FSC Press Release of September 28, 1998

Progress in Financial and Corporate Restructuring

and Future Tasks

I. Overview

1. Underlying Principles for Financial Restructuring

- In accordance to international standards and procedures, resolution plans for nonviable financial institutions were developed. Others with a clear chance to return to normal operations will be fully supported as a way to strengthen competitiveness thus alleviate the credit crunch situation.

(1) Capital adequacy standards was the basis of identifying financial institutions to be resolved

(2) Required submission of management rehabilitation plans for those financial institutions that fail to satisfy prescribed capital adequacy standards

(3) Evaluation of management rehabilitation plans was conducted by an appraisal committee comprised of experts

(4) The Financial Supervisory Commission determined policies to be implemented after reviewing opinions from the appraisal committee

· Disapprovals: Resolution was pursued in a way that would minimize inconveniences to customers

· Conditional approvals: Required the submission of forceful self-rescue plans and implementation plans including replacement of management, after which the FSC closely monitors the satisfactory implementation of such plans

· Approvals: Support will be provided through the disposal of NPLs as well as other measures

(5) Policy schemes for the facilitation of normalization of financial institutions are formulated

O Business transfer (P&A): The focus was on providing financial support at a level sufficient to prevent the deterioration of the asset quality of the acquiring financial institutions

O Merger (nonviable bank + nonviable bank): The focus is on the swift creation of competitive and efficient leading banks

O Merger (sound bank + nonviable bank): Utilized as a means to resolve nonviable banks. However, the merged bank is provided with sufficient financial support so as to prevent the deterioration of the asset quality of the sound bank

⇒ To build a climate that is conducive to the soundness of financial institutions, thereby inducing the accelerated restoration of the financial market's intermediary function and competitiveness of the financial industry

2. Underlying Principles for Corporate Restructuring

- Develop 5 major tasks toward solving structural problems and upgrading institutional settings to that of internationally recognized standards

① Enhancement of transparency of corporate management

② Dismantling of cross guarantees

③ Significant improvement of capital structure

④ Singling out core businesses and strengthening of cooperative relationship with SMEs

⑤ Enhancement of accountability of controlling shareholders and management

- Nonviable corporates will be subject to exit if it is deemed to lack the capability of making a profit even after the normalization of the credit situation

- Corporate restructuring will be driven by creditor financial institutions

- The workout concept will be at the center of the overall process

- Develop schemes to provide full support to sound SMEs

3. Achievements and Future Plans

- Improvements toward institutional setting for the facilitation of restructuring

O Establishment of prompt corrective actions system toward financial institutions

O Improvement in restructuring climate including streamlining of merger- related procedures and the prohibition of cross guarantees etc.

O Prevention of moral hazard problems and the enhancement of transparency of management, thereby improving market discipline

- Identification and resolution of nonviable corporates and nonviable financial institutions

O Nonviable corporates will be subject to exit if it is deemed to lack the capability to return to normal operations even after the normalization of the credit situation

O Nonviable financial institutions (banks, securities companies, insurance companies etc.) will be subject to exit

O Viable financial institutions will implement self-rescue plans as well as management improvement plans

- Schemes for support toward financial institutions pursuing normalization

O Develop plans toward resolution of NPLs

O Develop support plans for banks pursuing mergers or foreign capital inducement

- Workout programs

O Signing of corporate restructuring agreement (210 financial institutions)

O Installation of corporate restructuring coordination committee

O Utilization of advisory groups

- Future plans

O Continued monitoring of financial institution's normalization programs

O Enhancement of financial soundness through workout programs

O Adoption of global standards

II. Institutional Setting Improvements for Expedited

Restructuring

1. Institutional Setting Improvements Relating to Financial Restructuring

- Improvements in deposit insurance system: Reduction of scope of guaranteed principal amount so as to prevent the risk of moral hazard and to encourage customers to choose financial institutions with discretion

O As for accounts opened or deposits made after August 1, 1998, only the principal amount will be insured for accounts of 20 million won or more per person

O RP issued by banks and securities houses after July 25, 1998 and fidelity/surety insurance policies entered into after August 1, 1998 will not be covered under the deposit insurance system

- Strengthening of bank disclosure system (April, 1998)

O Introduce new disclosure items necessary for judging management conditions including the amount of non-performing loans

O Mandatory disclosure of first half-year preliminary audit results

- Strengthening of prudential regulation of foreign exchange businesses (July, 1998)

O Provisions to maintain mismatch ratio for current assets to current liabilities (90 days to maturity) of at least 70%

O Introduction of a comprehensive risk management system encompassing risks relating to foreign currency denominated loans, payment guarantees, securities, off-shore funding etc.

