Financial Restructuring in Korea and Japan: Resolution of Non-Performing Loans and Reorganization of Financial Institutions

Abstract

South Korea and Japan responded to their financial crisis of the late 1990s by restructuring financial institutions. Also, financial authorities were created to supervise financial institutions and lead financial restructuring. Financial restructuring focused on the resolution of non-performing loans that had been contributing to financial failures and on strengthening their equity capital bases for sound management. Huge amounts of public funds were mobilized to pursue these policy goals. The Korean government took more drastic measures by closing or merging many failing financial institutions. Financial restructuring also facilitated bank concentration in Korea — and Japan — giving births to several mega banks. Both governments of Korea and Japan encouraged bank concentration by allowing the establishment of a financial holding company. The Korean government was more actively involved in merging banks while Japanese bank mergers were taken by business initiatives.Financial restructuring is expected to bring more market oriented business practices among financial institutions and loosen cooperative ties among financial institutions, corporations, and financial bureaucracy in both countries. Close bank-corporation ties through main bank system and corporate networks within a business group are being loosened in Japan particularly since concerned parties have come to seek market rationality over loyalty. On the other hand, the intervention in financial sector and the mediation in bank-corporation relationship by financial bureaucracy are expected to be weakened in the case of Korea. Nevertheless, discretionary power of Korea's financial bureaucracy appears stronger for the time being since it took the helmsman of determining which financial institution is out of market.

Management and Resolution Methods of Non-performing Loans: A Review of the Literature

“…During the last decade, a remarkable literature on management of banking crises and restructuring has been written (Τurner and Hawkins, 1999;Latter, 1997;Huang, 2001;Lee, 2002;Hoggarth et. al., 2004) and particularly on management of NPLs (Woo, 2000;Shih, 2004;Xu, 2005;Matousek and Sergi, 2005).…”

Management and Resolution Methods of Non-performing Loans: A Review of the Literature

“…During the last decade, a remarkable literature on management of banking crises and restructuring has been written (Τurner and Hawkins, 1999;Latter, 1997;Huang, 2001;Lee, 2002;Hoggarth et. al., 2004) and particularly on management of NPLs (Woo, 2000;Shih, 2004;Xu, 2005;Matousek and Sergi, 2005).…”