Transcript THE FINANCIAL CRISES IN MEXICO AND KOREA

THE FINANCIAL CRISES IN
MEXICO AND KOREA
Resolution Strategies, What
Worked and What Didn’t
By Sri Ram Aiyer
The Latin American Corporate
Governance Round Table, Mexico
City, 8-10 April 2002
Background
Mexican crisis Dec 1994; IMF assisted with
macro economic reforms while World Bank
and IDB assisted with Financial Sector
Restructuring from early 1995
Government led strategy to prevent systemic
collapse of commercial banks (re privatized in
1991/92, sold to Mexican Grupos)
Banks pursued reckless expansion of loan
book from 1991to 94, growing by over 8
times real GDP growth rate. Understated
deteriorating portfolio quality, and
increasingly underprovisioned for NPLs in
Governance
Reforms
Governance
Reforms
Focus was on transparency and disclosure
Upgrading of accounting and disclosure standards to
USGAAP for all banks, and by regulator, and revision
of prudential regulations– aimed at market
monitoring, and at shareholders and management
Increase in quality of core capital- aimed at
shareholders, to reduce moral hazard, but delayed
Strengthened supervision- aimed at management and
boards
Attempted to revise unlimited deposit protection by
FOBAPROA- reduce moral hazard, and improve
market monitoring
Increase competition- introduce foreign banking skills
Figure 1
Low profitability and high leverage led to increased vulnerability
of corporates
percent
Leverage ratios
percent
Rate of return on assets
6
4
Korea
3
5
Japan
2
HK
4
1
Singapore
3
1986
1988
1990
1992
1994
1996
0
1986
1988
1990
1992
1994
1996
1998
Korea-Governance Agenda
Korea is a case of CG principles in actual operation
Negotiated reforms in January 1998, first laws enacted in
February 98 as part of first SAL, and then in December 98 for
second SAL. Code of Best Practice issued and further laws
enacted by September 1999—while OECD principles were in
discussion.
Focus on shareholders, Boards of Directors, audit systems,
stakeholder monitoring of management, and market monitoring;
(see Oct 27, 2000 Press Release)
Audit Committees – WB believed US system was right; now
obligatory for all Korean financial institutions, which should also
have over half of total as outside directors, and minority rights
further reinforced
Some Issues
Boards of Directors – Finding qualified and independent ones was a
problem as this was a new type of job
Training them in the principles being adopted, their duties and limits,
etc., needed quick capacity building of trainers
Fear of legal liabilities – firms had hitherto been black boxes, while Feb
98 laws gave minority shareholders significant rights
Minority shareholders began suing large chaebol from March 98, with
good effect
Stakeholders – public interest groups taking active role as does press
Foreign Institutional Investors- seen as reliable outside monitors of
firms´practices, and their value appreciated more than other firms from
late 1998 already. More firms sought such investment
Bankruptcy Processes
Worked less well in Korea, mainly because of aversion to exit by large
firms, and unwillingness of banks to recognize losses. SMEs were
liquidated in thousands in 98, and this sector recovered fastest.
WB suggested specialized bankruptcy courts but GOK preferred to use
Seoul district court
This said, collapse and break up of Daewoo in summer 99 showed that
too big to fail myth had been crashed. Since then Hyundai group broke
up, Hyundai ITC is being sold off as is Hynix, and other affiliates of
chaebols. (Nothing like this was seen in Mexico)
In March 2001 GOK revisited need for speeding up corporate
restructuring, and by law enacted in September 2001 banks are obliged
to reassess quarterly the financial situation of weak firms with view to
pushing exit through courts if necessary.
Is it Working in Korea?
Early days, but laws and regulations are in
place
Corporate culture is the issue, but change is
being seen, in banks and large firms
Korea was an industrialized society with a
high level of literacy, so need for changes was
understood- school kids know about BIS
capital adequacy ratio! (Mexico is a more two
speed economy, one modern and another
more peri urban/rural and less literate)
Broader Points
Given integration of financial markets and their innovations,
improving and optimizing prudential regulations of Fis likely to
improve their own and their borrowers´ i.e.,
corporations´governance practices.
Positive externalities argue for BIS, OECD, IMF, WB etc to
continue to review and update principles for such regulations for
benefit of all
Convergence of securities laws through uniform rules and
standards would achieve same results, but these markets are
harder to monitor being more dispersed and heterogeneous.
Korea is a civil law society like Mexico, but using the crisis, was
able to enact new laws in a number of areas, unlike Mexico.