Lessons from the 1997 and the 2008 Crises in the Republic of Korea
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ADB EconomicsWorking Paper Series
Lessons rom the 1997 and the 2008 Crisesin the Republic o Korea
Hangyong Lee and Changyong Rhee
No. 298 | January 2012
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ADB Economics Working Paper Series No. 298
Lessons rom the 1997 and the 2008 Crises
in the Republic o Korea
Hangyong Lee and Changyong Rhee
January 2012
angyong ee is Associate rofessor at anyang niversity, and Changyong hee is Chief conomist ofthe Asian evelopment Bank. his paper was presented at the Asian conomic olicy eview Conferenceheld on 8 ctober 2011 in okyo. he authors are grateful to the editors, Chalongphob ussangkarn
discussant), ukiko ukagawa discussant), ea umulong, and seminar participants for valuablecomments. he authors accept responsibility for any errors in the paper.
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Asian evelopment Bank AB Avenue, Mandaluyong City1550 Metro Manila, hilippineswww.adb.org/economics
2011 by Asian evelopment Bankanuary 2012 155-5252ublication tock o. 1244
he views expressed in this paperare those of the authors) and do notQHFHVVDULO\UHHFWWKHYLHZVRUSROLFLHVof the Asian evelopment Bank.
he AB conomics orking aper eries is a forum for stimulating discussion and
eliciting feedback on ongoing and recently completed research and policy studies
undertaken by the Asian evelopment Bank AB) staff, consultants, or resource
persons. he series deals with key economic and development problems, particularly
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methodological issues relating to project/program economic analysis, and statistical data
and measurement. he series aims to enhance the knowledge on Asias development
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availability of statistical data and development indicators for monitoring development
effectiveness.
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journals or chapters in books. he series is maintained by the conomics and esearch
epartment.
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Contents
Abstract v
. ntroduction 1
. he irst hase oss of Credibility 2
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B. olicy esponses
. he econd hase Collapse of xports
A. inancial xcess or lobal mbalances?
B. Macroeconomic olicies 9
C. ecapitalization of Banks 10
. Corporate estructuring 12
. essons from the 199 and 2008 Crises 12
A. Comparison of Macro olicy esponses 12
B. Bilateral waps, oreign eserves,
and lobal inancial afety ets 14
C. Banking versus Capital Market evelopment 15
. inancial egulation from merging Market erspectives 1
. Conclusion 18
eferences 19
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Abstract
he economy of the epublic of orea was hit harder than anticipated by the
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the exchange rate. hen, in the second phase, the contraction of global demand
led to a collapse of exports and a sharp decline in economic activity, raising
FRQFHUQVDERXWDIXOOHGJHGQDQFLDOFULVLVLQWKHFRXQWU\7KLVSDSHUGHVFULEHV
KRZWKHJOREDOQDQFLDOFULVLVVSLOOHGRYHULQWRWKHRUHDQHFRQRP\DQGKRZWKH
JRYHUQPHQWUHVSRQGHGWRWKHQDQFLDOWXUPRLOWDOVRSURYLGHVWKHEDFNJURXQG
DQGUDWLRQDOHIRUWKHRUHDQJRYHUQPHQWVGHFLVLRQVWRDGRSWVSHFLFSROLF\measures. Based on orean experiences during the 199 and the 2008 crises,
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issues that might have regional implications for Asia.
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I. Introduction
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FULVHVWKH$VLDQQDQFLDOFULVLVDQGWKHJOREDOQDQFLDOFULVLVHDUQLQJIURP
WKHQDQFLDOFULVLVLQWKHHSXEOLFRIRUHDXSJUDGHGLWVPDFURHFRQRPLFDQG
QDQFLDOPDQDJHPHQWV\VWHPWRDYRLGPDNLQJWKHVDPHPLVWDNHVDJDLQ1 he orean
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PDUNHWVUHJXODUO\PRQLWRUHGIRUHLJQH[FKDQJHOLTXLGLW\FRQGLWLRQVDQGLQSDUWLFXODU
took foreign exchange reserve management very seriously. ue to these efforts and the
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would be limited in scale and severity. he government believed the situation in 2008 was
different and that a slowdown of the orean economy could be expected, but not a crisis.
