This article explores how financial and corporate reform has been achieved in Korea in the aftermath of the Asian financial crisis. In the financial sector remarkable reforms were achieved for several years after the crisis. First, to reduce a huge volume of bad debt in the banking sector the government injected a total of 155. 3 trillion won of public funds by the end of 2001. As a result of this action, the non-performing loan ratio of the banking sector fell from 12. 9% at the end of 1999 to 1. 9% in 2004. Second, some bank mergers and restructuring of financial institutions through financial holding companies has been accomplished.
There are some arguments about how the Korean financial system should be developed. Some analysts have urged that the Korean financial system should evolve from a bank-based financial system to a capital market-based financial system. However, the underdevelopment of Korea’s capital market and problems related to transparency make such an evolution to a capital market based financial system difficult.
In the corporate sector, chaebols had lowered their debt-to-equity ratios to 200% by 1999, according to Korean government requirements. The government also required chaebols to overcome the problem of overdiversification. Chaebols exchanged some specific businesses on a large scale. Business consolidation through this type of deal had been proceeding since 1998.
Among the five largest chaebols, the LG Group started to restructure its group companies under the holding company system in 2001, and the SK Group began to introduce the holding company system in 2007. However, citizens’ groups monitoring the chaebols and state prosecutors have brought some lawsuits against the five largest chaebols. To elucidate these problems, drastic reform of the corporate governance structure of the chaebols is a key issue still to be addressed.

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A decade of reform in East Asia has witnessed successful progress in financial restructuring, which has enabled the recent robust growth. However, the real reform needed to achieve a disciplined financial system will require much more time and more intensive efforts, sustained by both mature market functions and efficient banking intermediaries. The East Asian experience so far has proved that a mere shift from bank lending to a corporate finance market did not automatically improve the governance of family-owned and -controlled firms. More stringent rules for empowering minority equity-holders and open access to information may add inconsistent disincentives to list firms, while bond issuance may not be able to offer appropriate financial support for certain types of businesses, if the information costs are included. The banking sector needs more sophistication, especially for supporting small and medium-sized enterprises. Meanwhile, enhancement of financial supervision has become an additional urgent agenda, along with the soaring number of cross-border transactions, often supported by foreign financial institutes with their advanced technologies. After the first round for financial restructuring, the reform in East Asia has entered a new phase: this needs to consist of a more comprehensive approach and speedy implementation of the policy agenda, without indulging in complacency.

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This paper critically reviews the conventional discussion on the financial system in Southeast Asia. Discussion of the financial crisis in 1997 has usually stressed, as a way forward, the enhancement of corporate governance, overcoming excess debt finance, and a shift to market based financial methods such as equity and bond markets. By showing numerical evidence for the cases of Thailand and Malaysia, this paper challenges these conventional views from the perspective of the relationship in the region between the financial and industrial sectors.
Considering the early emergence of the financial sector in Southeast Asia and the relatively delayed industrialization of the region, bank lending to the manufacturing sector is a relatively recent practice. The foreign-capital-led industrialization after the mid-1985s created a further serious cleavage between these sectors. Examination of recent micro-financial data for firms since the early 1990s shows that the debt ratio and the bank borrowing ratio in the major firms in Thailand and Malaysia was surprisingly low, and that these figures neither increased during the early 1990s when crisis was creeping, nor changed after the crisis.
Ten years on from the crisis, the economy of the region has recovered, a process led mainly by the growth of the manufacturing sector, whilst the financial sector remains stagnated. In spite of the efforts of governments and international organizations, careful empirical observation indicates that the shift in the financial systems towards a market-based approach, such as equity or bond markets, is still in progress.
The financial system and the corporate finance structure are generally prescribed by the structure of the manufacturing sectors that constitute the demand side of the fund. The unexpectedly slow development of the market-based financial system, in spite of the efforts of the authorities, could mean that the demand for funds through the organized market is still scare in major industries such as export manufacturing.
In the long run, a change in the financial system and in corporate finance would be brought about by a change in the manufacturing sector, while policy reform in the financial system should remain circumspect. Considering the still inactive financial intermediation of the commercial banks, it is necessary to pursue a balanced recovery of the financial system, instead of a one-sided emphasis on a market-based shift.

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In the aftermath of the Lehman Brothers’ fall, not only the leading countries of the EU but also the new member states (NMS) were facing challenges from economic recession. During the crisis, because of the strong financial inter-linkage relationships among the European Countries, there was concern whether the western European nations would be infected by the financial crisis occurring in some of the NMS. However, even the Baltic countries, which were the most severely affected by the crisis, did not plunge into the situation as did some of the East Asian countries which had experienced a similar crisis in 1997.
The aim of this paper is to examine that why the policies implemented by the NMS succeeded in overcoming the crisis. The author particularly verifies the characteristics of the banking sectors in the NMS and the policy responses of euro-pegged countries both before and during the crisis. The data that are referenced in this paper are from the BIS, multinational bank statistics, Eurostat, and national central banks.
On the aspect of the banking sectors, it should be the noted that the liquidity of local subsidiaries was preserved. Since the 1990s, some multinational banks which are called “common lenders” had expanded into the NMS and became those countries’ major banks. At the same time, on the background of the EU’s integration, these banks had also provided retail banking services over a long term. Furthermore, on the basis of the Vienna Initiative, the foreign parent banks, the authorities of home-host countries, and the international financial institutions had participated in multiple lending during the crisis.
On the aspect of policy responses, what is important is that the fixed exchange rate system was maintained. Depending on the implementation of internal economic adjustments, such as reduction in wages and fiscal restraint, the international competitiveness of exports was restored external debt was also kept at a steady level.
In the near future, it is necessary to examine whether the dominant oligopoly of multinational banks will maintain the stability and robustness of the banking sectors and the within the area of NMS. At least, from the case of the current crisis, it is obvious that the dominant oligopoly of multinational banks can avoid rapid and massive capital outflows, and the contagion of crisis.

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