- Strengthening of loan classification standards and provisioning requirements (July, 1998)

O In accordance to international practices, classify loans in arrears of 3 months or more as substandard and below and loans in arrears of 1 month to 3 months as precautionary loans

O Raise provisioning requirement for precautionary loans from 1% to 2%

O Introduce provisioning requirements for CP, guaranteed bills and privately placed bonds belonging to trust accounts

O Introduce asset quality classification standards based on a forward looking approach starting from January 1, 1999

- Strengthening of prompt corrective actions system

· Bank: BIS capital adequacy ratio

· Securities companies: Operational net capital ratio

· Insurance companies: Solvency margin ratio

O Improvement of accuracy of assessment of capital adequacy through upgrading asset classification standards, provisioning requirement standards and accounting principles to international standards

O Preclude judgement-making of the regulatory bodies and instead activate prompt corrective actions as a mechanical procedure based on objective and clear-cut conditions

2. Institutional Setting Improvements relating to Corporate Restructuring

- Enhancement of transparency of corporate management

O Early introduction of combined financial statements (advanced by 1 year, 2000 → 1999) (Feb. 24, 1998)

O Mandate the introduction of a nominating committee for outside auditors at large corporates (Feb. 24, 1998)

O Strengthening of disciplinary measures toward outside auditors and persons involved in accounting-related issues (Feb. 24, 1998)

- Prohibition of cross guarantees

O Prohibition of new debt guarantees among affiliated companies within chaebols and the dismantling of existing debt guarantees by the end of March, 2000 (Feb. 24, 1998)

O Prohibition of bank's request for cross guarantees (April 1, 1998)

- Improvement of capital structure

O Relaxation of the ceilings on securities holdings at financial institutions to facilitate debt-equity swap (Sept. 14, 1998)

O Introduction of framework that will allow the establishment of mutual funds including corporate restructuring fund (Sept. 16, 1998)

O Introduction of limit on CP and privately placed bond holdings at financial institutions to prevent monopolization of funds by chaebols

- Identification of core business

O Incorporate restructuring plans, such as the mergers and acquisitions of affiliated companies, in the contents of the capital structure improvement agreement

- Strengthening of accountability of controlling shareholders and management

O Easing of preconditions to be satisfied for minority shareholder class action suits (Feb. 24 & May 25, 1998)

O Easing of preconditions concerning voting rights of equity stakes held by institutional investors (Sept. 16, 1998)

O Mandatory appointment of outside director at listed companies (Feb. 20, 1998)

O Appointment of outside directors and auditors as well as the registration of owner of business group as CEO of core business unit

- Improvement of corporate exit related regulations

O Amendment of bankruptcy and foreclosure related legislation including Corporate Reorganization Act etc. (Feb. 24, 1998)

O Abrogation of mandatory tender offer system (Feb. 24, 1998)

O Easing of restrictions on M&As undertaken by foreigners (Feb. 24, 1998)

O Exemption of special tax on disposition of assets for restructuring purposes (Feb. 24 & Sept. 16, 1998)

Ⅲ. Financial Sector Restructuring

1. Fiscal Support

- The Korean government has emphasized that financial restructuring should in principle be funded by the financial institutions themselves. In practice, however, it is impossible to deny assistance to financial institutions. Given the current economic difficulties, turmoil in financial markets could trigger a crisis in all sectors of the economy. Also, it is extremely difficult for the financial institutions to raise funds in the bearish stock and properties markets. On the other hand, the government is fully aware that granting financial support creates a moral hazard problem on the part of financial institutions.

- The government's basic position, therefore, is that it will not financially support the financial institutions unless they undertake individual efforts to reduce costs and recapitalize through foreign investment. Banks are also required to write-down capitals of existing shareholders, while their management should take responsibility for their misdeeds. In return, the Korean government will make sure that financial support is sufficient enough to return solvency to the troubled financial institutions.

- The Korean government is planning to spend a total of 64 trillion won (including 14 trillion won already spent) to facilitate financial restructuring, of which 32.5 trillion won (including 7.5 trillion won already spent) will be used to finance the purchase of non-performing loans, while 31.5 trillion won (including 6.5 trillion won already spent) will be spent on recapitalization and deposit payment.

a. Purchase of Non-Performing Loans

- Eligible Financial Institutions: The Korean government will facilitate the disposal of non-performing loans for those financial institutions planning a merger or those whose rehabilitation plans have been approved by the Financial Supervisory Commission(FSC). Financial institutions falling under these categories are;

· Resolved and acquiring banks (5 pairs)

· Merged banks (4)

· Banks under rehabilitation plans (9)

· Fidelity/surety insurance companies under merger (2)

- Eligible Bad Loans

O All bad loans that fall into category of "Substandard Loans (those whose interest payments are more than three months in arrears) and below", will be purchased by KAMCO, in principle. Small loans of 10 million won or below, and bad loans held by offshore branches of Korean banks will be excluded. By doing so, the government will dispose of all the non-performing loans held by problem banks and 50% of non-performing loans held by sound banks.