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eventually managed to avoid the apocalypse.
n retrospect, the global crisis spilled over into the orean economy in two phases in
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E\JOREDOLQYHVWRUVUHVXOWLQJLQODUJHFDSLWDORXWRZVVLPLODUWRWKHFDVHRIQ
WKHIRXUWKTXDUWHURIWKHFDSLWDODFFRXQWGHFLWUHDFKHGELOOLRQZKLFKLV
HTXLYDOHQWWRRYHURIJURVVGRPHVWLFSURGXFW*'37KHJRYHUQPHQWLQWURGXFHG
PDQ\SROLF\PHDVXUHVWRKHOSUHVWRUHIRUHLJQLQYHVWRUVFRQGHQFHVXFKDVSURYLGLQJ
guarantees for external liabilities of orean banks, using its large foreign reserves to
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199 and 2008 to international investors. owever, these measures proved ineffective. t
was the bilateral swap arrangements with the ederal eserve that eventually stabilized
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UHVWRUHGFRQGHQFHLQWKHRUHDQHFRQRP\ZKLOHWKH6ZDVJURXQG]HURRIWKHJOREDO
crisis. owever, the positive effect of the ederal eserve bilateral swaps did not last
long.
n the second phase, the export dependence of Asian economies triggered market
pessimism, and the global crisis unavoidably spilled over to the real sectors of the Asian
economies. he expectation was that the crisis in advanced economies would hurt Asia
at least as much as the est because of its heavy reliance on exports to advanced
economies. ndeed, the epublic of orea, one of the more open economies in the1 See Lee and Rhee (2007) or lessons rom the 1997 crisis in the Republic o Korea.
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region, was vulnerable to the contraction of global demand. he year-on-year growth rate
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government, together with other advanced economies, agreed to implement a historically
unprecedented, globally coordinated expansionary policy response. ortunately, the
orean economy managed to rebound relatively fast as the global market started to
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the corporate sector after the 199 crisis.
he objectives of this paper are two-fold. irst, we describe how the orean economy
was affected by the global crisis and how the orean government responded to the
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implementing them. econd, based on orean experiences during the two crises, we
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policies in crisis management, the pros and cons of holding large foreign reserves,
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development in Asia. e believe that these are relevant not only to the epublic of orea
but also to other Asian countries.
he remainder of this paper is organized as follows. ections and describe the
causes and progress of the 2008 crisis in the epublic of orea by dividing it into two
phases. hey also describe the government policy responses during those periods.ection documents the similarities and differences in the lessons learned from the two
crises. ection concludes.
II. The First Phase: Loss o Credibility
A. Capital Outfows and Foreign Exchange Shortage
hen the subprime mortgage problems surfaced in mid-200 in the and urope, theRUHDQJRYHUQPHQWDQWLFLSDWHGWKDWWKHLPSDFWRQWKHRUHDQHFRQRP\RIWKHQDQFLDO
2 In the literature on contagion, countries are linked through two diferent channels o transmission: trade andnance. In the rst phase, the nance channel was more important in the transmission o shocks to the Koreaneconomy. The second phase, in contrast, highlighted the critical role o international trade in the propagationo adverse shocks. Gerlach and Smets (1995) and Glick and Rose (1999) stressed the international trade channelwhile Kaminsky and Reinhart (2000) and Van Rijckeghem and Weder (2001) emphasized the importance o theinternational nance channel.
2 | ADB Economics Working Paper Series No. 298
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turmoil in advanced countries would be rather limited in scale and severity. Before the
bankruptcy of ehman Brothers in mid-eptember 2008, policy makers seemed to believe
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5 months of imports of goods and services) could shield the orean economy from theQDQFLDOFKDRVLQDGYDQFHGFRXQWULHV
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collapse of ehman Brothers, the unprecedented credit crunch in the global market forced
banks in advanced economies to withdraw their funds from Asia, and in particular, from
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and resulted in sharp depreciations of the exchange rate and huge increases in credit
default swap C) premiums. he exchange rate of the orean won ) against the
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end-May. he C premium, a proxy for foreign currency funding cost, skyrocketed to
5 basis points on ctober 2 from 91 basis points in early August. he stock price also
SOXPPHWHGE\EHWZHHQ$XJXVWst and the end of ctober. uch magnitude of the
shock was way off expectations from the orean governments perspective and the bad
memory of the 199 crisis returned.
