south korea - analyzing its financial system from a functional perspective

8/2/2019 South Korea - Analyzing its Financial System from a Functional Perspective

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SOUTH KOREA:Analyzing its Financial System

from a functional perspective

Ashish Baghel

Sandeep K Biswal


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Profile

Area: 100032 sq kms

Population: 50.5 million

GDP: $1.549 trillion (PPP)

Growth rate: 3.62% (real)

Exchange rate: 1107.3 Won per USD Inflation: 4%

Interest rate: 3.25%

Import: $524.4 billion

Export: $556.5 billion

Forex reserve: $306.4 billion

Market Cap: 107.37 % of GDP (2010)

Unemployment rate: 3.75%


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Functions

Six basic or core functions performed by the financial system:

1. To provide ways of clearing and settling payments to facilitatetrade.

2. To provide a mechanism for the pooling of resources and for thesubdividing of shares in various enterprises.

3. To provide ways to transfer economic resources through time,across borders, and among industries.

4. To provide ways of managing risk.

5. To provide price information to help coordinate decentralizeddecision-making in various sectors of the economy.

6. To provide ways of dealing with the incentive problems createdwhen one party to a transaction has information that the otherparty does not or when one party acts as agent for another.


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1. Payment System

The payment systems of Korea consist of one large-valuepayment system (LVPS) and several retail payment systems(RPSs). The LVPS is owned and operated by the Bank ofKorea (BOK). Most of the RPSs are owned and operated bythe Korea Financial Telecommunications and ClearingsInstitute (KFTC).

LVPS: The BOK began operation of its BOK-Wire+ system inApril 2009, adding a hybrid settlement function to theexisting real-time gross settlement (RTGS) system, BOK-Wire. This improvement was aimed at reducingparticipants liquidity burdens.

RPS: The most prominent are the Electronic BankingSystem, the Cheque Clearing System, the InterbankRemittance System and the ATM Network.


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Securities transactions are matched, confirmed,cleared and settled mainly by the Korea Exchange(KRX) and Korea Securities Depository (KSD). TheKRX operates two stock exchanges (the KOSPI andKOSDAQ Markets) and one futures exchange (the

Derivatives Market), and is also the centralcounterparty (CCP) of the securities markets itoperates.

The final settlement of securities occurs no later

than T+2 (ie T+2 for stocks and T or T+1 forbonds).


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Item Name Unit 2007 2008 2009 2010 2011

Cleared (Number)Thousand

bills799,671.00 740,234.00 641,266.00 512,155.00 413,777.00

Cleared (Value) Bil.Won 4,360,723.20 5,121,637.70 5,399,803.30 5,811,846.20 5,301,060.90

Daily Av. Clearings

(Value)Bil.Won 17,674.00 20,644.00 21,251.00 23,062.90 21,289.40

Dishonored (Value) Bil.Won 4,860.60 7,638.20 7,578.90 8,479.70 5,688.10Dishonored Ratio

(Number)% 0.11 0.15 0.14 0.15 0.11

Cheque Clearing System

Item Name Unit 2007 2008 2009 2010 2011

Direct Debits Bil.Won 59,363.70 63,026.60 63,681.00 71,797.60 81,750.70

Direct Credit Ttansfers Bil.Won 26,463.70 25,668.50 28,271.40 34,182.60 35,979.10

Bank GIRO System


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Item Name Unit 2007 2008 2009 2010 2011

Domestic currency

funds transferBil.Won 34,902,521 40,713,301 42,549,511 47,428,354 48,277,668

Treasury funds transfer Bil.Won 743,987 922,148 904,214 971,582 1,097,360

BOK loans and

discounts settlementBil.Won 177,733 162,285 240,598 224,764 185,961

Government and public

bonds settlementBil.Won 1,002,369 1,229,036 2,281,717 1,938,377 1,933,775

Foreign currency funds

transferMil USD 61,587 64,590 80,104 71,458 72,768

BOK Wire System


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EFT/POS: Elec. Fund Transfer at the point ofsale

