Chairman's Speech at Seoul Foreign
Correspondent's Club

5. 21. 1998

Ladies and gentlemen

It is my honor to have this opportunity to share with you the framework and the key elements of the restructuring package for the financial and corporate sectors in Korea.

As you know, Korea is currently facing crucial challenges. At the core of them lies the successful installation of new rules into the Korean economy.

In the past, the government-led economy has had serious market imperfections, in particular, deep rooted problems with capital resource allocations and business opportunities.

Past industrial policies has traditionally meant capacity-driven policies for the largest companies and have created a vigorous demand for new capital in the rapidly growing economy.

In other words, many Korean industries have experienced a short supply of monetary capital. This has been the result of commercial banks focusing on funding government-led projects rather than lending to competitive markets.

This is evident from the long lines of borrowers knocking on the doors of the banks. This tradition has distorted the fair allocation of credit.

Only large companies with sufficient collateral had been the beneficiaries of the limited credit resources while small to medium sized companies had been subject to a constant credit crunch.

In turn, large companies have been active in expanding their production capacity and diversifying into new and often non-competitive businesses with borrowed capital. Thus, high leverage and thin margin are common characteristics of the Korean companies.

As a result, the non-performing loans increased astronomically and the Korean economy lost its credit from the international financial circles.

To restore as quickly as possible international credibility in Korea, the government will gather all of its capacities to execute the restructuring programs.

Ee strongly believe that any delay in implementation will increase the cost of restructuring exponentially and decrease our chances of a prosperous future. Restructuring is not a matter of choice but a matter of survival.

Today, I would like to focus on the topics not addressed in the press release yesterday on the restructuring scheme .

Top priority will be given to the reform of commercial banks. Restructuring of non-bank financial intermediaries will be the second priority and will be handled during the latter half of this year. However, any institutions destabilizing the financial system will be shut down without hesitation.

Currently, it seems that a great deal of the banks' new lending is focused on shoring up large borrowers whose default on existing debts could endanger the banks.

Such "evergreening" practices are inherently unstable, starve worthy small and medium-sized enterprises of credit, and further erode bank's portfolio and franchise value.

Therefore, corporate restructuring of the debt-ridden large companies will be pursued in tandem with bank reforms.

The cost of restructuring must be met primarily by the financial institutions or corporations themselves so as to minimize the burden on taxpayers and the risk of moral hazard. The government's role centers on instituting the proper environment for reform.

With respect to financial institutions, the fiscal support will be provided as a supplementary measure to their own restructuring. The government will not directly intervene in the corporate sector restructuring process.

The government's fiscal support will provide for 1) the purchase of non-performng loans by the Korea Asset Management Corporation, 2) recapitalization of financial institutions and 3) depositor protection.

Currently, the Korean government is targeting 100 trillion won worth of non-performing loans for immediate disposal .

The KAMC will purchase the half of NPLs at an estimated market price, approximately 50% of the book value, i.e. 25 trillion won.

The Korea deposit Insurance Corporation will inject new capital of about 16 trillion won for the recapitalization of viable financial institutions.

The government expects that 9 trillion won will be sufficient to meet the demand for increased depositor protection.

Fiscal resources to address restructuring measures will be mobilized largely by means of issuing public bonds. The KAMC and the Deposit Insurance Fund will issue bonds 25 trillion won and 15 trillion won, respectively. The government will provide a guarantee on these bond issues and will bear interest costs.

The 12 commercial banks currently failing to meet the BIS 8% ratio submitted their restructuring plans on April 30th. It is my impression after briefly browsing through them that they fail to satisfy the necessary requirements.

Upon receiving the plans, the 6 internationally recognized accounting firms are invited to conduct an assessment and audit of their recapitalization plans as well as their assets.

They will focus on finding hidden non-performing assets thereby making the involved banks' balance sheets more transparent according to the international standard.

Then, a professional independent committee will be formed to evaluate and compare the plan with audit results. Based on the outcome of the comparison, the committee will make specific recommendations.

The approval process of the plans will be completed by no later than the end of June.

If the plan is not approved or is not implemented as agreed, the FSC will adopt appropriate measures including forced mergers, acquisitions, or liquidation.

The remaining 12 commecial banks with a higher-than-8% BIS ratio at the end of last year will also be placed under a strict diagnotic review by the Bank Supervisory Authority very soon.

