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FOREIGN PRIVATE EQUITY FUNDS IN SOUTH KOREAN BANKS

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By Group E Click to edit Master subtitle style Jayadhrita Banerjee Deepika Gontia Shivankur Sharma Isha Wadhwa Arindam Bhattacharya Kaustubh Dalal

Korean economy earlier!!

Since the 1960s, South Korea pursued an export-oriented development strategy, where the growth of specific industries was emphasized. The government encouraged the import of raw materials and technology to assist its export-oriented industries. Domestic savings and investment were also promoted.

The government influenced the banks financing decisions, directing funds towards large export-oriented companies at 8/1/12 subsidized interest rates.

Government always interfered in the operations of banks in South Korea. Korea Exchange Bank, Korea Development Bank and Korea Housing Bank were fully owned by the government. The government pressurized the banks to finance the Chaebols activities, which focused on growth rather than the profitability of their investments. This led to a high debt-equity ratio .

The banks provided loans to these companies with the understanding that the 8/1/12 government would rescue them, in case they

The Korean Won was pegged to the US Dollar. In 1997, the US dollar appreciated and, consequently, the Won appreciated as well, resulting in an overvalued Won. The pegged exchange rate led to extensive borrowing by domestic banks and conglomerates under the illusion that exchange rate risk did not exist.

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WHAT LEAD TO THE CRISIS???????

The South Korean banks borrowed short-term loans from international financial institutions and lent them over long-term. The domestic firms, which were already highly leveraged, also accessed foreign funding to finance their projects. The countrys total foreign debt amounted to more than $160 billion by 1997, and a major portion of this was short-term debt, which was repayable in less than a year.

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The Chaebols imported technology and machinery for their risky projects. A rise in imports and a fall in exports implied the South Korean economy, which depended on exports, now suffered trade deficits. By 1996, South Koreas current account deficit was over $23 billion or equivalent to 4.5% of its GDP.

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THE CURRENCY CRISIS

The Asian Financial Crisis, which began in Thailand in July 1997, spread to Malaysia and Indonesia. The foreign investors fled the region, and the Asian currencies devalued against the dollar. The currency crisis spread to South Korea, where the government spent precious foreign reserves to protect the Wons exchange rate. The value of the Won declined from an average of W804/US$ in 1996 to an average of W1400/US$.

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When the Won was depreciated, the private sector found it difficult to repay the foreign loans or the interest payments due on the loan denominated in foreign currencies. Many of the Chaebols such as Kia, Jinro and Hanbo Steel, which figured amongst the top thirty Chaebols in South Korea, collapsed and the banks suffered from enormous nonperforming loans .

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THE BAIL OUT.

In the aftermath of the Korean Financial Crisis, the South Korean government constituted the Financial Supervisory Commission and abolished the ceilings on interest rates. Other measures taken to guard against the recurrence of the financial crisis included the introduction of international accounting standards, implementing prudent banking practices.

In order to reduce the bad debt burden of domestic banks and corporations, the government set up asset management 8/1/12

The government invited foreign investment in the troubled South Korean banks. Non-performing loans were auctioned off to foreign investors. South Korea became an attractive destination for foreign direct investment, as the depreciated Won and fewer bids made assets cheaper. The foreign funds purchased distressed South Korean banks at dirt-cheap rates and injected much needed capital into the banks.

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THE BENEFIT FROM FOREIGN INVESTORS!! Under private equity investors, the South Korean banks were free from government intervention. They financed those projects, which the
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The foreign-owned banks had a positive impact on the local banks as the latter have focused on profit maximization in order to compete successfully with the former. The banks, which prior to the financial crisis concentrated on financing the Chaebols, focused on lending to Small and Medium Enterprises (SMEs) and households. The foreign funds acquired the domestic banks, restructured them and then sold them to strategic investors, who could not take the risk of restructuring ailing banks themselves.

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Good corporate governance, transparent business, greater expertise, wider business scope; these all came with the overseas investors. There was a sharp difference in the performances of foreign and domestic banks in South Korea.

In 2003, the 33 foreign bank branches saw a 38.8% increase in their combined net profit by posting Won411, 000bn. The figures become significant when compared with the 63.4% decline in the net profit of the 19 locally-owned banks. 8/1/12

HOWEVER.

The detractors of foreign private equity funds contended that their main criteria for investment were short-term gains. They argued that this quest for short-term profit could drain South Koreas national wealth. They maintained that the stability of South Korean financial markets was threatened by the speculative nature of foreign capital and that the government should restrict foreign ownership of domestic banks.

Frequent inflow and outflow of foreign funds 8/1/12 not only have a negative impact on the will

Some Korean economists were of the opinion that the government should have spent a few more trillion Wons from public funds to rescue the troubled banks instead of letting speculative foreign funds acquire them; as they believed that the former course of action would perhaps be cheaper in the long run. The Bank of Korea (BOK) also urged the government to limit foreign ownership of Korean financial institutions in response to the large holding of foreign investors in Korean commercial banks.

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In order to ensure increased participation of South Korean buyers, the BOK advised the government to delay the privatization of domestic banks.

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DANGERS OF FOREIGN FINANCING..

MNC may enjoys high competitive advantages over local firms that can destroy local competition rather than promote it. They may create uncertainty because foreign firms control the country within it by controlling part of its industries. They may not promote any development for the nation's economic activities by simply source their components from abroad. which means the tey will drive local producers out of business.

Can drive out money from the economy 8/1/12 rather than injecting it in the economy.

SOLUTION STATED!!!!!!!

The only way to prevent foreign investment funds from taking over local banks is to increase their value by boosting competitiveness. so, foreign equity funds will not show interest in Korean banks because they cannot make high capital gains through short-term investment.

If

Government

intervention to control 8/1/12 the inflow and outflow of foreign

THANK YOU
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