Shelagh heffernan modern banking phần 7 pdf

[ 417 ] F INANCIAL C RISES ž In this region, exports (increasingly manufactured goods) trebled between 1986 and 1996 and, on average, made up about 40% of each country’s GDP by 1996. These countries, competing with each other in global markets, faced growing pressure from Chinese products and, frequently (except in Korea), the firms were foreign owned. ž Restrictions on capital movements had been liberalised, and by 1996 were completely free. These economies experienced a huge inflow of foreign credit but (see below) inward foreign direct investment had started to decline. Increasingly, foreign firms were looking to China as the Asian base for their manufacturing plants. For the five Asian countries, 18 $75 billion of net international credit was granted in 1995–96, consisting of bank loans (20%), net bond finance (22%) and net interbank (58%), compared to just $17 billion (or 18% of total net capital inflows) for net equity and portfolio investment. In 1997 it fell to $2 billion (just under 4% of net capital inflows), compared to $54 billion in foreign credit. 19 ž Large, indebted corporations exerted strong political influence. Nowhere was this more evident than in Korea. In the 1960s, the Korean government adopted an industrial policy that was to transform it from a largely agricultural economy to one based on manufacturing, which, by 1996, absorbed 90% of capital and accounted for 61% of GDP. The ‘‘economic miracle’’ was achieved through complex, interactive relationships between the government which directed state investment in around 30 chaebol: family owned industrial groups, each associated with a financial institution responsible for meeting the chaebol’s funding needs. Long-standing relationship banking consolidated the link between chaebol and bank. 20 Using funds generated from household savings, the government also supported about 30 state owned firms which were largely monopolies. The government promoted key sectors such as steel, vehicles, chemicals, consumer electronic goods and semiconductors. Provided an industry met the goals set by the state, it could expect protection from imports and foreign investors, preferential rates from state controlled interest rates, and cheap financing from the banks. There was significant competition among the four car manufacturers, the five chemical firms and four semiconductor companies. However, the emphasis was on revenue growth and capturing market share, rather than adding value. In the 1990s, return on capital was less than the cost of the debt. At the onset of the crisis in 1997, most of the chaebol had debt to equity ratios in excess of 500%. Any equity was held by the family, which meant there was little in the way of corporate accountability. In July 1997, the eighth largest conglomerate, the Kia group, collapsed, defaulting on loans of just under $7 billion. Two more chaebol had failed by December, which, together with other factors, undermined foreign and domestic confidence in the economy and contributed to the onset of crisis. 18 Korea, Indonesia, Malaysia, Philippines, Thailand. 19 Source: BIS (1998, table VII.2). 20 Bae et al. (2002) show that relationship banking can be costly to the firm in periods of bank distress. Looking at the bank crisis period, they show that firms which are highly levered experience a larger drop in the value of their equity. By contrast, the drop in share value is less pronounced for firms that rely on several means of external financing, and with more liquid assets. [ 418 ] M ODERN B ANKING However, Korea had the legal framework to deal with the chaebol problems. Creditors have been able to use the courts to put the chaebol into receivership. Though the Daewoo crisis did not come to the fore until mid-1999, its creditors negotiated rate reductions, grace periods and debt–equity conversions to stabilise its debt of $80 billion, then proceed with the break-up and sale of its assets. Other chaebol have been stabilised, after debt restructuring agreements with bankers. The state also intervened, requiring gearing ratios to be reduced to at least 200%, and prohibiting cross-guarantees of chaebol members’ debt. 21 The situation is quite different in Indonesia and Thailand, where corporate restructuring has been hampered by the absence of clear legal guidelines on issues such as foreclosure, the definition of insolvency and the legal rights of creditors. ž Exchange rate regimes: these countries had all