securities companies(54)**o Asset management companies(55)

o Futures companies(14)**o Securities finance companies(1)o Investment advisory companies(83)o Credit specialized financial companies ***(55)

o Venture capital companies(121)o Trust companies****(24)**o Financial Supervisory Service(1)

o Korea Deposit Insurance Corporation(1)o Korea Financial Telecommunications & Clearings Institute(1)o Credit guarantee institutions(2)o Credit rating companies(4)o Korea Asset Management Corporation(1)o Korea Housing Finance Corporation(1)o Korea Securities & Futures Exchange(1)o Money broker companies(9)���� Figures in parentheses are numbers of institutions.
���� Foreign companies' branches are included.
���� Credit specialized financial companies consist of credit card companies, leasing companies,
installment financing companies, and new technology venture capital companies.
���� The figures of trust companies are based on the banks' trust accounts.

29

Part Ⅴ Financial Markets
Money Market
The money market in Korea embraces the call market and a wide
rangeofotherfinancialmarketsincludingthoseforMonetary Stabilization Bonds(MSB), negotiable certificates of deposit (CD), repurchase agreements (RP),commercial paper (CP), and cover bills (CB).
Since 1985, there has been a sharp increase in the outstanding balance of money
market instruments. This has been chiefly prompted by product innovation and the
expansion in the number of financial institutions handling such instruments.
However, the scale of the money markets contracted except for the MSB andcall markets in the course of financial and corporate restructuring. Most notably,
the CP market shrank dramatically in the three years after the crisis. As thefinancial market stabilized as a result of financial and corporate restructuring, themarkets for CD and CP rebounded from 2001 as did the RP market from 2000.

Capital Markets
The growth of the capital markets in Korea has been substantial. Encouraged bygovernment efforts and an improved investment climate with rapid economic
growth and the opening of the stock market, the role of the capital markets inmobilizing funds continued to strengthen. The monthly traded value of stocks inthe exchange swelled from 4.5 trillion won as of December 1990 to 93.3 trillion
won as of June 2008 and that of bonds also burgeoned from 3.2 trillion won to
243.9 trillion won. The market value of listed stocks in KOSPI (The Korea
Composite Stock Price Index) increased from 79.1 trillion won as of the end of1990 to 850.9 trillion won as of the end of June 2008.
In the meantime, foreign direct investment in stocks was allowed in 1981 for the
first time within a ceiling set on the total stocks of each individual issue.
30

Thereafter, the government expanded the investment ceilings several times,
completely lifting them in May 1998, except for investment in public corporations.
The stock holdings of foreigners as a percentage of stock market capitalization in
KOSPI soared remarkably from 13.7 percent at the end of 1997 to 30.7 percent asof the end of June 2008.
Opening of the bond market was sequenced later than the stock market mainly
in consideration of differences between domestic and foreign interest rates and thelow domestic demand for bonds. In December 1997 immediately after the currency
crisis, all restrictions on foreign investment in listed bonds were abolished. Foreign
investment in bonds, however, has remained lackluster with foreign holdings
representing only 6.0 percent of all listed bonds as of the end of June 2008.

31

Money and Capital Markets
1. Money Market Trends (Balance as of the end of period)(billion won)
1990

1998

2000

2003

2004

2005

2006

3,650.5

15,955.8

12,916.0

24,773.8

27,481.5

34,608.2

28,626.2

MSB** 15,240.5

45,673.3

66,377.7 105,496.7 142,773.0 155,235.0 158,390.0 150,340.0 142,440.0

CD6,803.5

15,742.6

14,217.8

36,827.6

43,544.9

63,877.1

79,774.0 112,769.1 130,591.9

RP3,357.1

17,543.4

26,308.7

38,703.1

34,574.9

42,932.7

58,417.7

68,250.7 72,668.9

CP

22,686.6

19,872.1

9,113.5

16,214.3

15,898.2

20,043.0

27,624.0

45,297.2 50,573.9

CB

276.8

4,092.9

11,201.4

4,305.1

3,906.0

4,031.4

3,675.0

4,444.7

4,383.0

Call*

2007

2008.627,882.5 26,632.0

Daily average transactions during the last month in the period
Monetary Stabilization Bonds issued by the Bank of Korea
Source : Money and Banking Statistics, the Bank of Korea

