The Korean Banking Crisis: Picking up the Pieces

Abstract

As is well known, the industrial policy of the Korean government during the 1970s gave rise to the chaebol groups, i.e., large family controlled industrial conglomerates. These companies, unlike traditional Korean companies, focused on the production and export of products in heavy industries such as industrial machinery, electronics, chemicals, autos, and shipbuilding. During this time, Korean commercial banks were instructed to allow easy credit access (at favorable loans rates) to the firms in these industries. This policy required additional sources of funding that the existing commercial banks were unable to meet. Subsequently, the government established specialized banks to fill the gap. Toward the latter part of the 1970s, policy loans, i.e., loans which supported government programs and aimed primarily at the chaebol companies, accounted for nearly eighty percent of domestic credit extended during that period. During this same period, tightly regulated non-bank financial institutions were introduced into the economy in an effort to diversify financing sources and to attract funds into the organized market. The development strategy bolstered the expansion of existing firms into targeted sectors through preferential access to bank credit at below-market rates. These firms not only expanded rapidly into many areas of specialization but also into many which were not explicitly targeted by government policy.