adopted some type of US dollar peg. 22 In the absence of any serious inflation, real effective exchange rates were stable, with only a slight rise in 1995–96. Trade weighted exchange rates were also stable. Once the Thai baht came under pressure, and floated in July 1997, it depreciated rapidly. The other countries responded by widening their fluctuation bands (depending on the system of pegging), but the runs continued, forcing them, with the exception of Malaysia, 23 to float their respective currencies. The Indonesia rupiah was floated in August; the Korean won in December. All of these governments had used their central banks to defend the currency, exhausting much of their foreign exchange reserves 24 and pushing up domestic interest rates. The financial sector ž All of the Asian economies were bank dominated, with underdeveloped money markets. Between 1990 and 1997, bank credit grew by 18% per annum for Thailand and Indonesia, 12% for Korea. By way of contrast, credit growth averaged 4% per annum for the G-10, and was just 0.5% for the USA. By 1997, bank credit as a percentage of GDP for Thailand, Korea and Indonesia was, respectively, 105%, 64% and 57% – amounts that were close to, or in the case of Thailand above, those for developed countries. The rapid increase in the supply of credit, in the absence of the growth of profitable investment opportunities, caused interest margins to narrow (to the point that they were roughly equal to operating costs), even though riskier business loans were being made, largely in construction and property. Property was also used as collateral – soaring property prices fooled the banks into thinking the risk they faced from property-backed loans was minimal. 21 This account comes from Scott (2002), pp. 61, 63. 22 Hong Kong was the only economy in the region with a currency board. Ferri et al. (2001), using data on SME borrowers (1997–98), show that during a systemic banking crisis, relationship banking with the banks that survive has a positive value because it reduced liquidity problems for SMEs, and therefore made bankruptcy less likely. 23 Prime Minister Mahathir of Malaysia blamed speculators for the run on the ringgit and refused to float the currency, though the band was widened. 24 For example, foreign exchange reserves in Thailand amounted to about $25 billion pre-crisis, but by the time the baht was floated, the central bank had issued about $23 billion worth of forward foreign exchange contracts. [ 419 ] F INANCIAL C RISES Table 8.3 Bank Performance Indicators Thailand Indonesia Korea Malaysia Weighted Capital Assets Ratio 1997 9.3 4.6 9.1 10.3 1999 12.4 −18.2 9.8 12.5 ROA 1997 −0.1 −0.1 9.1 10.3 1999 −2.5 −17.4 9.8 12.5 Spread ∗ 1997 3.8 1.5 3.6 2.3 1999 4.8 7.7 2.2 4.5 ∗ Spread: short-term lending rate – short-term deposit rate. Source: BIS (2001), table III.5. ž The build-up of bad credit would not have been possible had foreign lenders been unwilling to lend to these countries. In a First World awash with liquidity, 25 there were a number of reasons why Japanese and western banks found these markets attractive. Until the onset of the currency crises, the economic performance of these tiger economies had been impressive. Through the 1990s, real economic growth rates were high, inflation appeared to be under control, they had high savings and investment rates, and good fiscal discipline: government budgets were balanced. As Table 8.3 shows, the weighted capital assets ratios were, with the exception of Indonesia, respectable. Borrowers (usually local banks) were prepared to agree a loan denominated in a foreign currency (dollars, yen), thus freeing up the lender from the need to hedge against currency risk. Short- term lending was particularly attractive, allowing western banks to avoid the standard mismatch arising from borrowing short (deposits) and lending long to firms. Finally, many foreign lenders were under the impression these banks would be supported by the government/central bank in the unlikely event of any problems (see below). ž Increasing reliance on short-term borrowing as a form of external finance: international bank and bond finance for the five Asian countries between 1990–94 was $14 billion, rising to $75 billion between 1995 and the third quarter of 1996. By 1995, the main source of the loans was European banks, and nearly 60% of it was interbank. By the beginning of 1997, foreign credit made up 40% of total loans in Asia. 26 Of these loans, 60% were denominated