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Document Type

Case Study

Abstract

Following the collapse of Lehman Brothers on September 15, 2008, a number of foreign governments enacted stabilization measures to protect their domestic economies in the wake of the global credit crunch. The Bank Recapitalization Fund (the Fund), announced by the South Korean government on December 18, 2008, and implemented on February 15, 2009, was one such intervention intended to assist Korean commercial banks in strengthening their capital bases and thus restore normal lending practices between banks and nonfinancial institutions. Invoking its authority under Article 65, Section 3 (“Emergency Credit to Financial Institutions”), of Chapter IV of the Bank of Korea Act, the government committed up to KRW 20.0 trillion for the purchase of preferred shares, hybrid securities, or subordinated debt from participating banks. Each bank wishing to utilize the fund was required to sign with the Korean government a Memorandum of Understanding (MoU) stating its commitment to using the funds gained from the sales to support the real economy. Continued individual usage, interest rates, and restrictions were determined based on the institution’s adherence to the MoU terms. On March 31, 2009, the Fund purchased approximately KRW 4.0 trillion in hybrid securities and subordinated debt from eight Korean banks and financial institutions. By December 2011, the government had recovered KRW 2.8 trillion through bond sales and bank buyback arrangements. The remaining KRW 1.2 trillion was repaid to the government by August 2016, at which point the Fund ceased operations.

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