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US$4 Billion ADB Loan To Korea to Address Financial Sector Reform

The Republic of Korea’s financial sector will be substantially reformed and strengthened with the help of a of US$4 billion loan approved today by the Asian Development Bank in support of the Government of Korea’s Financial Sector Program. In addition, the Bank has also approved a technical assistance loan of $15 million for institutional strengthening of the financial sector.

The Program is a rapid response to an exceptional and urgent crisis in the Korean economy. It will complement the Government’s macroeconomic stabilization and structural reforms being supported by the International Monetary Fund’s (IMF) Standby Arrangement under the Fund’s emergency financing mechanism. The financial sector reforms are an integral component of the broader structural reforms being supported by the IMF to restore macroeconomic stability.

The Program supports the Government’s initiatives in implementing various policy and institutional measures in the financial sector that will not only support the resolution of the currency crisis but also address the structural problems in the financial sector through increased reliance on market forces with independent regulatory oversight. The coordinated policy and institutional reforms address the areas of banking, nonbank financial institutions, financial markets, as well as accounting and disclosure reforms. In the areas of banking and nonbank financial institutional reforms, the Program supports the establishment of an independent Financial Supervisory Agency that will more effectively monitor performance as well as the increased freedom of entry and exit for both domestic and foreign participants. At the same time, the independence of the Bank of Korea supported under the Program will give it operational freedom to pursue domestic price stability that will provide a sound basis for financial sector development.

Restructuring of the financial sector will also be strengthened by the planned improvements in the operation of financial markets. The equities and bond markets will be improved through increased reliance on market forces, improved access to international investors and new financial products to reflect the more market based economy. In addition, the improved corporate accounting and disclosure standards will improve the operation of financial markets as well as enhance the effectiveness of both bank and nonbank financial institutions.

The ADB’s $4 billion loan in support of the Program will come from its ordinary capital resources (OCR), with interest at a rate per annum equal to the London interbank offered rate (LIBOR) plus the Bank’s standard spread for public sector loans from the Bank’s OCR (currently 0.40 percent), including a commitment charge of 0.75 percent per annum calculated in accordance with the Bank’s standard procedures. Each tranche of the loan will be repaid in full on the date 7 years after its disbursement.

The loan is expected to be used over a period of 30 months from the date of loan effectiveness. The loan will be released in four tranches: the first tranche of $2 billion upon loan effectiveness; the second tranche of $1 billion is expected to be released in early 1998; the third tranche of $700 million is expected to be released by the end of 1998; and the fourth tranche of $300 million is expected to be released by year-end 1999.

The Program will be supplemented by technical assistance in key areas vital to the reform activities. These include management of non-performing loans and restructuring of the banking sector, capacity building of a newly created regulatory body, institutional strengthening of credit rating agencies and reviewing institutional and other aspects of the introduction of mortgage-backed securities.

An additional loan of $15 million will be provided from the Bank’s ordinary capital resources for this program of technical assistance. The loan will carry an interest at a rate to be determined in accordance with the Bank’s pool-based variable lending rate system for US dollar loans, and will have an amortization period of 15 years, including a grace period of 3 years.

The Ministry of Finance and Economy will be the executing agency for implementing and coordinating the Program.

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