in dollars, the rest in yen. Two-thirds of the debt had a maturity of less than a year. 27 ž The almost unlimited availability of bank credit led to over-investment in industry and excess capacity. There was a close link between local bank lending and the construction and real estate sectors, especially property development. In Thailand, by the end of 1996, 30–40% of the capital inflow consisted of bank loans to the property sector, mainly 25 In the west, there was an easing of monetary policy from 1993. However, after the relatively harsh recession between 1990 and 1991, companies were reluctant to borrow or invest until 1997, when the economic boom increased borrowing once again. Japanese banks were keen to gain market share overseas. 26 Foreign investors were also attracted to the Asian stock markets – about 33% of domestic equities were held by foreigners at the end of 1996. 27 Source of these figures: Bank for International Settlements (1998, table VII.2). [ 420 ] M ODERN B ANKING developers. The figure for Indonesia was 25–30%. The problem was compounded by the use of collateral, mainly property. The loan to collateral ratios stood between 80 and 100%, creating a collateral value effect, that would further destabilise banking sectors once property (and equity) prices began to decline. The role of collateral and collateral values in models of shocks and money transmission has been emphasised by Bernanke and Gertler in various papers. 28 ž Some government policies could inadvertently contribute to the problem. For example, the Thai government introduced the Bangkok International Banking Facility (BIBF) in 1993, to promote Bangkok as a regional banking sector and encourage the entry of inter- national banks. The BIBF was also used by domestic banks to diversify into international banking intermediation by obtaining offshore funds for domestic or international lending. Unfortunately, they gave Thai banks 29 a new way of borrowing from abroad, using BIBF proceeds to invest heavily in property and related sectors. ž Asian banks borrowed in yen and dollars from Japan and the west, and on-lent to local firms in the domestic currency. There was little use of forward cover against the currency risk arising from these liabilities because of the relative success of the peg, up to 1997. For example, the Thai baht had not been devalued since 1984, with only slight fluctuations around the exchange rate (BT25.5:$1). Rising interest rates and a collapsing currency proved lethal. Firms could not repay their debt, and banks found it increasingly difficult to repay the principal and interest on the dollar debt. Non-performing loans as a percentage of total loans soared, especially in Thailand and Indonesia. As Table 8.7 shows, by 1998, the percentage of non-performing loans was just under 40%. ž A tradition of forbearance towards troubled banks, and the widespread impression that governments would support the banking sector – through either implicit or explicit guarantees. For example, in Indonesia, the costly and protracted closing of Bank Summa in 1992 resulted in a policy of no bank closures in the years prior to the crisis. 30 Similar attitudes prevailed in all these countries. An added problem was that even if the authorities had wanted to close insolvent banks, an inadequate legal framework in most of these countries made it very difficult to force firms into insolvency. ž Regulation of the financial sector was nominal, for several reasons. First, named as opposed to analytical lending, i.e. it was the individual’s connections with the bank that mattered. There was little in the way of assessment of the feasibility of proposed projects, nor was the risk profile of the borrower evaluated. Together with a lack of staff training and expertise, it meant no modern methods of risk assessment were used by the banks. In Korea political interference meant some financial institutions were subject to unfair audits and penalties. 31 ž In Thailand, the same group of top officials moved back and forth between business, the banking sector and government. Offices were run to enhance an official’s future standing, 28 See for example, Bernanke and Gertler (1995). 29 In December 1996, 45 financial firms were licensed to handle BIBFs, or, effectively, engage in offshore activities. 15 were Thai banks and 30 were foreign banks or bank branches. The Thai banks used their BIBFs to borrow from abroad and lend locally. 30 Batunaggar (2002), p. 5. 