Edited by Duck-Koo Chung and Barry Eichengreen
Chapter 8: Financial restructuring
8. Financial restructuring1 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...
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