- Purchase Price

O In the case of collateralized loans, KAMCO will pay 45% of the appraisal value of the collateral, excluding claims on wage and advanced lease payment. In the case of uncollateralized loans, KAMCO will pay 3% of book value. Long-term loans will be purchased at a discount rate of 45%, while the discount rate will be settled by the net present value method after the court decides the terms of repayment.

Bad Loan Purchase Plan (for the month of September, 1998)

(Unit : Trillion won)

Financial Institution

Non- Performing Loan(A)

Volume of Purchase

(B)

Price of Purchase

Ratio of Purchase

(B/A)

Resolved Banks(5)

Daedong Bank

Dongnam Bank

Donghwa Bank

Kyungki Bank

Chung Chong Bank

7.3

1.0

1.1

2.1

1.7

1.3

4.6

0.8

0.5

1.2

1.4

0.7

1.0

0.2

0.1

0.2

0.3

0.2

63.0




Acquiring Banks(5)

Kookmin Bank

Korea Housing Bank

Shinhan Bank

Koram Bank

Hana Bank

6.7

2.3

1.9

1.6

0.5

0.4

2.7

0.9

0.5

0.9

0.3

0.1

1.2

0.4

0.2

0.4

0.1

0.1

40.3




Merged Banks(4)

Commercial Bank of Korea

Hanil Bank

Boram Bank

Korea Long Term Credit Bank

7.4

2.8

2.6

0.5

1.5

5.0

2.2

2.1

0.4

0.2

2.4

1.0

1.0

0.2

0.2

67.6



Banks under Rehabilitation(9)

Cho Hung Bank

Korea Exchange Bank

Peace Bank

Chungbuk Bank

Kangwon Bank

Daegu Bank

Pusan Bank

Bank of Cheju

Kyungnam Bank

11.5

3.7

3.2

0.5

0.4

0.5

1.1

1.0

0.3

0.7

7.8

2.8

2.0

0.2

0.3

0.2

0.8

0.7

0.2

0.6

3.5

1.2

0.9

0.1

0.1

0.1

0.4

0.3

0.1

0.3

67.8








Sub-Total(23)

32.9

20.0

8.1

60.8

Fidelity/surety Insurances(2)

5.0

3.0

1.0

60.0

Total(25)

37.9

23.0

9.1

60.7

- Purchase plan of bad loans

O 39 trillion won worth of non-performing loans will be purchased from banks, merchant banks, and fidelity/surety insurance companies with public money of 17.7 trillion won by the end of September, 1998.

O 30 trillion won-plus worth of NPLs will be purchased from specialized banks, sound banks, merchant banks, securities companies, mutual savings & finance companies with public money of 10 trillion won, starting from October, 1998.

O Additional non-performing loans realized in the future will also be purchased by KAMCO (with about 5 trillion won) to make a cleaner banking system.

Schedule for KAMCO Purchase of Non-Performing Loans

(Unit: trillion won)


97.11

∼98.81)

98.9

98.10∼

122)

1st half

993)

Total


available

amount

Banks

Insurance

Total

Non-

Performing Loans

16.0

20.0

3.0

23.0

25∼30

12∼17

76∼86


-

Purchase Price

8.6

8.1

1.0

9.1

9.8

5

32.5


32.5

1) All commercial banks including Seoul Bank, Korea First Bank, All merchant banks, Fidelity/surety insurance companies

2) Specialized Banks, Some Sound Banks, Merchant Banks, Securities Companies, Trust Companies

3) Newly Realized Non-Performing Loans

- As previously mentioned, the purchase of non-performing loans is conditional on the simultaneous implementation of reforms on the part of financial institutions. Additional 25 trillion won of KAMCO fund will be raised by issuing government guaranteed bonds. The government is planning to raise additional funding through the liquidation of collateral and the issuance of ABS by KAMCO, among others.


- By the end of September 1998, KAMCO will have spent 9.1 trillion won in purchasing over the 60% of non-performing loans held by 25 financial institutions. This means that 23 trillion won worth of non-performing loans will be purchased by KAMCO.

b. Fiscal Support for Recapitalization and Loss Compensation

- Principles of Financial Support

O KAMCO will purchase the NPLs of acquired and acquiring banks(5 pairs), and capital will be injected so as to prevent the deterioration of acquiring banks' BIS ratio.