Non-bank financial institutions will be restructured based upon the majority shareholders initiative.

The restructuring of leasing companies will be undertaken after the asset quality assessment in conjunction with the restructuring of the parent company banks.

For any ailing merchant banks, the FSC will further review the performance of their rehabilitation plans and issue any necessary measures such as capital increases and suspension of operations based on their BIS capital adequacy ratio targets, 6% and 8%, by the end of June of 1998 and 1999, respectively.

Insolvent securities firms and insurance companies will be liquidated by the end of September, 1998 commensurate with the establishment of a transparent criteria for financial prudence.

Investment trust companies will be required to pursue their own recapitalization plans. As market conditions become favorable, the FSC will step in to remedy their operations along with banks' trust accounts in the second half of this year.

In order to minimize the side-effects of financial sector restructuring, measures for stabilizing the financial markets will also be implemented.

Financial stability will be ensured by setting up contingency plans under various scenarios such as liquidity shortage, etc.

Emergency liquidity will be provided by the Bank of Korea when a severe liquidity shortage takes place in the wake of accelerated restructuring.

Deposit guarantees will be ensured until the completion of all restructuring in order to prevent any bank runs.

Concerning corporate sector restructuring, debt reduction agreements between main creditor banks and 64 business groups have been reached.

Each bank will establish a review committee composed of in-house as well as outside experts to identify ailing corporations. By ailing corporations, I mean those who cannot report a profit in a normal business environment, for example of 10 to 12% interest rate.

Banks' asset assessments done by the accounting firms are the same as evaluating the viability of each corporation. Adequate provisions for the banks will be required for the loans to the not-so-viable corporations. Thereby the banks can easily cut losses by terminating credit to any non-viable entities.

Before the end of this month, some companies which are beyond any hope of saving will be identified. This task is similar to removing the oxygen mask from brain dead patients, and will save oxygen for the sound companies.

We will encourage the use of outside advisory groups in order to facilitate a self-managed restructuring process, and implement chaebol restructuring in full scale.

A variety of special purpose vehicles will be established and the joint venture with the foreign corporations will be encouraged so that capital can be provided to viable companies from the outside.

The "Structural Reform Planning Unit" has been established within the Financial Supervisory Commission(FSC). This organization will play a pivotal role in the crisis management and restructuring of not only the financial industry but also the corporate sector.

The unit recruits experts from the academic, legal, accounting and financial fields by open competition. We will also use some experts dispatched from other government agencies or research institutuions. Many consultants from the World Bank are providing technical assistance to the unit.

I think you may have concerns regarding the Dong-Ah group which recently found itself in financial trouble, primarily due to the increase in receivables related with apartment construction.

The creditor's council, composed of 50 financial institutions, concluded that acquiring repayment through the restructuring of the group is the best way for creditors. The companies and assets of the group, saving the construction arm, are to be sold to domestic or foreign investors as soon as possible. The owner and CEO, Won-seok Choi has given up all his shares. The existing management will be changed.

Once again the corporate restructuring will be done under the banks' initiative, and the government won't intervene. If necessary, the government may provide the basic guidelines.

A good example of a large conglomerate's successful restructruing, I think, is the Halla group. Rothschild has decided to lend 1 billion dollars to Halla by acquiring the right to arbitrate M&As for the group. Rothschild will get the top priority of repayment for any money lent.

This money will be used for purchasing debts after deep discounts, and foreign capital will be induced by the creditworthiness and name-value of Rothschild.

I'd like to conclude this speech with wiping out a concern about staggering of restructuring. In terms of the speed of restructuring, we are a little ahead of the schedule suggested by IMF or IBRD.

The legal framework has already been overhauled, and the establishment of mutual funds and the tax reforms for corporate restructuring have been scheduled.

Asset assessments of financial intermediaries for systematic restructuring are conducted and government policy for fund raising have been coming out.

Although the corporate restructuring has not been advanced as expected because of the owners' exessive attachment to management control, they are beginning to understand that it is urgent and inevitable to adapt themselves to new environments.

Therefore, I believe, with technical assistance of international experts, there will be some visible progress in restructuring in the new futrue.

Since foreign participation in the Korean econony is so essential in overcoming the difficulties currently facing us, I would like to ask for your continuing support.

I welcome your advice any time, and expect to meet with you in person sometime in the near future.