October 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 This statement leads us to believe that the review was based on outdated information and is not in line with underlying circumstances.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 negative review on the Korean banking industry does not accurately reflect the current situation and future prospects.
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Structural Reform Planning Unit.
Financial Supervisory Commission