- New banks created by the merger of a sound bank and troubled bank, such as that between Hana and Boram, will be given enough fresh capital to bring their BIS ratio up to ratios of sound banks. New banks resulting from a merger between two troubled banks will be given a capital injection sufficient to bring their BIS ratio up to 10% (taking into account the potential for some assets turning bad before the end of 1998).


Schedule of Fiscal Support

(Unit : Trillion Won)

98.1∼8

98.9

98.10∼12

99.3

Total


available amount

8.1

11.9

1.9

6.5

28.41)


31.5

1) Loss coverage for Korea First Bank, Seoul Bank and 5 acquiring banks is not included.

Content of Financial Support in September 1998

(unit: trillion won, %)

Banks

Capital Injection and Loss Coverage

BIS ratio

after support

Capital Injection

(In Trillion won)

Loss Coverage

(In Trillion won)

5 acquiring banks

Kookmin

Housing bank

Shinhan

Hana

Koram

1.3

--+

|

| 1.3

|

--+

5.8

--+

|

| 5.8

|

--+

11∼13%1)

11.58%

11.88%

11.07%

13.30%

11.78%

Mergers

Commercial bank

Hanil

Boram

3.6

--+ 3.3

--+

0.3

-

-

-

over 10%2)

10.0%

10.0%

13.3%

Bank Total

4.9

5.8


4 insurance companies

-

1.2

-

Total

4.9

7.0


1) BIS ratio according to the revised calculation method of Banking Supervisory Authority in June 1998.

2) Target BIS ratio for the end of 1998.

* Support will be provided to 5 acquiring banks after pending articles revisions, and to Boram bank after the shareholder's general meeting scheduled for November.

Content of Fiscal Support in September 1998

Financial Institution

Fiscal support

(In Trillion Won)

Date

① 5 acquired and

acquiring banks

■ Purchase of 7.3 tn non-performing loans : 2.21)

■ Cover for the difference between

assumed liabilities and assets of the

acquired banks : 5.8

■ Capital injection : 1.32)

▶9.28(Mon)

▶9.30(Wed)

▶immediately

upon completion

of article revision

② Merger

(Commercial Bank

+ Hanil Bank,

Hana + Boram,

Kookmin+Long-term

Credit Bank)

■ Purchase of 5 tn non-performing loans

: 2.4 tn

■ Capital injection : 3.6


▶9.28(Mon)

▶9.30(Wed)

*Support to Hana and Boram Bank will be provided in November

③ Stand-alone banks

(Chohung, etc)

■ Purchase of 7.8 tn non-performing

loans : 3.5

▶9.28(Mon)

④ 4 closed

insurance companies

■ Cover for the difference between

liabilities and assets : 1.2

▶9.30(Wed)3)

⑤ fidelity/surety

insurance companies

■ Purchase of 3.0 tn non-performing loans

: 1.0

▶9.28(Mon)

Total

(21.0)

■ Purchase of 23.0 tn non-performing

loans : 9.1

■ Capital injection and coverage for the

difference between liabilities and

assets : 11.9


1) KAMCO purchases 4.6 tn non-performing loans of acquired banks at 1.0 tn, 2.7 tn non-performing loans of acquiring banks at 1.2 tn.

2) In addition to 1.3 trillion won injected directly by the KDIC, 0.7 trillion won will be injected through subordinated debt swaps with government-held equities from the Public Money Management Fund.

3) Approximately 0.9 tn will be given in advance.

c. Fiscal Support for Individual Financial Institutions

Five Acquired/Acquiring Banks


- Content and schedule of fiscal support

Size of Fiscal Support By Category

Content

Implementation Schedule

O Purchase of NPLs:

Inject 2.2 trillion won

Write off 7.3 trillion won*

September 28, 1998

O Compensation of differences between

assets and liabilities:

5.8 trillion won

September 30, 1998

O Recapitalization support:

1.3 trillion won**

maintain acquiring bank's BIS ratio

Immediately after

changing the articles of banks

* For acquired banks, injection of 1 trillion won to dispose of 4.6 trillion won of NPLs. For acquiring banks, injection of 1.2 trillion won to dispose of 2.7 trillion won of NPLs.

** Additionally 0.7 tn capital injection will be made through subordinated debt swaps with government-held equities from the Public Money Management Fund.

