Title

Financial Liberalization and Internationalization: The Korean Experience

Author

Dong Won Koh

Date of Award

5-1996

Document Type

Dissertation - Closed Access

Degree Name

Doctor of Juridical Science (S.J.D.)

Institution

Duke University School of Law

Abstract

For the past two decades, there have been rapid and fundamental changes in the worldwide banking and financial industries through financial and technological innovations. These significant changes have increased the pressure on all countries to liberalize their financial markets. In Korea, as the country’s economy expanded and the financial environment changed rapidly, the financial system has experienced a substantial transformation in line with moves to enhance the competitiveness and efficiency of the financial industry. As part of those reforms, financial liberalization and internationalization have been implemented since the early 1980s.

During the periods of economic development in the 1960s and 1970s, Korean financial institutions were heavily regulated. Major commercial banks were nationalized, and banking institutions had no autonomy in their management. Interest rates were also heavily controlled, and the Government subjugated the central bank. Direct monetary control methods were preferred in order to control money supply, and banks were forced to deal with “policy loans” under the direction of the Government.

The tight financial restrictions have cause many adverse effects. To rectify these problems and at the same time to further develop the financial industry, financial liberalization and internationalization have been pursued. Major commercial banks were privatized, and entry barriers for financial institutions were significantly lowered to promote competition in the financial industry. Managerial autonomy of banks was substantially restored. Interest rate deregulation has also been sought, and the scope of business of financial institutions has been expanded. Foreign exchange controls have been relaxed­ to a considerable degree, and capital markets have been gradually internationalized. Furthermore, various measures to open financial markets have been undertaken, along with the financial liberalization and internationalization. In the early 1990s, the Korean Government launched a financial reform plan to restructure the financial industry and to implement drastic measures for liberalizing and internationalizing the financial markets in a more systematic way.

The thesis not only analyzes and evaluates the financial liberalization and internationalization in Korea, but also describes the Korean financial system. The thesis concludes by making some recommendations for the future desirable direction of financial liberalization and internalization in Korea. First, this thesis strongly argues that the independence of the Korean central bank should be secured a soon as possible because the independence of the central bank is a crucial element for pursuing the financial liberalization and internationalization. Second, this thesis recommends that the Korean Government should adopt a universal banking system as the optimal model of the future Korean banking system, because universal banking helps improve bank competitiveness through the diversification of business. Finally, this thesis urges the Korean Government to adopt a risk-adjusted premium system, rather than a flat rate premium scheme, in implementing the bank deposit insurance system, because the flat rate system causes “moral hazard” problems.

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Library of Congress Subject Headings

Banking law, Korea (South)

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