31 Casserley and Gibb (1999), p. 325. [ 421 ] F INANCIAL C RISES and for regulators, this meant avoiding any controversial action which would upset senior bankers and/or politicians. Many of the banks had family connections: a family would succeed in a certain area of business and then expand into banking by buying up its shares. For example, in the early 1900s, the Tejapaibul family began a liquor and pawnshop business in Thailand, and by the 1950s the business was so large that ownership of a bank would ensure a ready source of capital. They established the Bangkok Metropolitan Bank in 1950, and bought controlling stakes in other banks in the 1970s and 1980s. After problems in the 1990s, the central bank appointed the managing director and other staff, while a family member remained as President. In 1996, US regulators ordered it to cease its US operations. In early 1998, with 40% of total loans designated non-performing, the family was forced to accept recapitalisation by the state and loss of management control, with the family losing close to $100 million. 32 It is currently owned by the Financial Institutions Development Fund. Part of the Bank of Thailand, the FIDF was set up in the 1980s as a legal entity to provide financial support to both illiquid and insolvent banks. It normally takes over a bank by buying all its shares at a huge discount. ž The ratio of non-performing loans to total loans illustrates the growing problem of bad debt. Table 8.4 reports the BIS estimates. Even in 1996, they were on the high side if the benchmark for healthy banks is assumed to vary between 1% and 4%. In 1997, Thailand’s NPL/TL rose to 22.5%. In 1998, Korea’s and Malaysia’s percentage of NPLs are high by international standards, but dwarfed by the estimates for Thailand and Indonesia. These ratios are understatements because of lax provisioning practices. In most industrialised economies a loan is declared non-performing after 3 months. In these Asian economies, it is between 6 and 12 months. Bankers also practised evergreening: 33 a new loan is granted to ensure payments can be made or the old loan can be serviced. ž Weak financial institutions/sectors, supported by the state. By the time of the onset of the crisis (and in Indonesia’s case, long before), it was apparent that these countries’ financial sectors were part of the problem. In Thailand there was tight control over the issue of bank licences, but finance companies were allowed to expand unchecked. By 1997, the country had 15 domestic banks and 91 finance companies – their market share in lending grew from just over 10% in 1986 to a quarter of the market by 1997. In response to pressure from the World Trade Organisation, Thailand allowed limited foreign bank Table 8.4 BIS Estimates of Non-performing Loans as a Percentage of Total Loans Thailand Indonesia Korea Malaysia Philippines 1996 7.7 8.8 4.1 3.9 na 1997 22.5 7.1 na 3.2 na 1999 38.6 37.0 6.2 9 na Source: Goldstein (1998); BIS (2001). 32 Source: Casserley and Gibb (1999). 33 See Chapter 6 and Goldstein (1998), p. 12. [ 422 ] M ODERN B ANKING entry, with 21 foreign banks in 1997. However, their activities were severely constrained because each one was only allowed a few branches. ž In the Korean financial sector, activities were strictly segmented by function. Specialised banks provided credit to certain sectors, for example, the Housing and Commercial Bank, development banks (e.g. the Korea Long Term Credit Bank and the Export Import Bank), and nation-wide/regional banks. By 1997, there were eight national banks, serving the chaebol and the retail sector. Ten regional and local banks offered services to regional (or local) business and retail clients. Government influence was all pervasive. Not only did they own shares in some banks, but all executive appointments were political. There was directed lending – the government would pressure a bank to grant specific amounts of credit to firms. Political connections, not creditworthiness, was the determining factor in many bank loan decisions. ž There were also investment institutions, which held about 20% of total assets in 1997. They were made up of merchant banks, securities firms and trusts. Merchant banks had no access to retail markets, raising their funding costs. Using funds raised by commercial paper issues, overnight deposits and US dollar loans, they invested in relatively risky assets, including risky domestic loans and Indonesian and Thai corporate bonds. Once these economies collapsed, these