- Effect of Fiscal support

⁚ The NPLs of 5 acquiring banks will decrease sharply, and their BIS ratios will increase to 11∼13 percent, a level comparable to a clean bank in advanced countries.


Effect of Fiscal Support(Acquiring Banks)

Bank

BIS ratio (%)

NPLs (trillion won)*

Kookmin

11.58

2.3 → 1.4

Housing

11.88

1.9 → 1.4

Shinhan

11.07

1.6 → 0.7

Hana

13.30

0.4 → 0.3

Koram

11.78

0.5 → 0.2

* These are the amount banks want to sell. Additional sales are possible

Merged Banks


- Content and schedule of fiscal support

O Mergers between sound and troubled banks

· Accounting for the possibility of further loan deterioration before the end of 1998, sufficient capital will be injected into the newly merged bank to maintain the BIS ratio of sound bank*.

O Mergers between troubled banks

· Accounting for the possibility of further loan deterioration* before the end of 1998, sufficient capital will be injected into the newly merged bank to increase the BIS ratio to 10 percent.

(* Recognition of possible further losses in sales of precautionary loans, co-financed loans, and loans exposed to leasing companies)

Contents of Support for Merged Banks

Bank

Content

Schedule

Commercial

+ Hanil

⼐ NPLs: Inject 2 trillion won

Write off 4.3 trillion won NPLs

⼐ Recapitalization: 3.3 trillion won

September 28

September 30

Hana + Boram

⼐ NPLs: Inject 0.2 trillion won

Write off 0.4 trillion won NPLs

⼐ Recapitalization: 0.3 trillion won

September 28

November

Kookmin + KLTCB*

⼐ NPLs: Inject 0.2 trillion won

Write off 0.2 trillion won NPLs

September 28

* Korea Long-Term Credit Bank

- Conditions of support

O Elimination of redundant employees and branches; disposal of fixed assets; replacement of management

O Reduction of NPLs through self-financing

O Loss sharing through the reduction of capital, etc.

- Effect of support

O With reduced NPLs and a BIS ratio over 10 percent, the merged banks will become healthy, larger and leading banks.

Effect of Fiscal Support(Merged Banks)

Bank

BIS ratio (%)

NPLs (trillion won)

Commercial Bank

-+

|10

-+

2.8 → 0.6

Hanil Bank

2.6 → 0.5

Boram Bank

13.3

0.5 → 0.1

KLTCB

- *

1.5 → 1.3

* The BIS ratio of Kookmin bank (to be merged with KLTCB) is 11.58%.

Stand-alone (Banks under Rehabilitation) banks


< Cho Hung Bank/Korea Exchange Bank >

- Cho Hung Bank is required to implement self-rescue efforts, either through foreign capital participation or promoting a merger by October, 1998.

- Korea Exchange Bank will normalize its situation through additional contributions by major shareholders, namely the Bank of Korea and German Commerz Bank.

- Government support for these two banks includes the purchase of 4.8 trillion won of NPLs at the discounted price of 2.1 trillion won.

O The 2.8 trillion won of NPLs at Cho Hung will be purchased for 1.2 trillion won, and the 2.0 trillion won of NPLs at Korea Exchange Bank will be purchased for 0.9 trillion won.

Peace Bank/Kangwon Bank/Chungbuk Bank


- These banks have received approval for capital reduction (September 11) and completed implementation plans for management improvement.

- They are then required to implement capital reduction by the end of September and recapitalization plans by the end of October.

Recapitalization Plan


Peace Bank of Korea

Kangwon Bank

Chungbuk Bank

Capital reduction

(minimum)

at least to 100 billion won(2.73:1)

at least to 25 billion won(4.25:1)

at least to 25 billion won(4.54:1)

Recapitalization

120 billion won

100 billion won

120 billion won

* Figures in parentheses stand for the ratio of capital reduction

- The government will purchase 0.7 trillion won of NPLs for 0.3 trillion won.

Contents of Fiscal Support


Peace Bank

Kangwon

Chungbuk

·NPLs value

0.2 trillion won

0.2 trillion won

0.3 trillion won

·Purchase price

0.1 trillion won

0.1 trillion won

0.1 trillion won


Banks with BIS Ratio exceeding 8%


- Banks deemed to be in danger based on diagnostic reviews completed by August 31 will be subject to a management appraisal during September.

- At the end of this appraisal, banks with unsatisfactory results are required to comply with management improvement recommendations or requests.

- The size of fiscal support for these banks includes the purchase of 2.3 trillion won of NPLs for 1.1 trillion won.

