Chapter 13: Corporate Governance in Korean Banks
Doowoo Nam INTRODUCTION Financial institutions are important in a sense that they aﬀect the behavior of ﬁrms through lending or collecting fund based on the evaluation of a business performance of the ﬁrms and ﬁnancial status. For a long time, however, Korean ﬁnancial institutions ignored the credit evaluation of borrowers and risk management, having performed only a function of allocating ﬁnancial resources according to governmental policy decisions. Therefore, the Korean banking industry was criticized as one of the main factors leading to the 1997 ﬁnancial crisis. Of course, government intervention for various reasons was responsible for the weak banking system, but the wrong structure of corporate governance and decision-making system of Korean banks contributed to the fragility of the banking industry. Of cardinal signiﬁcance in bank management is the capability of evaluating and managing the credit quality and risks, which cannot be easily or perfectly quantiﬁed. In banking institutions, therefore, the possibility for bad loans or poor investment decisions would signiﬁcantly increase if the decision making process of making loans or investments is under the control of one or two people. In this regard, it becomes most important that the authority is not concentrated on a few, especially a chief executive oﬃcer (CEO), in designing the decision-making system of banking institutions. This is where the importance of corporate governance comes in at banking institutions. For the sound corporate governance of banking institutions the decision-making authority should be allocated equitably so that ‘checks and balances’ are...
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