banks faced mounting losses. Depositors panicked, especially those who held US dollar accounts. Loan rollovers were also terminated, which forced these banks to buy US dollars. The central bank tried to defend the won but by late 1997, had used up all of their foreign exchange reserves. An application for IMF standby credit was agreed by early December. It amounted to $21 billion over 3 years, with just under $6 billion for immediate disbursement. A few days later, the won was floated – in 6 weeks it lost 50% of its value against the US dollar. Indonesia’s banking sector aggravated the crisis in that country. It was unique among the countries in allowing foreign bank participation. Foreign banks could own up to 85% of joint ventures. Major banking reforms came into effect in 1988, and between 1988 and 1996, the number of licensed banks grew from 20 to 240. Branch networks grew and new services were offered by banks. This stretched the supervisory services, and banks began to engage in questionable practices. There was intense competition among banks. This contributed to the rapid expansion of credit, much of it named or ‘‘connected’’, 25–30% of it going to the property sector, especially developers. In 1991, prudential regulation was tightened by Bank Indonesia. Banks had to meet capital ratios, and were rated. Mergers were encouraged, but did not take place, and banks used their political connections to escape the tough new measures. From 1990, Indonesia’s private corporate (non-bank) sector borrowed heavily from overseas, with most of the debt denominated in dollars. 34 By 1997, it had grown to $78 billion, exceeding the amount of sovereign external debt by close to $20 billion. Lack of confidence in the banking and corporate sectors caused the currency crisis to deepen, even after the rupiah was floated. 34 The government had stopped banks from taking on much external debt. [ 423 ] F INANCIAL C RISES 8.3.2. The Contagion Effect The Asian crisis provides a classic example of contagion. The previous section illustrates how each country had unique problems which made them prime contagion targets following the rapid decline of the currency and financial markets in Thailand. There were two dimensions: positive feedback mechanisms within each country and rapid geographical spread across national boundaries. Initially, the currency markets bore the brunt of the contagion: the currency crisis spread from Thailand to Indonesia, Malaysia, the Philippines and Korea because investors tended to group these countries together. Table 8.5 shows a degree of correlation between Thai equity prices and those in other Asian markets. The exception is Korea, where, pre-crisis, the correlation was slightly negative. Post-crisis, the correlation strengthens, especially in Korea, where it jumps to just under 60%. Table 8.5 suggests that overseas investors will have believed that asset returns in these economies would remain positively correlated to a high degree. The currency crisis spread rapidly because of the high substitutability of many of each other’s exports, the absence of capital controls, and the perceived similarity of financial conditions. Since these countries competed with each other in world export markets to a high degree, a fall in the value of the Thai baht would mean the other currencies would have to decline to remain competitive. Traders reacted accordingly, selling these currencies in anticipation of their inevitable depreciation. The surprise depreciation wrecked the balance sheets of banks and companies with unhedged foreign exchange liabilities. High interest rates and a deteriorating economic outlook caused a steep decline in the property and equity markets. The hitherto sound loans suddenly looked problematic, causing concern about the viability of the banks with high percentages of non-performing loans, backed by collateral, the value of which was collapsing. For these reasons, the contagion spread from the foreign exchange markets to the bank sectors very quickly. Indonesia had a history of bank problems, as was illustrated in Chapter 6. In the absence of bank guarantees, runs on banks quickly follow and include: ž Withdrawals by depositors. ž A run on off-balance sheet products, for example, closing trust accounts, mutual funds. ž Cuts in domestic and international interbank funding. ž Borrowers run down credit lines, in anticipation of not being able to do so in the future. ž Financial assets such as equity, bonds and