BANKING SYSTEM

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 internationalization.

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 privileges.

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.