Shortly after the 15th Presidential election in December, 1997, the National Assembly passed a number of financial reform bills which would transform the whole map of the Korean financial industry. Some legislation was the result of financial sector reform efforts staged by the government throughout the year, and others were dictated by the International Monetary Fund (IMF) in order to secure a rescue fund.

The gists of the financial reform package are:
- to grant total independence to the Bank of Korea (BOK), the central bank, in implementing monetary policy with price stability as its main mandate;
- to establish a unified financial regulatory agency with operational and financial autonomy; and
- to enhance prudential regulations over financial institutions for safe and sound operations.

Bank of Korea Act

The revised Bank of Korea Act (Law No. 5491), which shall come into force on April 1, 1998, provides for the central bank's independence and neutrality in formulating and implementing monetary policy. The BOK has to set a goal in achieving price stability in consultation with the government, and to materialize the operational program of the monetary policy for the stabilization of prices.

The policy-setting Monetary Board shall be chaired by the Governor of BOK rather than the Minister of Finance and Economy. The Governor of BOK is appointed by the President after the deliberation of the State Council.

The Minister of Finance and Economy may no longer convene the meeting of the Monetary Board, nor suggest agenda to the Monetary Board. However, the Vice Minister of Finance and Economy may attend the Monetary Board's meetings and express his opinion. Likewise, the Governor of BOK may participate in the deliberations of the State Council with respect to monetary and financial issues.

If the Minister of Finance and Economy deems the decision of the Monetary Board contradictory to the government policy, he may request a second-discussion to the Monetary Board. If the seven-member Monetary Board overrides his demand with more than five members voting, the President has the final say in such controversial issue.

The BOK has to transfer its banking regulatory authority to the newly established Financial Supervisory Agency.

Act for Establishment of Financial Supervisory Agency, Etc.

The fiercely debated Act for Establishment of Financial Supervisory Agency, Etc. (Law No. 5490), which shall be effective on April 1, 1998, consolidates the three existing regulatory bodies in banking, securities and insurance into a single supervisory organization. This unified financial watchdog, under the Prime Minister's Office, comprises the Financial Supervisory Commission, a nine-member decision-making body, and the Financial Supervisory Board, a special entity with no paid-in capital in charge of supervision and regulation of banks, securities firms and insurance houses.

The Chairman of the Financial Supervisory Commission also represents the Financial Supervisory Board and recommends the executive officers, including the Vice Superintendents and the Assistant Superintendents of the Financial Supervisory Board, to the Financial Supervisory Commission which shall appoint each of the executive officers.

The financial resources of the Financial Supervisory Board will include the contributions from the government, the BOK and other financial institutions, and the audit charges from the financial institutions. The Financial Supervisory Board shall set up a standing mediation committee to settle a variety of financial disputes between financial institutions and the consumers receiving their financial services.

Act for Structural Reform of Financial Industry

The revised Act for Structural Reform of Financial Industry (Law No. 5496) purports that the efficiency and competitiveness of the Korean financial industry shall be enhanced by means of structural reform of financial institutions. Now that the three existing regulatory bodies are to be consolidated into the Financial Supervisory Agency, the Minister of Finance and Economy's authority with respect to the mergers and conversions of financial institutions, the exit, liquidation and bankruptcy of troubled institutions shall be conferred to the Financial Supervisory Commission or the Financial Supervisory Board, as the case may be.

The objective and function of the Financial Supervisory Commission is to supervise and offer assistance to improve the management of the troubled financial institutions. The Financial Supervisory Commission may request these debt-ridden organizations to increase capital, retire shares, seek merger and acquisition by a third party, suspend duties of the directors and appoint an administrator to the under-capitalized financial institutions.

Also, special procedures for investment by the government or the Deposit Insurance Corporation in under-capitalized financial institutions are introduced. The Financial Supervisory Commission may request the government or the Deposit Insurance Corporation to invest in any under-capitalized financial institutions in order to accelerate and facilitate the normalization of the management of such financial institutions. In this case, the Financial Supervisory Commission may ask them to decrease the capital of such financial institutions through retirement of shares or any other methods of which procedures are also streamlined by this amendment.