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GHFLWLQRWKHULQYHVWPHQWVZKLFKLQFOXGHWUDGHFUHGLWVORDQVERUURZLQJVFXUUHQF\
DQGGHSRVLWVDQGRWKHUVWKHULQYHVWPHQWVDFFRXQWHGIRUELOOLRQRXWRIWKHWRWDO
FDSLWDODFFRXQWGHFLWRIELOOLRQ$PRQJRWKHULQYHVWPHQWVLQSDUWLFXODUVKRUWWHUP
borrowings by deposit-taking institutions domestic banks and branches of foreign banks)
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7KHVXGGHQFDSLWDORXWRZVZHUHGHQLWHO\GXHWRFUHGLWRUEDQNVOLTXLGLW\FRQVWUDLQWV
But it does not explain why the epublic of orea was particularly hit more severely than
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economy played a pivotal role, which can be attributed to many factors. espite itssustained effort to strengthen its external sector, the epublic of oreas high dependency
on large and short-term external debts was the major culprit. he stigma from the 199
crisis was also important.
Lessons from the 1997 and the 2008 Crises in the Republic of Korea | 3
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ndeed, the rapid increase in borrowings by the banking sector, especially since 200,
resulted in large external debts and thus increased the vulnerability of the orean
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end of 2005, but it grew rapidly thanks to large-scale borrowings by domestic banks and
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1998.4 Moreover, short-term external debt, whose original maturity is less than a year,
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UHVHUYHVWKHUDWLRRIVKRUWWHUPGHEWWRUHVHUYHVLQFUHDVHGWRLQWKHrdTXDUWHURI
2008. Moreover, as of the end of 2008, total current external debt debt with remaining
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debts and long-term debts due in 2009. hus, the ratio of current external debt to foreignexchange reserves became close to 1.
o be fair, there were many reasons why the orean government thought this time
was different. n responding to concerns about external debts, the orean government
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two reasons.
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supposed to be nonobligatory debt, meaning they were not subject to any repayment
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unearned revenue) for shipbuilding contracts, which would be cleared off from thebooks at the time of delivery of the ships. xcluding these nonobligatory debts, the net
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WKHFODLPHGELOOLRQ7KHLQFUHDVHLQGHPDQGIRUKHGJLQJDJDLQVWIRUHLJQH[FKDQJH
rate risk by shipbuilding companies caused more complexity.5 Because of the large size
of the shipbuilding contracts and the long time interval between orders and delivery, the
shipbuilding companies in the epublic of orea are exposed to high exchange rate risks
and thus have a great incentive to hedge the risks. hus, they open forward contracts
with banks, and accordingly banks are left with exposures to exchange rate risks in
the future. he banks then borrow foreign currency and convert these into domestic
currency in the spot market to hedge the risks in its forward position. As the government
argued, although these forward contracts raised the current external debts, the level ofdebts would be reduced at the maturity date of the forward contracts. hen shipbuilding
3 In the 4th quarter o 2008, the total external debt slightly decreased but GDP declined more, resulting in anincrease in external debt-to-GDP ratio.
4 The external debt-to-GDP ratio was 210% in the 1st quarter o 1998.5 The orders received by Korean shipbuilding companies amounted to $61.7 billion in 2006 and $97.5 billion in
2007. The growth rates o the orders received were 97.3% and 58.0% in 2006 and 2007, respectively.
4 | ADB Economics Working Paper Series No. 298
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companies deliver foreign currency to banks with the received payment at the maturity
date, banks can repay the external debts with the proceeds. his is the reason why
the orean government argued that the external debts in the epublic of orea were
overly exaggerated. But the orean shipbuilders and banks never imagined that their
counterparties, whose credit ratings were higher than theirs, can be credit-constrainedand would fail to honor their contract.