CMS: Cash Management Service

Item Name Unit 2007 2008 2009 2010 2011

Interbank Funds Transfer

VolumeBil.Won 812,205 812,556 803,909 814,498 866,483

Shared CD/ATM NerworkVolume

Bil.Won 240,181 243,519 242,531 256,668 274,663

Electronic Banking

Netwok VolumeBil.Won 6,085,677 7,172,981 8,287,929 9,551,737 11,141,076

EFT/POS system Volume Bil.Won 79 58 45 39 34

CMS system Volume Bil.Won 101,922 109,952 102,108 107,920 116,540

Bank line Volume Bil.Won 1,577 1,379 1,143 1,034 1,049

Other Payment Systems


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2007 2008 2009 2010 2011

LVPS 31,743,648 36,746,621 37,902,037 42,560,254 43,384,494

General Transfer 22,132,416 27,660,333 28,451,278 25,212,380 24,500,629

Call Transaction System 7,436,741 6,137,462 5,598,200 12,011,686 11,429,303DVP System 1,978,558 2,587,378 3,358,958 4,794,734 6,883,761

PVP System (CLS) 195,933 361,447 493,601 541,454 570,801

RPS 11,782,771 13,652,423 15,021,186 16,692,263 17,863,048

Check Clearing System 4,388,977 5,153,210 5,421,195 5,780,959 5,261,942Giro System 146,442 153,765 157,532 174,074 195,913

Interbank Shared Networks 7,247,352 8,345,448 9,442,460 10,737,230 12,405,193

Electronic Banking System 6,085,677 7,172,981 8,287,929 9,551,737 11,141,076

Interbank Funds Transfer (IFT) System 812,205 812,556 803,909 814,498 866,483

CD/ATM System 240,181 243,519 242,531 256,668 274,663CMS System 101,922 109,952 102,108 107,920 116,540

Local Banks Shared System 1,577 1,379 1,143 1,034 1,049

E-Commerce Payment System 5,712 5,003 4,793 5,334 5,348

EFT/POS System 79 57 45 39 34


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2. Economies of Pooling

A financial system provides a mechanism for the pooling offunds to undertake large-scale indivisible enterprise or forthe subdividing of shares in enterprises to facilitatediversification. In modern economies, the minimuminvestment required to run a business is often beyond the

means of an individual or even several individuals. From the perspective of firms raising capital, the financial

system provides a variety of mechanisms (such as securitymarkets and financial intermediaries) through whichindividual households can pool (or aggregate) their wealth

into larger amounts of capital for use by business firms. From the perspective of individual savers, the financial

system provides opportunities for households to participatein large indivisible investments.


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Item Name 2007 2008 2009 2010 2011

Total Number of Corporate

Securities Offerings1,591 1,629 2,305 2,145 2,036

Total Value of Corporate

Securities Offerings62,391 57,838 95,824 93,913 114,559

Total Number of Rights

Offerings of Listed Co.66 42 61 96 67

Total Value of Rights Offerings

of Listed Co.2,288 717 1,674 4,304 2,439

Total Number of Public

Offerings New Issues337 227 316 158 97

Total Value of Public Offerings

New Issues 14,955 4,363 9,942 6,035 10,463

Total Number of Public

Offerings Outstanding Shares1,188 1,373 1,928 1,891 1,692

Total Value of Public Offerings

Outstanding Shares45,260 52,759 84,208 83,574 101,658

Proceeds From Corporate Securities Offerings (Bil Won)


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Item Name 2007 2008 2009 2010 2011

Treasury Bonds 48,259 52,054 84,976 77,721 81,306

National Housing

Bonds8,550 8,473 9,544 8,939 10,002

Industrial Finance

Debentures27,150 26,519 23,333 9,176 15,025

Corporate Bonds 45,260 52,759 84,208 83,574 101,658

Monetary Stabilization

Bonds156,690 151,390 375,460 248,150 197,140

Seoul Metropolitan

Subway Bonds553 360 633 612 621

Amounts of Principal Government, Public and Corporate Bonds Issued (Bil Won)


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3. Transfer of resources across time

and space

A well-developed, smooth-functioning financialsystem facilitates the efficient life-cycleallocations of household consumption and theefficient allocation of physical capital to its most

productive use in the business sector. Intermediaries that serve this function include

banks and thrifts in financing corporateinvestments and housing, insurance companies

and pension funds in financing corporateinvestments and paying retirement annuities, andmutual funds that invest in virtually all sectors.


