The Korean Economy Beyond the Crisis

The Korean Economy Beyond the Crisis

Edited by Duck-Koo Chung and Barry Eichengreen

Providing an integrated analysis of the event and its consequences, the chapters in the book consider the causes of the crisis, the response of the US government and International Monetary Fund, adjustments in the Korean monetary and fiscal policies, and the success of financial and corporate restructuring. The concluding chapters bring the story up-to-date, describing the aftermath of the crisis and assessing whether there has been sufficient reform to facilitate the country’s recovery and growth.

Chapter 8: Financial restructuring

Joon-Ho Hahm

Subjects: asian studies, asian economics, economics and finance, asian economics, financial economics and regulation


1 Joon-Ho Hahm MOTIVATION AND QUESTIONS There has been a large volume of research seeking to determine the nature and causes of the Korean financial crisis.2 Despite this, there is still no consensus on how the crisis and its resolution have affected the financial system. This chapter, by focusing on the corporate financing pattern and portfolio structure of financial institutions, endeavors to characterize the ongoing transition in the post-crisis Korean financial system. Based upon this characterization, it then evaluates the progress in financial restructuring and derives implications for further reform. Specifically, the chapter addresses the following questions: G G G G How can we characterize the pattern of credit allocation during the pre-crisis investment spree that so heightened the vulnerability of the financial system? How has the flow of funds changed during the crisis and the post-crisis restructuring period? Specifically, how has restructuring affected the financing behavior of nonfinancial firms and the portfolio allocations of commercial banks? What has been the result of the reform measures undertaken following the crisis? From the viewpoint of comparative financial systems, how can we characterize the ongoing structural transformation of the Korean financial system? What are the risks associated with the structural shift, and what are the policy implications? THE FLOW OF FUNDS BEFORE THE CRISIS In recognition of the problems associated with the tight control exercised by the authorities over the financial system, the Korean government began to liberalize the financial sector in the 1980s. The first step was the...

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