The Korean Economy in Transition

The Korean Economy in Transition

An Institutional Perspective

O. Yul Kwon

This informative book provides a comprehensive examination of the dynamics of institutional reform and the transition of the South Korean economy. The analysis, based on an institutional approach, stretches over three decades of remarkable economic success under a state-led system, through the 1997 financial crisis, to the current market-oriented system.

Chapter 9: The Korean Financial Sector: Its Transition and Future Agenda

O. Yul Kwon

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


9.1 INTRODUCTION Financial systems play a critical role in economic development. They comprise financial intermediaries such as banks, securities companies and insurance companies that pool funds and allocate them to appropriate projects, monitor firms and facilitate financial transactions. 1 Each nation has a distinctive financial system shaped by traditions, regulations, institutions and stage of economic development. The literature on financial systems generally categorizes two types: the US fmancial system based on the securities market and the German financial system based on banks (Jwa and Hahn 2003). The former is referred to as the 'market-based' system and the latter as the 'bank-based' system. Korea has adopted the latter system. The foundations of a modem financial system in Korea were laid in the early 1950s on the new institutional bases provided by the Bank of Korea Act and the General Banking Act. Since then, with several structural reforms, Korea's financial system has improved, strengthened and expanded over time. Yet by 1997 it became one of the main culprits of the financial crisis that rocked the Korean economy. Hence, the financial system, in particular the banking sector, has undergone drastic reforms in the wake of the crisis, and it has emerged as more efficient, transparent, stable and internationally competiti ve. As the current global credit crisis has deepened, the Korean fmancial system has once again been destabilized. The 2008 US fmancial crisis, which was at first regarded as a parochial fmancial event, has spread quickly across the world, attesting to the advanced state...

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