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Surplus-Deficit interaction

Surplus Unit Deficit Unit

Intermediation

Disintermediation


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Composition of Gross National Savings


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GNS - GDS

Item Name 2005 2006 2007 2008 2009 2010

Gross National Saving 31.95 30.75 30.77 30.72 30.31 31.88

Corporates 15.24 15.02 15.82 16.92 18.14

Households 6.90 5.72 4.34 4.44 5.36

Government 9.81 10.01 10.61 9.36 6.82 6.78

Gross Domestic Saving 32.34 31.02 30.92 29.99 29.93 32.17

GNS as % of GDP (at current prices)


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Sources of credit for households

Item Name 2005 2006 2007 2008 2009 2010 2011

Banks 56.19 57.14 54.66 53.61 52.53 50.95 49.94

Non-Bank DepositoryCorporations

16.14 16.03 16.60 17.58 18.12 19.42 20.47

Other Financial

Corporations22.52 21.63 23.44 23.30 24.01 23.81 23.60

NBFCs 5.15 5.20 5.30 5.51 5.35 5.83 6.00

Household borrowings (% of total)

NBDC:Mutual Savings Banks, Credit Unions, Credit Co-op Societies, etc.

OFC: Insurance, Pension Funds, Public Financial Institutions, etc.


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Distribution of household savings by

asset type


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Item Name 2007 2008 2009 2010 2011

Financial Corporations 50.38 57.44 35.58 44.07 47.17

Government 3.49 1.77 12.28 8.55 6.55

Non-financial

Corporations24.43 55.39 36.04 25.27 27.42

Households 10.14 16.55 14.61 17.59 16.18

Rest of the World 11.57 -31.15 1.48 4.51 2.68

Source of Funds

Item Name 2007 2008 2009 2010 2011

Financial Corporations 51.16 61.31 41.97 47.35 50.53

Government 9.25 9.13 9.96 11.28 10.74

Non-financial

Corporations14.76 31.36 22.61 13.08 14.92

Households 15.90 30.28 34.40 30.60 28.16

Rest of the World 8.93 -32.08 -8.94 -2.31 -4.36

Use of Funds


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Debt Instruments: Bank Loans

Item Name 2007 2008 2009 2011

Total 803,724 917,110 953,505 1,063,193

All Industry 440,043 528,537 544,001 607,336

Households 363,681 388,573 409,504 455,857

Bank Loans (Bil Won)

Item Name Item Name 2007 2008 2009 2010

All Banks 0.90 1.50 1.00 1.10

Domestic

Commercial Banks1.00 1.60 1.00 1.10

Specialized Banks 0.70 1.30 0.90 1.10

All Banks 0.60 0.60 0.50 0.60

Domestic

Commercial Banks0.60 0.60 0.50 0.60

Specialized Banks 0.50 0.60 0.50 0.60

Loans to

Enterprise

Loans to

Households

Delinquency Ratio (%)


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Bonds

Item Name Item Name 2007 2008 2009 2010 2011

Public Bonds 736,059,736 767,237,317 759,677,009 848,032,362 901,166,796

Corporate Bonds 94,777,209 97,164,972 254,096,969 270,157,986 301,421,488

Public Bonds 353,896,562 374,644,644 499,624,016 579,314,864 808,821,272

Corporate Bonds 1,835,715 1,698,912 4,758,339 4,952,255 6,316,784

Public Bonds 348,128,045 370,762,261 505,507,493 580,151,542 818,423,643

Corporate Bonds 3,266,885 3,222,349 4,686,720 5,053,876 6,393,360

Listed Amount

Trading Volume

Trading Value

Trades of Bonds (Mil Won)


