FSC Press Release upon Ailing Bank Resolution
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<Major Features>

  • Final assessment results of the Bank Appraisal Committee were reported to the Financial Supervisory Commission on June 28, 1998. A special meeting of the Financial Supervisory Commission was held at 7:00 am on June 29, 1998 and utilizing input from the committee decided the following;

    • Banks whose rehabilitation plans are deemed feasible, such as Cho Hung Bank, Commercial Bank of Korea, Hanil Bank, Korea Exchange Bank, Peace Bank of Korea, Kangwon Bank and Chungbuk Bank each received conditional approval of rehabilitation plan and are required to submit an implementation plan containing strong management improvement plans by the end of July

    • Banks whose rehabilitation plans are deemed not feasible, such as Dong Hwa Bank, Dongnam Bank, Dae Dong Bank, Chung Chong Bank and Kyungki Bank each received disapproval of rehabilitation plan and will have to transfer their assets and liabilities to Shinhan Bank, Housing & Commercial Bank, Kookmin Bank, Hana Bank, Koram Bank, respectively

  • The government will exert utmost effort in minimizing clients' inconveniences during the course of bank resolution by implementing following measures

    • Not only payment settlement and deposit repayment businesses but also businesses of overdraft and bill discount will be carried out as normal

    • In order to restore financial market stability as soon as possible, liquidity situation will be improved and credit extention toward corporate clients of resolved banks will be enhanced

1. Progress to-date

  • Submission of rehabilitation plans (April 30, 1998)

    • 12 banks with BIS ratio that fell short of 8% as of December 1997 were required to submit rehabilitation plans

  • Accounting firms' evaluation on rehabilitation plans (May 1 - June 8, 1998)

    • In accordance to evaluation criteria agreed upon with the IBRD, the feasibility of the following elements were evaluated
      • capital adequacy, recapitalization plan, asset quality classification, reduction plan for risky assets, cost reduction scheme, management improvement plan etc.

  • Bank appraisal committee's evaluation on rehabilitation plans (June 20 - June 27, 1998)

    • Bank appraisal committee (total of 12 persons; chairman 1, members 11)

    • Experts were selected from the private sector to ensure objectivity, professionalism and efficiency
      • Chairman : representative of the lead accounting firm from the group of accounting firms that conducted evaluation on rehabilitation plans
      • Members : accounting firms (5), law firms (2), professor (1), research institute (1), consulting firm (1), international expert (1)

  • Submission of appraisal committee's evaluation results of rehabilitation plans (June 28)

2. Evaluation results and required actions

    Approval

  • None of the banks received approval

  • 4 large commercial banks, Cho Hung Bank, Commercial Bank of Korea, Hanil Bank and Korea Exchange Bank, were recommended to be approved with some reservation by the Bank Appraisal Committee, since they were evaluated as being vulnerable to external macroeconomic conditions and contents of rehabilitation plans indicated a strong reliance on retained internal sources rather than external funds. Thus the FSC decided not to approve their rehabilitation plans.

    Conditional approval

  • 7 banks received conditional approvals : Cho Hung Bank, Commercial Bank of Korea, Hanil Bank, Korea Exchange Bank, Peace Bank of Korea, Kangwon Bank and Chungbuk Bank

    ¡ØThe Bank Appraisal Committee recommended to disapprove the rehabilitation plan of Peace Bank of Korea. However, since as of March, 1998 its total assets exceeded its total liabilities, it legally cannot be classified as a non-viable financial institution (in accordance to provisions of the ¡ºAct Concerning the Structural Improvement of the Financial Industry¡») However, taking into account the evaluation reviews by the appraisal committee it will receive conditional approval under the condition of extensive recapitalization efforts

    Disapproval

  • 5 banks received disapprovals : Dong Hwa Bank, Dongnam Bank, Dae Dong Bank, Chung Chong Bank and Kyungki Bank

  • These banks were deemed to have little possibility of achieving their rehabilitation plans and therefore were deemed not to be capable of carrying out normal business operations

<Resolution scheme>

    Conditional approval

  • Submission of implementation plan containing forceful management reform and recapitalization plan by end of July

    • Submission of the quarterly management improvement report

  • Contents to be included in the implementation plan

    • Change in Management
      - large scale replacement of management
      - management to be recruited from outside
      - experts of foreign national are to be included