Contents of Fiscal Support(Regional Banks)


Daegu

Kyungnam

Pusan

Cheju

·NPLs value

0.8 trillion won

0.6 trillion won

0.7 trillion won

0.2 trillion won

·Purchase price

0.4 trillion won

0.3 trillion won

0.3 trillion won

0.1 trillion won



2. Restructuring of Non-Bank Financial Institution

Merchant Banks


- Sixteen troubled merchant banks out of a total of thirty had their licenses revoked and are currently undergoing closure procedures.

-The remaining fourteen licensed merchant banks will be monitored to ensure that they implement their rehabilitation plans and achieve a BIS ratio of 8 percent(by June of 1999).

Leasing Companies


-Ten out of twenty-five leasing companies will be either liquidated or acquired, according to decisions made by their major shareholders. Those not undergoing liquidation are having their assets and liabilities transferred to a bridge leasing company.

- The remaining fifteen leasing companies will be monitored to ensure implementation of rehabilitation plans.

Insurance companies


- Four life insurance companies ordered to be closed will have their assets and liabilities transferred after a due-diligence review in late October.

O Among these assets and liabilities, four billion won is needed to purchase the non-performing assets, and 1.2 trillion won is needed to compensate for the gap between liabilities and assets. Of this sum of 1.2 trillion won, 0.9 trillion won will be supplied in advance by the end of September.

- The government will monitor sixteen insurance companies currently subject to management improvement measures to ensure compliance.

- The authorities are requiring two fidelity/surety insurance companies to submit revised rehabilitation plans containing provisions for a merger and management replacement, with the aim of inducing merger by November.

O The purchase of non-performing assets at these companies requires one trillion won, and will be completed by the end of September.

Securities companies


- Two securities companies(DongSuh, Coryo) had their licenses revoked and two(HanNam, KDB) were already suspended.

- Four companies with operational net capital ratios of less than 100 percent, namely SK, Ssangyong, KLB and Dongbang Peregrine, were ordered to submit management improvement plans. After diagnostic reviews by evaluation committee, two were suspended and two(Ssangyong, SK) were conditionally approved of their rehabilitation plans.

Investment Trust Companies


- For the six existing investment trust companies, the government is continually inducing management improvement and monitoring the implementation of rehabilitation plans.

- Sinseki Investment Trust had its license revoked, and Hannam Investment Trust, currently under suspension, will transfer its business to Kookmin Investment Trust by the end of September and undergo liquidation procedures.

- 1 Investment Trust Management Company(Dongbang-Peregrine) has dissolved of its own accord, and 5 companies are seeking for dissolution.

Mutual Savings and Finance Companies


- Out of 230 companies, the Non-Bank Supervisory Authority has imposed management control measures on 20 companies, and management guidance measures on 11 companies, with the goal of inducing rehabilitation.

- Companies deemed incapable of recovery will be closed either through a business transfer, sale or liquidation. The closure process will be managed by a bridge company created on September 16, 1998 specifically for mutual savings and finance companies.

Credit unions


- 12 unions were determined to be liquidated, and 27 subject to management guidance measures.

- Troubled unions will be required to pursue individual efforts or undergo mergers to induce rehabilitation.

3. Future Tasks Concerning Financial Restructuring

Accomplish the following by making improvements to regulations and practices and changing mentality;

◇ Enhancement of soundness and competitiveness of

financial institutions

◇ Enhancement of efficiency of financial market

◇ Establishment of market discipline

a. Enhancement of Soundness and Competitiveness of Financial Institutions

- Continued monitoring of financial institution's normalization process

- Ensure sound management of financial institutions by strictly enforcing prompt corrective actions system based on the degree of capital adequacy, thereby stabilizing the financial system

- Require the improvement of management strategies and setting of earning enhancement targets for banks receiving fiscal assistance

- Alleviate entry barriers to the financial market and strengthen accountable management system

- Enhance competitiveness through ongoing efforts toward financial deregulation

b. Enhancement of Efficiency of Financial Market

- Adoption of a system of differentiated interest rates according to risk and credibility

- Introduction of interest rate term structure by activating government bond market

- Develop an active stock market so that corporates may improve their capital structure through direct financing

- Launch a futures market as a way to provide a means to hedge risk

c. Establishment of Market Discipline

- Enhance credibility of accounting related information and upgrade disclosure system

- Prevent the risk of moral hazard by transforming the Deposit Insurance System (full-blanket guarantee → limited guarantee)

- Strengthen corporate credit evaluation system as well as credit information system for individuals

d. Prudent Financial Supervisory System

- Ensure a smooth transition of surveillance and investigative functions upon the launch of the integrated financial supervisory organization on Jan. 1, 1999

