Money and Banking

Money and Banking

When Park Chung Hee became president in 1961, he organized a highly centralized government with the power to direct the economy. Park quickly nationalized all banks, took control of foreign borrowing, and merged the agricultural cooperative movement with the agricultural bank. The government also took control of all forms of institutional credit, giving Park great control over the business community.

The government began to liberalize the banking system in the mid-1980s by denationalizing several banks, but refused to allow individual chaebol to acquire controlling shares in these banks. The government still maintained strong managerial controls over these banks through the Bank of Korea's Office of Bank Supervision and Examination, which, under the guidance of the Monetary Board, supervised and regularly examined banking institutions. Most of the credit provided by these banks went to the chaebol, but the banks also were required by law to make at least one-third of their business loans to small and medium-sized firms.

South Korea's financial sector in the late 1980s included a diversified commercial banking system, a securities market, and a wide range of secondary financial institutions. The banks kept pace with the rest of the economy, particularly after the liberalization and modernization of financial institutions in the mid-1980s and the establishment of the capital market system based on the Fifth Five-Year Economic and Social Development Plan.

The Bank of Korea was established as the central bank on June 12, 1950. Its major functions included the issuance of all currency; the formulation and execution of monetary and credit policies; the conduct of the bulk of foreign exchange control business; the research, collection, and preparation of statistics on many aspects of South Korea's financial system; and the supervision and regulation of the activities of private banks. The Bank of Korea engaged in loan and deposit transactions for the government; additionally, the bank transacted various government business activities. It also made loans to and received deposits from other banking institutions; all banks maintained their solvency through balances at the Bank of Korea.

South Korea's five major commercial banks (Chohung, Commercial, First, Hanil, and Seoul) were privately held. Together with two city bank joint ventures--the Kor-Am Bank and the Shin-Han (co-owned with the United States and Japan respectively)--there were 961 commercial bank branches across South Korea at the end of 1987. Local banks were found in every province.

The Bank of Korea regulated all commercial banking activities under the provisions of the General Banking Act passed in 1954. Commercial banks got their money through deposits from the general public, international loans, and funds borrowed from the Bank of Korea. The lending activities of commercial banks focused on short-term loans or discounts because long-term lending was still the prerogative of such specialized banks as the Korea Exchange Bank, Korea Housing Bank, and National Agricultural Cooperatives Federation. In the late 1980s, the banking industry operated according to a "prime" bank system whereby each major South Korean bank was assigned one domestic commercial bank. Under specific legislation designed to achieve certain functions or to assist special markets, six special banks received funds from the government and from the sales of debentures.

Three other financial development institutions supplied credit for business and government projects. The Export-Import Bank of Korea extended medium- and long-term credit to both suppliers and buyers to facilitate exports of capital goods and services, major resources development, and overseas investment. The Korea Development Bank, which was the government's shareholder in state-run enterprises, raised funds from the government as well as from international financial institutions and foreign banks to fund key industries and infrastructure projects. The Korea Long-Term Credit Bank financed equipment investment.

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