Resolving Non-Performing Loans (NPLs) and Recapitalizing Banks in Korea

The Korean Government implemented a comprehensive approach to address non-performing loans (NPLs) and recapitalize banks, ensuring a stable financial system. The following steps outline the key measures taken:

Due Diligence Reviews

• Conducted by accounting firms from May 1 to June 8, 1998
• Used internationally accepted criteria agreed upon with the World Bank

Bank Appraisal Committee Evaluation

• A 12-member committee evaluated rehabilitation plans for undercapitalized banks from June 20 to 27, 1998
• Submitted suggestions to FSC on June 28

FSC Evaluation and Classification

• Based on input from the Bank Appraisal Committee, FSC evaluated the prospects for viability of each bank
• Classified banks into “approval,” “conditional approval,” or “disapproval” categories

Conditional Approvals and Disapprovals

• Seven banks received conditional approvals, requiring revised implementation plans by end-July 1998
• Five banks were disapproved and subsequently liquidated

Mergers and Liquidations

• Four bank mergers were completed as of end-1999, encouraged by FSC’s support for NPL disposal and recapitalization
• Good assets and liabilities from the five disapproved banks were transferred to stronger banks under a P&A arrangement

Recapitalization and NPL Disposal

• The Government targeted W100 trillion worth of NPLs for immediate disposal as of March 1998
• Included core NPLs, bad loans, and a portion of precautionary loans that had turned bad

These steps demonstrate the Korean Government’s commitment to resolving NPLs and recapitalizing banks in a structured and transparent manner.