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Equities

Item Name 2007 2008 2009 2010 2011

Rights Offerings of

Listed Co.2,288 717 1,674 4,304 2,439

Public Offerings New

Issues14,955 4,363 9,942 6,035 10,463

Equities offerings (Bil Won)

Item Name 2007 2008 2009 2010 2011

No. of Listed Cos. 745 763 770 777 791

No. of Listed Issues 906 926 925 927 938

No. of Listed Shares ('000) 28,238,125 29,072,490 31,377,118 33,706,255 35,402,934

Total Market Capitalzation (Mil Won) 951,900,447 576,887,540 887,935,183 1,141,885,458 1,041,999,162

Weighted Average of Div. Yield 1.40 2.60 1.20 1.10 1.50


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S. Korea: Net capital exporter

Item Name 2007 2008 2009 2010 2011

Current Account 21,770 3,198 32,791 29,394 26,505

Capital Account -23,877 -1,154 -34,651 -27,479 -31,965

Errors and Omissions2,107 -2,044 1,861 -1,915 5,459

BoP (Mil USD)


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4. Allocation of risk

A well-functioning financial system facilitates the efficientallocation of risk-bearing. Through often elaborate financialsecurities and through private sector and governmentintermediaries, the financial system provides risk-poolingand risk-sharing opportunities for both households and

business firms. It facilitates efficient life-cycle risk-bearing by households,

and it allows for the separation of the providers of workingcapital for real investments (i.e., in personnel, plant, andequipment) from the providers of risk capital who bear the

financial risk of those investments. Hedging, diversification and insuring are prominent ways

though which allocation of risk function in performed in afinancial system.


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Insurance

Item Name 2005 2006 2007 2008 2009 2010

Total Gross Premium 87928.13 105168.32 119769.29 105897.00 99143.39 120869.29

Density 1747.10 2089.21 2369.82 2076.12 1889.64 2247.84

Penetration 10.71 11.36 11.84 10.84 11.04 11.19

Share of Life Insurance 68.27 66.39 66.28 63.82 62.05 59.57

Share of Foreign companies 18.33 19.15 21.26 22.08 20.14 19.66


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Hedging

Item Name 12/2011 09/2011 06/2011 03/2011 12/2010

Equity Securities 114,573,626 86,940,895 48,534,615 168,333,759 120,440,018

Debt Securities 7,099,228,443 4,428,440,442 2,158,775,727 7,778,092,972 5,910,803,241

Derivatives Total 9,346,583,851 7,266,943,927 3,477,276,880 12,518,278,675 9,807,564,825

Futures 8,668,572,941 6,723,593,669 3,192,961,277 11,772,651,485 9,225,804,591

Option 181,413,290 138,379,235 69,790,068 197,325,752 166,917,980Other Exchange-Traded Derivatives 0 27,553,784 24,316,279 20,181,860 10,525,853

Sum of Exchange-Traded Derivatives 8,849,986,231 6,889,526,687 3,287,067,623 11,990,159,097 9,403,248,425

Forward 119,549,006 92,087,822 33,905,757 93,318,135 62,442,684

Option 165,889,926 117,017,188 63,506,184 182,061,780 146,086,034

Swap 210,061,586 167,492,395 90,964,709 250,469,523 194,394,222

Other Over-the-Counter Derivatives 1,097,101 819,834 1,832,607 2,270,141 1,393,459

Sum of Over-the Counter Derivatives 496,597,620 377,417,240 190,209,257 528,119,578 404,316,400

Derivatives Relative to Equity 82 84 72 74 81

Derivatives Relative to Debt 1.32 1.64 1.61 1.61 1.66

Securities and Derivatives Transaction (Mil Won)


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5. Informational role of prices

A financial system provides price information thathelps coordinate decentralized decision-making invarious sectors of the economy. The manifest functionof financial markets is to allow individuals and

businesses to trade financial assets. An additionallatent function of the capital market is to provideinformation useful for decision-making.