mutual funds are sold and any proceeds withdrawn from domestic banks. Table 8.5 The Correlation Coefficients: Thai and Other Asian Equity Markets (weekly equity price movements) Equity markets Philippines Singapore Indonesia Malaysia Hong Kong Korea Pre-crisis (1/97–6/97) 0.66 0.38 0.35 0.34 0.26 −0.06 Post-crisis (7/97–2/98) 0.66 0.53 0.64 0.61 0.42 0.57 Source: BIS (1997), table VII.7. [ 424 ] M ODERN B ANKING Though domestic and foreign owned banks benefit from early runs, failure to restore confidence in the system means they too can be targeted, as agents take more drastic measures to shift their funds out of the country. The rapid onset of the severe, systemic Asian crisis was such that to counter the problem with bank runs the authorities had to ‘‘temporarily’’ close/suspend some banks, provide liquidity to solvent financial institutions and guarantee depositors’ (and creditors’) funds. Korea and Thailand issued guarantees as soon as domestic banks began to experience funding problems. Indonesia’s authorities were slower to react and the action taken was incomplete. These points become more apparent by reviewing some of the detailed restructuring which took place in Indonesia, Thailand and Korea. 8.3.3. Policy Responses and Subsequent Developments Thailand, Indonesia and Korea requested credit assistance from the IMF and other agen- cies. 35 The size of the packages grew with each settlement, as Table 8.6 shows, but only Korea’s exceeded the size of the earlier settlement with Mexico in 1995–96 ($51.6 billion). Note the bilateral commitments exceeded the IMF’s standby credit. One objective of such large amounts is to restore investor faith in the future of these economies. Any IMF package comes with a substantial number of conditions, tailored to accommodate the circumstances of the individual country. For the crises in Korea, Thailand and Indonesia, 36 they included: ž Closure of insolvent banks/financial institutions. ž Liquidity support to other banks, subject to conditions. ž Requirements to deal with weak banks, which can include placing them under the supervision of the regulatory authority, mergers or temporary nationalisation. Table 8.6 Official Financing Commitments (US$bn) IMF World Bank (IBRD) Asian Development Bank Bilateral commitments ∗ Total Thailand 3.9 1.9 2.2 12.1 20.1 Indonesia 10.1 4.5 3.5 22 40 Korea 21 10 4 22 57 Total 35 16.4 9.7 56.1 117.1 ∗ Bilateral commitments: agreements between national authorities of different countries (e.g. central banks in the west agree to support and contribute to the refinancing package). IBRD: International Bank for Reconstruction and Development. Source: BIS (1997). 35 Dr Mahathir, Prime Minister of Malaysia, did not approach the IMF to negotiate a restructuring agreement. Instead, tight capital controls were imposed from September 1998. 36 For the specific conditions imposed on these countries, see Goldstein (1998) or Lindgren et al. (1999). [ 425 ] F INANCIAL C RISES ž Purchase and disposal of non-performing loans, normally by an asset management company. ž Loan classification and provisioning rules were raised to meet international standards; similar guidelines were applied for rules on disclosure, auditing and accounting practices. ž Bank licensing rules were tightened, with improved criteria for the assessment of owners, board managers and financial institutions. ž Review of bank supervision laws. ž Bankruptcy and foreclosure laws to be amended/strengthened. ž Restructuring/privatisation plans for the banks or other firms that had been nationalised because of the crisis. ž New, tighter prudential regulations. ž Introduction of a deposit insurance scheme if one did not exist. Korea From Korea’s macroeconomic indicators, pre-crisis, there was little to suggest a crisis was imminent. Real GDP growth rates averaged 8% from 1994–97, inflation was stable at 5% and unemployment was low. Private capital inflows financed a current account deficit of about 5% of GDP in 1996. However, total external debt as a percentage of GDP had risen, from 20 to 30% between 1993 and 1996, and two-thirds of it was short-term debt. After Thailand was forced to float the baht in August 1997, the Philippine, Malaysian, Indonesian and Taiwanese currencies all came under extreme pressure. The stock exchanges in Hong Kong, Russia and Latin America declined sharply. From late October, the Korean won faced grave strains. Despite the widening of the fluctuation band from (+)or(−) 2.25% to 10% on 20 