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Document Type

Case Study

Case Series

Ad hoc Capital Injection

Abstract

Korea First Bank (KFB) and Seoul Bank (SB) were two of the five largest commercial banks in Korea with high levels of exposure to conglomerates, which had high short-term foreign debt in the late 1990s. Starting in the late summer of 1997, Korea, like other Asian economies, experienced capital outflows due to international creditors’ reducing their exposures to Korean financial institutions. Banks relied on the Bank of Korea for foreign exchange liquidity support. The two banks became insolvent owing to high levels of nonperforming loans and required government recapitalization after experiencing a run in early December 1997. As financial conditions deteriorated, Korea sought an International Monetary Fund (IMF) standby arrangement, and the bank recapitalizations became part of the IMF program. KFB received a total of 5.7 trillion Korean won (KRW; USD 4.8 billion) of capital in two rounds, and SB received a total of KRW 5.7 trillion in three rounds, as the initial size was not sufficient when the banks realized further losses. Meanwhile, the government originally intended to sell the banks immediately after the first round of capital injections but was unable to do so because of a lack of a potential investors. An IMF working paper evaluates the privatization of KFB in December 1999 as a landmark step to affect a market-driven corporate restructuring process, but the privatization of SB was criticized for not being complete after five years. In December 1999, the government sold a 51% stake in KFB for KRW 500 billion to Newbridge Capital with a put-back option requiring the government to repurchase all KFB loans that defaulted over the next two years (three years for loans in workout). The government sold the rest for KRW 1.7 billion to Standard Chartered in January 2005. The government recouped KRW 1.5 trillion in 2002 from the sale of SB to Hana Bank. In the case of KFB, the government lost KRW 17.6 trillion from the transactions before interest, of which KRW 12.6 trillion was recovered as of 2011. For SB, the government spent KRW 9.1 trillion and recovered KRW 6.4 trillion as of 2011.

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