    • Recapitalization and merger plans
      - minimum recapitalization requirement will be imposed on each bank
      - concrete schedule for recapitalization (mandated submission of deposit certificate etc. by end of July)
      - voluntary merger for cases in which recapitalization is deemed difficult

    • Capital reduction plans
      - capital reduction equivalent to the difference between net asset value (calculated using asset assessment results as at the end of March, 1998) and paid-in capital
      ¡æ if net asset value is negative full reduction of capital is required

    • Management improvement plan
      - cost reduction through cutback in branches, organizational structure and personnel as well as earnings improvement plans

    • Schemes to prevent the accumulation of non-performing assets

  • In the case of disapproval or unsatisfactory implementation, those banks will be subject to business transfer or merger orders

    Disapproval

    ¨ç Business Transfer

  • Good assets and liabilities of the resolved bank will be taken over by the acquiring bank under a purchase and assumption arrangement

    • As a way to minimize the period effected by business suspension, a P&A arrangement will be used to resolve banks, taking after experiences of advanced nations (legal basis :¡ºAct Concerning the Structural Improvement of the Financial Industry¡»article 14 paragraph 2)

    • liabilities to be transferred : all liabilities, excluding severance and retirement reserves

    • assets to be transferred : all assets (excluding assets with preferential rights such as retirement payments and national tax as well as substandard non-performing assets and below)

  • Banks acquiring resolved banks

    • Selection criteria
      - BIS ratio above 9% as of the end of 1997
      - possesses the capability to stabilize in a timely manner after acquiring resolved bank and is deemed capable to recapitalize through right issues or inducement of foreign capital
      - banks that can maximize the synergy effect considering competitive edge and branch distribution

    ¨è Business suspension and licence revocation

  • Resolved banks' business will be suspended and their license revocation will be requested to the Minister of Finance and Economy

  • However, with the approval of the receiver, the resolved bank may continue to engage in certain lines of businesses such as call back of loans and property disposal

3. Supplementary measures toward depositor and corporate client protection

    a. Minimization of inconveniences to depositors

    • Not only deposit repayment and payment settlement businesses but also overdraft and discount bill will be continued

      • Checks issued at resolved banks will be cashable at the acquiring banks

    • New savings and loan businesses will be carried out at branches of the acquiring banks

    b. Measures to prevent corporate liquidity problems

    • Increased support toward corporate clients of resolved bank

      • In place of the resolved bank the acquiring bank will take care of the following businesses
        - existing loans will be kept intact for a certain period according to orignal conditions
        - L/C as well as other payment guarantees will be confirmed or re-guaranteed
        - opening of L/C accounts

    • Liquidity and guarantee support toward acquiring banks

      • Enhancing call market liquidity by encouraging active participation by financial institutions
      • Acquiring banks will be provided liquidity through BOK's rediscount ceiling increase and purchases of MSBs and others on RP basis
      • Special guarantees by the Credit Guarantee Fund will be provided for corporate client's loans of the resolved bank
      • The excess of large exposure total limits or exposure limits per individual or business group is exceptionally approved for the acquiring banks

    • Loan rollovers for relatively large enterprises and SMEs (announced on June 26th) for alleviating liquidity squeeze

      • Exclusive of enterprises affiliated with the top 64 business groups (Enterprises that were identified as "non-viable", SMEs identified as "other enterprises" and marginal corporates, including insolvent corporates are to be excluded)
      • Financial institutions to participate : banks, securities companies, insurance companies, merchant banks
      • Commercial bills, privately-placed bonds or bond repayment guarantees with maturities through December 31, 1998 will be subject to rollover (qualified loans with maturity between June and December, 1998 is approximately 84 trillion won)

    c. Measures to protect acquiring banks from spilled over problem loans

    • Korea Deposit Insurance Corporation (KDIC) will cover for differences between good assets and liabilities
    • Purchase of NPLs and recapitalization of acquiring bank
    • Korea Asset Management Corporation (KAMC) will purchase NPLs that occur within a given period after P&A transaction (put back option will be allowed)

    <Reference : Protection provided to acquiring bank in the U.S. case>

      (1) the acquiring bank is permitted to sell back to the FDIC additional NPLs within a given time frame (eg: 1 year)
      (2) the acquiring bank is permitted to sell back to the FDIC a fixed amount of loans at book value or the original purchase price during a specified time frame
      (3) the acquiring bank is permitted to sell back to the FDIC up to a specified amount of loans at a discount (eg; 95% of purchase price) during a specified time frame
      (4) some combination of (2) or (3)