2. Capital Market Trends (As of the end of period)
1990

2000

2003

2004

2005

2006

2007

2008.6

StocksNumber of listedcompanies (KOSPI)*

669

704

684

683

702

731

740

760

Composite stock
price index

696.1

504.6

810.7

895.9

1,379.4

1,434.5

1897.11674.9Traded value**(bil. won)

4,454.5

52,261.1 45,625.70

46,316.3

65,521.5

70,707.5

95,268.6

850,859.5

Market value(bil. won)

79,109.7

188,041.5 355,362.6 412,588.1 655,074.6 704,587.5 951,900.4 850,859.5

3,213.1(284.2)

215,560.9 220,528.1 293,524.8 312,857.7 345,474.2 167,501.0 243,860.7(713.0) (19,431.7) (29,377.6) (19,275.5) (15,580.9) (20,084.8) (33,800.0)

Bonds
Traded value***(bil. won)

The Korea Composite Stock Price Index (4. Jan. 1980 = 100)Monthly average during the period
Monthly average during the period and figures in parentheses represent values traded on thestock exchange
Source : Korea Exchange, Korea Securities Dealers Association

32

Part Ⅵ Recent Changes in the Financial System
Korea undertook a strong drive for financial liberalization and market opening
from the early nineties. Unfortunately, however, in 1997 a string of large corporate
insolvencies and the consequent rapid build-up of financial institutions’ bad loans
undermined their soundness and threatened the systemic health of the financial
system. Coupled with the negative effects of the Southeast Asian currency crisis,
this caused a large net outflow of foreign portfolio capital, plunging Korea into afinancial and currency crisis.
Thereafter, financial sector restructuring focused on improving the financial
infrastructure in order to facilitate the early turnaround of troubled financial
institutions and to benefit from the positive effects of financial liberalization andopening policies. Important measures implemented since then include a shake-out
among financial institutions, the clearing-off of bad loans, the tightening ofprudential regulation, the heightened transparency of financial information, and thereorganization of the corporate governance of financial institutions.

Resolution of Unsound Financial Institutions
The top priority in financial sector restructuring was given to the earliest
possible resolution of unsound financial institutions. In 1998, five banks whose
capital adequacy ratios were below the 8% BIS guideline were forced to exit themarket. Nine banks merged to form four successor banks in 1999, and two merged
to form one successor bank in 2000. In the meanwhile, eight banks were
nationalized through recapitalization by the government.
Recently, in 2007, there were only a few instances of mergers between financial
institutions or exits from the market as the financial restructuring since the Asianfinancial crisis moved into its final stage. Looking at merger activities among
financial institutions, Shinhan Financial Group incorporated LG Card as its
subsidiary in March. In addition, Hana Financial Group acquired 100 percent ofstocks of Hana Life Insurance owned by Hana Bank in conformity with the33stipulation of the “Financial Holding Company Act” that a banking subsidiary of afinancial holding company cannot exercise control over an insurance or a securities
company.
In the case of non-bank financial institutions, 29 merchant banking corporations,
15 securities companies, 15 asset management companies, and 22 insurancecompanies were closed down in the period between 1998 and June 2007.

Injection of Public Funds
The government raised 102.1 trillion won in public funds by issuing Deposit
Insurance Fund Bonds and Non-performing Loans Management Fund Bonds forfinancial restructuring and recycled funds to the value of 42.3 trillion won throughnew issues of such bonds up until June 2008. Also it pumped in an additional 24.1
trillion won by June 2008 raised from various other sources including Public
Capital Management Fund and loans from the World Bank. As a result, the total
amount of financial support devoted to financial restructuring stood at 168.5
trillion won at the end of June 2008. Out of the total amount, 63.5 trillion won wasused for recapitalization, 38.6 trillion won for the purchase of non-performing
loans, and 30.3 trillion won for the payment of deposit insurance claims.
Throughout the year 2007, the government encouraged financial institutions tocarry out restructuring at their own initiative. In the process, Korea Deposit
Insurance Corporation provided support amounting to 132 billion won from publicfunds to financial institutions for compensation for losses, the purchase of nonperforming loans, and the vicarious payment of deposits on behalf of troubled
institutions.