6HFRQGDPRQJWKHVKRUWWHUPH[WHUQDOGHEWVRIELOOLRQELOOLRQZDVRZHGWR
branches of foreign banks. herefore, orean domestic banks and corporations owed only
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WKHVKRUWWHUPERUURZLQJVE\WKHEUDQFKHVRIIRUHLJQEDQNVIURPWKHLUKHDGTXDUWHUV
accounted for about half of the short-term external debts. he orean regulator never
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WKH\ZHUHEHOLHYHGWRKDYHDFFHVVWRDPSOHOLTXLGLW\IURPWKHLUKHDGTXDUWHUVRUHRYHU
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while this tendency is not found for the branches of foreign banks. ince 200, externalassets of domestic banks also started to increase, though not as much as external debts,
but external assets of branches of foreign banks virtually remained unchanged while their
H[WHUQDOGHEWVVLJQLFDQWO\LQFUHDVHGWPHDQVWKDWWKHH[WHUQDODVVHWOLDELOLW\RIIRUHLJQ
bank branches was not matched while domestic banks were advised to do so. he
orean government never thought it was a problem. o one imagined that global banks,
which had higher credit ratings than the sovereign rating of the epublic of orea, could
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should become a new important issue for Asian policy makers.
Another indicator of vulnerability that foreign investors and media focused on after the
onset of the crisis was the high loan-to-deposit ratio in the banking sector. A high loan-WRGHSRVLWUDWLRLPSOLHVWKDWEDQNVKHDYLO\UHO\RQERUURZLQJWRQDQFHGRPHVWLFOHQGLQJ
suggesting a high leverage ratio of the banking sector. he loan-to-deposit ratio reached
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n response to this concern, the orean government argued that the loan-to-deposit ratio
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of deposit Cs) are not included in deposits, thereby increasing the loan-to-deposit ratio.
7KHORDQWRGHSRVLWUDWLRLQWKHHSXEOLFRIRUHDZDVDURXQGRQFH&'VZHUH
LQFOXGHGQOLNHRWKHUFRXQWULHVWKH%DQNRIRUHD$FWFODVVLHV&'VDVGHSRVLWOLDELOLWLHV
for which banks are mandated to set provisions. urthermore, most Cs in the epublicof orea were sold at bank counters and they are essentially the same instrument as
ordinary time deposits in nature. n fact, the rollover ratio of Cs is higher than that of
deposits and the banks regarded Cs as a stable source of funding in the epublic of
6 While CDs are included in deposits under the US banks accounting system, they are separately accounted or byKorean banks.
Lessons from the 1997 and the 2008 Crises in the Republic of Korea | 5
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orea. But once the crisis occurred, individual country characteristics were not taken into
account in foreign investors perceptions.
B. Policy Responses
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memory of the 199 crisis started to haunt orean consumers and businesses. inancial
institutions and companies stopped lending to each other for fear of counterparty risks
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borrowings by domestic banks. ince most foreign governments also provided guarantees
to their banks, it was an inevitable choice to avoid reverse discrimination.
7KHJRYHUQPHQWDQGWKH%DQNRIRUHDDOVRSURYLGHGIRUHLJQH[FKDQJHOLTXLGLW\WRQDQFLDOLQVWLWXWLRQVXVLQJIRUHLJQH[FKDQJHUHVHUYHVWRVRPHH[WHQW7KHHSXEOLF
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governments less active use of foreign reserves even if it has enough holdings to cover
short-term external liabilities. owever, it is not the level of short-term liabilities but trade
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reserve holdings could limit the governments ability to respond to a shortage of trade
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to deteriorate very rapidly after the onset of the crisis. An increase in uncertainty about
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pessimistic view on the future of the orean economy by foreign investors and media,
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such as securities companies were severely hit due to their high dependence on short-
term wholesale borrowing than deposits. he Bank of orea was initially reluctant to
VXSSO\OLTXLGLW\WRQRQEDQNQDQFLDOLQVWLWXWLRQVEXWDJJUHVVLYHDQGQRQFRQYHQWLRQDO
intervention by the ederal eserve made it hard for the Bank of orea to avoidVXSSO\LQJOLTXLGLW\WRQRQEDQNQDQFLDOLQVWLWXWLRQVDVZHOO
'XULQJWKHSHULRGRIWKHUVWSKDVHRIWKHJOREDOFULVLVWKHJRYHUQPHQWVHIIRUWVSULPDULO\
IRFXVHGRQUHVWRULQJIRUHLJQLQYHVWRUVFRQGHQFHWPLJKWEHWUXHWKDWWKHHYDSRUDWHG
FRQGHQFHZDVWKHXQGHUO\LQJUHDVRQZK\WKHRUHDQHFRQRP\ZDVKLWKDUGHUWKDQ
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other emerging market economies. ome of the skepticism was very unfair and in part,
stemmed from the memories of the 199 crisis in the epublic of orea. Many investors
DJDLQTXHVWLRQHGWKHWUDQVSDUHQF\DQGFUHGLELOLW\RIJRYHUQPHQWVWDWLVWLFVDVWKH\GLGLQ
199. he government undertook efforts to improve investor relations around the world
and stressed that this time is different to foreign investors.