- Transform the financial supervisory system into one that services market participants by making a clear distinction between redundant regulatory measures and those provisions that fall in the ranks of prudential regulation

- Introduce a function-based regulatory system utilizing experts from varying capacities

IV. Corporate Restructuring Achievements and Future

Plans

1. Major Achievements

- Signing of capital structure improvement agreement between major creditor banks and top 64 chaebols (Feb. - May '98)

O Develop capital structure improvement schemes, set up plans to nominate outside directors and auditors, and nominate owner of business group as CEO of core business unit

- Designation of nonviable corporates (June 18, 1998)

O Each bank installed a "Corporate Viability Assessment Committee" on May 9, 1998 and assessed the viability of a total of 313 corporates, including corporates belonging to 11 emergency loan recipients and weak corporates affiliated with the top 64 chaebols

O 55 corporates representing 17.6% of evaluated corporates (out of the 55, 20 belong to the top 5 chaebols, whereas 32 belong to the 6-64 chaebols)

- Assistance toward SMEs

O "Special Task Force for SMEs" was installed at each bank for the increased financial assistance toward relatively sound SMEs (May 9, 1998)

O SMEs were categorized into 3 classes that are 'first priority for support,' 'conditional support' and 'others' (end-June, 1998)

※ a total of 22,199 corporates were categorized (in loans over 1 billion won per creditor bank)

· corporate receiving first priority for support: 7,851 (35.4%)

· corporate receiving conditional support: 12,926 (58.2%)

· others: 1,422 (6.4%)

O Banks will be exempt from the responsibility of NPLs that occur as a result of new loans extended up to the end of September, 1998 to corporates classified under the 'first priority for support' and 'conditional support' categories, thereby inducing an environment conducive to SME financing

O As a way to ease credit crunch, banks are to extend maturity of SME loans to the end of December, 1998 (May 15)

O The Banking Supervisory Authority dispatched its staff, amounting to 48 persons, to banks for the purpose of monitoring the progress and activities relating to SME assistance (June 23)

- Set up of workout teams at banks (June 20)

O Workout teams, which will be responsible for the assessment of corporate viability will directly report to the president of each bank

O As for the top 5 chaebols, dedicated teams separate from the workout teams will be organized for each chaebol (July 2)

- Signing of corporate restructuring agreement (June 25)

O A corporate restructuring agreement was signed as a way to ensure that a collaborative relationship was upheld among creditor financial institutions during workout process

O As of September 25, 18 out of top 64 chaebols (50 firms) and additional 7 big corporates have signed the agreement

- Appointment of advisory groups

O Advisory groups will be utilized to the fullest extent possible so as to enhance the transparency and professionalism of the workout process

O Necessary procedural matters relating to the technical assistance loan from the IBRD, which will be utilized by the 6 large creditor banks to employ advisory groups, are in progress

2. Future Plans

- 5 top chaebols

O September 15th∼November 15th: Develop preliminary restructuring plan

O November 15th∼December 15th: Mediation between major creditor financial institutions and chaebols

O Until December 15th: Final decision to be reached with regards to each chaebol's restructuring program at the creditor banks council. Core issues falling out of the program will be incorporated in the capital structure improvement plan.

- 6-64 chaebols and large corporates

O Screening of corporates to undergo workout either by the designation of the creditor banks or by the application of chaebols themselves

O Workout process will be conducted upon negotiations between the creditor financial institutions and corporates, incorporating contents laid out in the corporate restructuring agreement

- SMEs

O Workout will be driven at a bank level, while assistance to corporates eligible for 'first priority for support' and 'conditional support' will be carried out in a swift manner

- Dismantling of cross guarantees

O Develop a scheme to dismantle cross guarantees based on market principle

- Credit management system for business groups

O Upgrade credit management system to international standards through the cutback in credit ceilings on single interlinked business groups (from 45% of equity capital to 25% of equity capital) and the redefining of large credits (credit exceeding 15% of equity capital → 10% of equity capital)

- Enactment and amendment of legislation relating to restructuring

O Undergo discussions with related ministries to enact the "Provisional Law for Corporate Restructuring" so as to resolve impediments throughout the corporate restructuring process

O Amendment to the Tax Exemption Act so as to render support toward tax burdens

V. Expected Outcome of Restructuring

1. Eradication of Financial Institution's Non-performing Assets

- Afford financial institutions the opportunity to remove a large amount of non-performing assets, which have heavily burdened banks and non-bank financial institutions alike, from their books, permitting financial institutions to carry out management on a strong and stable foundation

- NPLs of financial institutions as of end-June, 1998, amount to 63 trillion won (banks: 40 trillion, non-banks: 23 trillion), which accounts for 10.2% of total credits