34

Public Funds Injected(November 1997 ~ June 2008)(trillion won)
SourceKorea Deposit
Insurance Corporation

Korea AssetManagement Corporation
Fiscal resources
Bank of Korea

Support type

Total

Recapitalization

50.8

Compensation for losses

18.6

Purchase of assets

11.0

Repayment of deposits

30.3

Subtotal

110.7

Purchase of NPLs

38.6

Recapitalization

11.8

Purchase of subordinated debentures

6.4

Subtotal

18.2

Recapitalization

0.9

Total

168.5

35

Heightening Prudential Regulation
In order to tighten the prudential regulation of financial institutions, a prompt
corrective action framework was introduced so that regulatory authorities couldorder financial institutions that failed to meet certain criteria to replace their
management, reduce capital, merge, or dispose of certain businesses. And the asset
quality classification standards of banks, merchant banking corporations, securities
companies, asset management companies and insurance companies were
strengthened in order to take into consideration the future repayment capacity ofborrowers. To reduce the risk resulting from large credit exposures to a single
entity, the ceilings on credit to a single individual or juridical person, as well as toa single large business group, were lowered. Also criteria for internal controls anda compliance system were introduced for banks, merchant banking corporations,securities companies, asset management companies, insurance companies, etc.

Improving Corporate Governance of Financial Institutions
An outside director system and an audit committee system were introduced to
improve corporate governance in 1999. At least three outside directors must be
appointed to make up over half of total board membership and an audit committee
must be set up with outside directors forming at least two-thirds of its membership.
These two systems were put in place for all commercial banks and merchantbanking corporations, and for some securities companies, insurance companies,
asset management companies, and other financial institutions whose assets areabove a specific level.
To attract foreign investment, the restriction on the nomination of foreigners as
directors of banks was lifted and ceilings on the foreign ownership of domestic
banks were eased in 1998.

36

In 2002, to encourage the emergence of sound financial capital and promoteaccountability in the management of financial institutions, the single shareholder
ceiling restriction on the holding of stocks issued by a bank or a bank holding
company was raised from 4 percent to 10 percent.

Heightening Transparency of Financial Institutions
At the same time, efforts have been made to strengthen market discipline and toenhance the transparency of financial information. Standards for accounting andpublic disclosure were heightened to enable shareholders, creditors, and others togauge financial institutions’ management performance accurately from theirfinancial statements. For example, a mark-to-market system for marketablesecurities was introduced and financial institutions’ financial statements should
now be drawn up according to accepted corporate accounting standards.
In 2007, in order to prevent unfair transaction behavior between financial
institutions and major shareholders, the government made it obligatory formerchant banking corporations, mutual savings banks, securities companies andcredit specialized financial companies to pass a resolution at a board of directors’
meeting concerning transactions with their major shareholders and give public
notice of the transactions.

37

Other Recent Steps
During 2007, the government revised a number of finance-related laws andregulations, with emphasis on improving the efficiency and soundness of thefinancial institutions.
As an initial step, pursing the balanced development of the financial industry
through the galvanization of the capital market, the government enacted the“Financial Investment Services and Capital Market Act”(promulgated on August
3, 2007, to come into force on February 4, 2009). Through this, it defined financial
investment products comprehensively as financial products that have the potential
to give rise to loss of principal and included financial contracts, such as exchangetraded and over-the-counter derivatives, within the scope of financial investment
products. Applicants who wish to engage in financial investment services should
receive approval or enroll for those fields of services which they wish to enter
either individually or collectively.
In addition, to upgrade banks’ risk management systems and to help banks
achieve appropriate capital adequacy in keeping with the enforcement of the New
BIS Agreement(Basel Ⅱ), the government differentiated risk weightings whenestimating credit risk according to a borrower’s credit rating and added operatingrisk to the targeted objects of equity capital management, along with the previous
credit risk and market risk(“Regulation on Supervision of Banking Business”,
promulgated on June 28, 2007, implemented on January 1, 2008).

38

● Published on :● Publisher

December 24, 2008

: Lee, Seongtae
Governor, the Bank of Korea● Published by: The Bank of Korea,
Seoul, Korea● Editor: Lim, Jaechul