Interest rates and security prices are information usedby households or their agents in making their

consumption-saving decisions and in choosing theportfolio allocations of their wealth. These same pricesprovide important signals to managers of firms in theirselection of investment projects and financings.


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Various Bond Yields


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Item Name 2007 2008 2009 2010 2011

Growth rate of GDP 5.10 2.30 0.30 6.20 3.60

Producer price(% change) 1.40 8.60 -0.20 3.80 6.10

Consumer price(%change)

2.50 4.70 2.80 3.00 4.00

Core inflation(% change) 2.40 4.20 3.60 1.80 3.20

KOSPI 1,712.50 1,529.50 1,429.00 1,765.00 1,983.40

Exchange Rate per USD 929.20 1,103.40 1,276.40 1,156.00 1,108.00

Credit Risk of 2011 1 2011 2 2011 3 2011 4 2012 1

Large Corporations -3.00 -6.00 -3.00 3.00 6.00

Small and Medium-

sized Enterprises6.00 16.00 9.00 13.00 28.00

General Households 9.00 9.00 3.00 6.00 13.00


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6. Managerial incentive and decision

making

A financial system provides ways to deal with the incentiveproblems when one party to a financial transaction hasinformation that the other party does not, or when oneparty is an agent for another.

A well-functioning financial system reduces the incentiveproblems that make financial contracting difficult andcostly. These problems arise because parties to contractscannot easily observe or control one another, and becausecontractual enforcement mechanisms are not costless toinvoke.

These contractual frictions take a variety of forms: moralhazard, adverse selection, and information asymmetries.


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Chaebol: Family controlled business

groups One of the fundamental causes of the Korean financial

crisis of 1997 widespread corporate value destructionamong the Chaebol.

This system pursues growth and market share at the

cost of profitability and shareholder value. Low cash flow rights (20%) but very high controlling

rights (70%), by way of complex cross holdings amongaffiliated firms.

A large disparity between these two rights is a warningsignal. It indicates the strength of the controllingshareholders incentive to transfer wealth fromminority shareholders.


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Chaebol: Too big to fail

Prior to the crisis, only around 27% of the

companies created or maintained shareholders

value.

Amount of bonus depends largely on rank andseniority rather than performance.

While Samsung owned ChoongAng, The

Federation of Korean Industries, a strong lobbygroup for Chaebol owned Korean Economic Daily,

two most widely circulated news dailies.


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Turnaround factors

One major contributor to improved

governance has been the lowering of barriers

to foreign ownership in Korean companies.

13% in 1996 to 37% in 2006.

In addition to growing pressure for better

governance from foreign investors, grassroot

reform movements headed by newly formedNGOs have sprung up.


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Item Name BoP (Mil USD) CPI Discount Rate

Exchange Rate

(per USD) Savings Ratio

Unemployment

Rate

GDP Growth

Rate

Korea 29,394 101.00 1.20 1,134.80 32.00 3.70 6.20

U.S.A -470,902 219.20 0.50 1.00 12.50 9.60 3.00

Japan 195,755 99.60 0.30 81.40 5.10 4.40

China 305,400 104.60 1.80 6.60 4.10 10.40

United Kingdom* -75,229 116.80 0.50 1.60 11.90 7.80 2.10

E.M.U -55,960 114.30 1.00 0.70 10.10 1.80

Germany 187,943 109.60 1.20 0.70 23.10 7.10 3.70

Taiwan 39,872 105.90 0.50 30.40 31.60 5.20 10.70

Cross Country Comparison (2010)


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Thank You

Sources: ECOS Economic Statistics System

KOSIS Korea Statistical Information System

FSIS Financial Statistics Information System

Statextracts Organization for Economic Co-operation and Development SDBS Statistical Database System Asian Development Bank

south korea - analyzing its financial system from a functional perspective

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