O Approximately 20 trillion won of NPLs (or 1/3 of total NPLs), most of which belongs to troubled banks, will be resolved by the end of September

※ In the case of 12 troubled banks, on average, 70% of NPLs will be purchased

O Starting from October NPLs of sound banks, specialized banks and non-bank financial institutions will be resolved, aiming at the complete resolution of NPLs by the first half of 1999

Summary of NPLs (End of June, 1998)

(in trillion won)


Total Credit

Total NPLs 1)

NPL ratio

Banks

471.6

40.0

8.5%

Non-banks

153.2

23.5

15.3%

Total

624.8

63.5

10.2%

1) NPLs : loans classified as substandard and below

- Once this process is completed these financial institutions will turn into clean banks paralleling those of industrialized nations (the NPL is less than 1% of total credit) and drawing an end to the heavy burden of NPLs borne by the financial institutions

2. Improvement of capital structure of financial institutions

- Financial soundness of troubled banks with BIS ratio below 8% is expected to improve significantly

O 5 banks had their business transferred to banks with healthy financial structure

O 3 newly merged banks will be provided with fiscal assistance

O 2 banks that will be sold to foreign buyers will bring in large-scale foreign capital

O 9 banks pursuing normalization plans on their own will improve capital structure through self-rescue efforts and foreign capital inducement

※ A number of specialized banks, including KDB, Industrial Bank of Korea and KEXIM will receive fiscal support during 1998

- With the capital adequacy problem, which was the main cause of credit crunch, resolved, the real economy will be stimulated and we will be in a far better position in terms of inducing foreign capital

3. Foundations for Real-Sector Economic Recovery

- Acceleration of workout process

O With the normalization of the banking sector, which in turn drives the corporate restructuring process, corporate sector restructuring will be conducted in a more bold and speedy fashion

O Corporte restructuring will be completed by end-December of this year

- Full-fledged economic stabilization policy

O Financial and corporate restructuring will be completed by the end of this year, leading to the recovery of the intermediary function of the financial market and the alleviation of credit crunch

O The weak industrial sector will be rejuvenated and an economic stabilization policy will be pursued for sustained economic growth, thereby realizing a full-fledged economic recovery by the second half of next year

O In the longer term, sound leading banks that can withstand macro economic shocks both internal and external will be created and these banks will help induce sustained growth of the real economy

- Restoration of foreign investor confidence

O By pushing for swift and concrete results in its restructuring efforts, Korea will be able to differentiate itself from other crisis ridden countries and at the same time international investors that were reluctant to acknowledge Korea's firm commitment will be persuaded, restoring foreign confidence in Korea to acceptable levels


4. Improvement of Banking Practices

- Subsequent to the resolution of 5 banks, customers changed their preference from high risk, high return financial products to safe, quality oriented products

O While deposits at the acquiring banks increased, other banks experienced a drop in deposits

O As the risk factor of performance based products became apparent to customers, new deposits at bank trust accounts decreased, while regular saving accounts saw an increase in deposits

- Funding costs of sound banks will be reduced once the financial market is transformed into one based on public confidence

5. Moving onto a More Competitive Financial Sector

- Financial restructuring will reshape the financial sector, by introducing a new market structure based on competition among players to render high quality financial services

O Financial institutions that do not possess the capability to recover on their own or even with financial assistance have no chance of returning to normal operations will be resolved as a general rule

· Resolution of nonviable financial institutions that impaired market order through reckless investment and excessive competition to attract customers

※ Out of a total of 410 financial institutions 55, or 13.4% of the total, were exited (as of Sept., 1998)

O Creation of large-sized leading banks, which will spearhead the financial industry, through bank consolidation

· Commercial Bank of Korea/Hanil Bank : Total assets of 100 trillion won

O Bank consolidation among banks with contrasting speciality areas, thus bringing out synergy effect to the maximum extent

· Merger between Kookmin Bank, which specializes in retail financing and LTB, which centers on corporate financing

6. Efficiency of the Financial Industry

- Representative benchmarks measuring efficiency of banks, such as total assets per employee and ratio of operational revenue to personnel expenses have improved substantially in the first half of this year

O Owing to the ongoing downsizing of staff, assets per employee and deposits per employee, 5.9 billion won and 4.1 billion respectively, have improved extensively compared to that of year-end 1997 levels

O Interest rate margin has broadened as a result of wide fluctuations in interest rates and the unsymmetrical movement in deposit and lending rates

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Structural Reform Planning Unit

Financial Supervisory Commission

Seoul, Korea