At the same time, the power of supervisory authorities will be revamped to reflect the reform of the financial supervisory system. Thus, the authority to designate an entity as an under-capitalized financial institution, to impose management improvement actions, and to establish standards for prompt corrective actions shall be transferred from the Ministry of Finance and Economy, the Monetary Board and the Securities and Exchange Commission to the Financial Supervisory Commission. Furthermore, the authority to enforce prompt corrective actions shall also be transferred from the Ministry of Finance and Economy, the Monetary Board and the Securities and Exchange Commission to the Financial Supervisory Commission.

Depositor Protection Act

So far, the deposit insurance funds have been managed by the respective regulatory bodies in charge of banks, securities firms, insurance houses, merchant banks, credit co-operatives, etc. The revised Depositor Protection Act (Law Nos. 5421, 5492) calls for the consolidation of such diverse deposit insurance funds into the Deposit Insurance Corporation.

The consolidated Deposit Insurance Corporation is expected to take an initiative in reorganizing troubled financial institutions by demanding on-site examinations of, financial contract transfers from or bankruptcy petitions against under-capitalized institutions. In an effort to restructure the financial industry across the board, the government may invest some of the state-held properties in the Deposit Insurance Corporation. This is intended to protect deposit holders from any possible shutdowns of banks and other financial institutions.

Latest Amendment to the KDB Act

In line with the financial reform under way, the Korea Development Bank Act (the "KDB Act") was amended by the National Assembly on December 29, 1997. This amendment was made by the Act Concerning Adjustment of the Certified Public Accountant Act, Etc. Following the Act for Establishment of Financial Supervisory Agency (Law No. 5505). This Act was promulgated on January 13, 1998. The newly amended provisions of the KDB Act are as follows:

First, the authorized capital of KDB was increased from five trillion won to ten trillion won, which will be fully subscribed to by the government;

Second, the KDB's obligations to the government in case of borrowing from the government are subordinated to other indebtedness incurred by KDB in conducting its operations;

Third, the government's offsetting of the losses at the year-end may be implemented by granting government-held securities subject to the deliberation of the State Council, the approval of the President and the consent of the National Assembly; provided, however, that in case it is deemed urgently necessary for the sound operation of KDB and the stabilization of financial order, the consent from the National Assembly may be obtained ex post facto; and

Fourth, the Minister of Finance and Economy may, when deemed necessary, entrust the Superintendent of the Financial Supervisory Board the authority to examine KDB.

At the same time, the Act Concerning Improvement of Managerial Structure and Privatization of Public Enterprises (Law No. 5379) has been amended to ensure that, in case the government contributes in kind to increase the paid-in capital of KDB and other government banks, the stock-ownership limitation does not apply thereto.

The latest amendment to the KDB Act has reflected the changes surrounding the Bank. Amidst the financial turmoil in the Korean banking industry during the final months of 1997, the government committed itself to infuse its resources into the troubled banks plagued by accumulated nonperforming assets and huge appraisal losses on security investments, i.e., by underwriting long-term subordinated bonds issued by the nation's commercial banks. Moreover, the Minister of Finance and Economy disclosed that the government plans to bail out Korea First Bank and Seoul Bank by investing in the paid-in capital increase subject to their viable rehabilitation plans.

Against this backdrop, Article 44 of the KDB Act bears full faith and credit of the government in case of any accumulated net losses that cannot be redeemed by KDB. To clarify the procedures, the government decided to revise some provisions of the KDB Act within the framework endorsed by the IMF by i) increasing the authorized capital to ten trillion won, and ii) inserting the transfer of government-held securities for the purpose of offsetting the deficit, as mentioned above.

Real-Name Financial Transaction and Secrecy Act

The former Presidential Fiscal and Economic Emergency Order concerning the real-name financial transaction system has been replaced in general by the Real-Name Financial Transaction and Secrecy Act (Law No. 5493), which became effective on December 31, 1997. However, the newly introduced long-term bearer bonds imply the loosening of the real-name system.

To witness the virtual demise of the real-name financial transaction system, the general tax formula on financial incomes exceeding 40 million won a year per household will be shelved indefinitely until the current economic crisis is resolved.
(Source: KDB Economic & Industrial Focus, March 1998)