November, and IMF standby credit worth $21 billion agreed on 4 December, the won was floated on 16 December. The crisis quickly spread to the banking sector. The government moved quickly to deal with the problems in the merchant banking sector. In December 1997, in the same month when the won was floated and an IMF agreement reached, 14 merchant banks were suspended, and 10 of these were closed in January; more closures followed through 1998. The rest were given deadlines for submitting recapitalisation and rehabilitation plans. Since most of these banks were small and many owned by chaebol, the government avoided making capital injections. The surviving 11 banks (see Table 8.7) received capital from their respective owners. The situation with the commercial banks was a different matter because of the systemic risk widespread closure posed. These banks were either nationalised or merged with other banks. Korea First Bank and Seoul Bank were nationalised in 1998. They had been left highly exposed to chaebol that went bankrupt in 1997, and were targets for deposit runs. Attempts to privatise Seoul Bank failed, and a major foreign bank was contracted to run it. 51% of Korea First was sold; the new investors assumed responsibility for management. In 1998, five healthy banks each took over an insolvent bank, by government decree. Through ‘‘assisted acquisitions’’ (i.e. with state financial support), 11 banks merged to create five banks in 1999 and 2000. New banks were given put options on the non-performing loans of the banks they were taking over and capital was injected to maintain their capital ratios at pre-acquisition levels. Performance contracts were imposed on top management [ 426 ] M ODERN B ANKING Table 8.7 The Korean Banking Sector: pre/post-crisis Pre-crisis (12/96) Post-crisis (7/99) No. of banks Market share ∗ No. of banks Market share ∗ Commercial banks 26 40% 12 19% Commercial banks – state owned ∗∗ 0 0 5 18% Merchant banks 30 6% 12 4% Specialised/development banks 3 20% 3 20% Investment trust companies 8 10% 4 20% Credit unions 1600+ 5% 1600+ 5% Mutual savings 230 10% 210 7% Life insurance 33 9% 29 7% Source: Lindgren (1999), p. 76. ∗ Market share: % share of assets. ∗∗ Banks with majority government ownership; the state had a minority interest in six other banks. to encourage restructuring, which was successful. Staff costs were reduced by 35%, and the number of branches by 20%. Foreign banks were permitted 100% ownership and in December 1999, Korea First Bank was sold to a US financial holding company, Newbridge Capital. Deutsche Bank was hired to prepare Seoul Bank for privatisation and sale to foreign investors in June 2001. However, despite a respectable bid from an American group, 70% of it was sold to Hana Bank in late 2002. Non-performing loans were disposed of more successfully than in other countries. The Korean Asset Management Company (KAMCO) had been established in 1962. For a fee, it collected non-performing loans from banks. In 1997, a special fund was set up within KAMCO to purchase all impaired loans from firms covered by the Korean Deposit Insurance Corporation. It was funded by the Korean Development Bank, the Korean Deposit Insurance Corporation, special government guaranteed bonds and the commercial banks. This special fund is, effectively, a ‘‘bad bank’’, discussed earlier in the chapter. It purchased the NPLs at 45%, 3% for unsecured loans, and disposed of collateral. KAMCO sold some of the NPLs to international investors and others at public auction, foreclosed and sold the underlying collateral, and collected on loans. As of June 1999, 7 trillion won was collected from loans with a face value of 17 trillion, or 41% of the face value. 37 By global standards, this is a reasonably successful recovery rate. As shown in Table 8.7, restructuring cut the number of merchant banks by 60% and the number of private merchant banks by half. The five commercial banks that were state owned in mid-1999 were to be re-privatised by 2002, in accordance with the terms of Korea’s agreement with the IMF. At the time of writing, some progress had been made. Of the five state owned commercial banks in Table 8.7, as of 2003: 37 Source: Lindgren (1991), p. 72. [...]... Second, the definition of NPLs omits [ 442 ] MODERN BANKING Table 8.11 Non-Performing Loans as a Percentage of Total Loans, 1998–2003 1998 City banks Regional banks Regional banks 2 Trust banks LTCB Average 1999 2000 2001 2002 4.8 3 .7 5.3 8.4 10 5.4 5.2 4.9 5.5 11 9.1 5.8 6.1 5.6 6 .7 8 .7 9 6.1 6.6 7 8.2 7. 