Korea's financial sector includes a diversal
commercial banking system, a wide range of secondary financial
institutions, and a securities market. Financial institutions can
be divided into two main categories: monetary institutions and
other financial intuitions. The former includes the Bank of Korea -
the nation's central bank - and deposit-taking banks.
There was a substantial change in the
environment of the financial sector in the mid-1980s. In 1986, the
current account shifted to a surplus from perennial deficits,
alleviating the chronic difficulty of a shortage of domestic
savings in the national economy. due to the achievement of price
stability from 1982 on-wards, the demand for financial assets
greatly increased and became more diversified. while domestic banks
were eager to expand and diversify the scope of their business
abroad, pressure from leading industrial countries for the opening
of the domestic financial market was greatly intensified. to cope
and the government actively pursued financial liberalization and
The cornerstone of financial liberalization was
laid in December of 1988, with the extensive deregulation of
interest rates of banks and non-bank financial services industry,
entry barriers were further lowered and, in 1989, three new
commercial banks were established. In a similarly motivated
development, a number of securities investment trust companies were
set up in 1989 and, in the four-year period from 1987 to 1990,
eighteen life insurance companies were established. The latter
comprised thirteen domestic companies and five joint-venture
companies. In addition, four foreign life insurance companies were
allowed to open branches in Seoul.
Throughout this period, a series of measures
had been taken to grant commercial banks even greater autonomy in internal management, leaving in place only the minimum restrictions
necessary for the maintenance of sound banking management.
In addition, the commercial banks have all
greatly increased their paid-in capital, thus boosting their
competitiveness and raising their international stature. For the
internationalization of the financial market, the shift of the
current account to a surplus in 1986 also proved to be a watershed.
domestic commercial banks have been diversifying their overseas
networks by establishing more subsidiaries and branches abroad,
bringing their total numbers up to 27 and 53, respectively, at the
end of June 1990. Foreign bank branches in Korea, whose numbers
stood at 67 as of June 1990, have been placed on an equal footing
with domestic banks by the lifting of certain restrictions on their
operations and, at the same time, a contraction of their
While the swap facilities preferentially granted
to foreign banks for inducing foreign capital inflow have been
gradually reduced, several new sources of local-currency funding were
made available to them. They have been allowed, for instance, to make
use of the re-discount facilities of the Bank of Korea, to enter the
trust business, to issue negotiable certificates of deposit and to
participate without restriction in the newly-integrated call market.
The second major thrust of internationalization
centres on the foreign exchange market. There has been considerable
relaxation of foreign exchange controls since the beginning of 1987.
Successive steps have been taken to liberalize current invisible
payments and transfers and to ease controls on over-seas investment.
The government clearly demonstrated the direction of its policy on
foreign liberalization by its acceptance in November 1988 of the
obligations of Article VIII of the IMF agreements.
Effective from March 1990, the government
introduced a new exchange rate system as part of an effort to move to a
full-fledged system of market-based determination of exchange
rates.Under the new regime, the daily market-average rate for the U.S.
dollar is determined by the weighted average of the inter-bank
won-dollar exchange rates in spot transactions the previous business
day. The exchange rates of the won against other foreign currencies are
calculated by the won-dollar market average rate in the domestic market
and the exchange rates of the dollar against other foreign currencies
in international currency markets.
Foreign investors access to the capital market has
been expanded gradually. Additional trust funds, both the closed-end
type such as the Korea Europe Fund and the open-ened type, have been
established. Foreign securities companies have also been allowed to
open representative offices, increasing the number of such offices to
24 at the end of June 1990. Moreover, domestic companies were permitted
to issue convertible bonds (CBs) and bonds with warrants (BWs) in
overseas capital markets. From 1987 Korean securities companies,
securities investment trust companies have been allowed to make direct
investments in foreign capital markets up to a certain amount. It is
anticipated that foreign investors will be able to invest directly in
the domestic securities market from 1992, to a limited extent.