5 10 6.6 8.9 7. 7 9 9.5 9.6 8.9 2003 7. 8 7. 7 8.9 7. 5 6.2 7. 8 NPL: risk management loans, loans to borrowers... coops Agricultural coops Fishery coops 7 64 53 73 2 27 325 Shinkin credit associations 5-1 bridge bank, 4 internet banks 192 22 1085 510 2655 76 00 379 0 111 46 325 8015 40 16.4 14 42.3 66 .7 65.6 15 .74 28 17. 1 5.4 1.3 0.9 3.9 9 21.6 10.8 3.2 2.3 0 .7 3.2 7. 4 0 22 22 .7 16.6 5 0.9 0.4 3.1 11 0 0 1996 689 12.4 16.3 1.6 1.5 11.4 0.3 1.1 1.1 3.3 0.1 3.8 1 6.9 0.2 21.9 0 .7 20 12.8 8.8 1.6 na na na 0.5 na 5.9... financial institutions∗ 1 2 477 3 581 2.5 19.4 Securities firms Money market dealers Life insurance Non-life insurance 276 3 59 276 206 97 7 158 07 4869 42 62 24 18 ∗ Government financial institutions consist of the Development Bank of Japan (25 branches, 55.6 employees per branch), Japan Bank for International Co-operation (29 branches, 30 employees per branch), Finance Corporations (2 57 branches, 35 employees... and lows, 1988–2003 Nikkei Annual Highs and Lows 88-03 45 000 38916 35 000 30 000 25 000 20 000 226 67 212 17 20833 15 000 14809 10 000 02 20 01 20 00 20 20 99 98 19 97 19 96 19 19 95 19 94 93 19 92 19 91 19 19 90 89 19 88 19 Date Source : Datastream 03 76 08 5 000 19 Index Value (JPY) 40 000 [ 438 ] MODERN BANKING pledging real estate as collateral As the asset and property prices continued on their upward... 19 97, the rupiah was trading at 4600 to the dollar By late January, it had declined to 15 000 rupiah:$1 48 [ 431 ] FINANCIAL CRISES Table 8.9 Indonesia’s Banking Sector, Pre- and Post-Crisis Pre-crisis, July 19 97 Post-crisis, August 1999 No of banks Private domestic banks State domestic banks Joint ventures/foreign banks ∗ Market share No of banks Market share∗ 160 34 44 50% 42% 8% 82 43 40 17% 73 %... et al (1998), p 73 [ 4 47 ] FINANCIAL CRISES The Japanese are very big savers compared to the rest of the world Total deposits as a percentage of GDP rose from 1.58 to 2.06 between 1983 and 1996 By contrast, in the USA, they were 0. 57, falling to 0.42 in 1996 The US figures are replicated by other OECD countries, though they tend to be a bit higher, in the region of 0.52 and 0. 67 (19 97 figures).68 However,... value By mid-19 97, problems were such that 7 of the 15 commercial banks required daily liquidity support as depositors shifted funds to the seven state banks, perceived to be safer The Bank of Thailand had been slow to take action because it was afraid any intervention would be interpreted as confirmation that the banks were in trouble and prompt a run on the whole banking system In August 19 97, the government... Finance companies State finance company Commercial banks State owned banks, specialised Commercial state owned banks Foreign banks (branches) ∗ Market share No of banks Market share∗ 90 1 14 7 1 14 20% 0 59% 7% 8% 6% 22 1 7 7 6 14 5% 1% 39%∗∗ 15% 6% 12% Source: Lindgren et al (1999), p 101 ∗ Market share: % of total assets ∗∗ Two of the private commercial banks have received substantial foreign capital injections... of problems, refers to the ‘‘fragility’’ of the banking system Why do these problems persist when, in most countries, similar policies have resolved the crises? The IMF report refers to the ‘‘stock and flow’’ problems of the banking sector and it is in this context that the discussion below explores the reasons for the prolonged crisis [ 440 ] MODERN BANKING Box 8.2 Japan: Symptoms of and Solutions... 1996, and in 19 97 its inflation rate stood at 5%, with a current account deficit at 3% of GDP The currency crisis led to floating of the rupiah in August 19 97 By November 19 97, the IMF had approved a programme of reforms, together with standby credit of $10.1 billion, of which $3 billion was available for immediate use So what went wrong, and how did the country end up with a systemic banking crisis? . Malaysia Hong Kong Korea Pre-crisis (1/ 97 6/ 97) 0.66 0.38 0.35 0.34 0.26 −0.06 Post-crisis (7/ 97 2/98) 0.66 0.53 0.64 0.61 0.42 0. 57 Source: BIS (19 97) , table VII .7. [ 424 ] M ODERN B ANKING Though. Malaysia Weighted Capital Assets Ratio 19 97 9.3 4.6 9.1 10.3 1999 12.4 −18.2 9.8 12.5 ROA 19 97 −0.1 −0.1 9.1 10.3 1999 −2.5 − 17. 4 9.8 12.5 Spread ∗ 19 97 3.8 1.5 3.6 2.3 1999 4.8 7. 7 2.2 4.5 ∗ Spread: short-term. Percentage of Total Loans Thailand Indonesia Korea Malaysia Philippines 1996 7. 7 8.8 4.1 3.9 na 19 97 22.5 7. 1 na 3.2 na 1999 38.6 37. 0 6.2 9 na Source: Goldstein (1998); BIS (2001). 32 Source: Casserley