owever, these government investor relations efforts turned out to be ineffective,
and ironically, it was the bilateral swap arrangement with the ederal eserve on 29
ctober 2008 that eased the concerns about a currency crisis and stabilized the foreign
exchange market. he bilateral swap arrangements with the ederal eserve were
effective because they were not subject to the stigma effect. As announced by the
ederal eserve in its press release, the swap arrangement was designed to mitigate
WKHVSUHDGRIGLIFXOWLHVLQREWDLQLQJ6GROODUIXQGLQJLQIXQGDPHQWDOO\VRXQGDQGZHOO
managed economies. Brazil, the epublic of orea, Mexico, and ingapore were included
DQGLGHQWLHGDVODUJHDQGV\VWHPLFDOO\LPSRUWDQWHFRQRPLHV7KHVWLJPDHIIHFWZDV
effectively minimized as the ederal eserve swap did not single out a country, unlikethe case of the bilateral nternational Monetary und M) program. n fact, the orean
government declined the bilateral offer from the M to subscribe to its new lending
facility, the lexible Credit ine in mid-ctober, as it feared the stigma effect will worsen
LQYHVWRUVFRQGHQFHHYHQWKRXJKWKHOH[LEOH&UHGLWLQHFDUULHGOHVVHUFRQGLWLRQDOLWLHV
than its standard program loans. t was an ironical moment since it was the that
LQLWLDWHGWKLVFULVLVDQGWKHQUHVWRUHGFRQGHQFHLQWKHRUHDQHFRQRP\
Meanwhile, the epublic of orea did not avail of the Chiang Mai nitiative
Multilateralization CMM) swaps, a regional safety net among AA countries,
because the CMM is an ex postcrisis-resolution mechanism, not an ex ante crisis
prevention mechanism, and the epublic of orea was not in default situation. n addition,WKH&UHTXLUHVWKHVVXSHUYLVLRQLIPRUHWKDQRIWKHVZDSDUUDQJHPHQW
amount is used.
III. The Second Phase: Collapse o Exports
A. Financial Excess or Global Imbalances?
he swap arrangement with the ederal eserve was a turning point in the stabilization ofWKHRUHDQQDQFLDOPDUNHW%XWLWVSRVLWLYHHIIHFWGLGQRWODVWORQJURPPLGRYHPEHU
the credit crunch problems again began to worsen. his time, it was not just the epublic
RIRUHDEXWWKHZKROHRI(DVW$VLDWKDWORVWJOREDOFRQGHQFH7KHDUJXPHQWJRHVWKDW
7 Baba and Shim (2011) point out that Bank o Korea loans unded by the swap lines with the Federal Reserve weremore efective than swaps using its own oreign reserves. It suggests that a countrys own oreign reserves andintercentral bank swap arrangements are ar rom perect substitutes.
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even though the crisis started from the est, Asia would suffer at least as much due to
its heavy dependence on exports to advanced economies. Contraction of global demand
would lead to an export collapse and sharp declines in economic activity, which would
deteriorate the balance sheets of Asian corporations and banks. hen, the balance sheet
effects could trigger a banking crisis eventually. his possibility could become a realityparticularly in the epublic of orea because income-elastic capital goods and durables
account for a large part of orean exports.8
ogether with the changes in market sentiments, a subtle reinterpretation of the global
QDQFLDOFULVLVHPHUJHG$WUVWLWZDVDUJXHGWKDWWKHFULVLVZDVFDXVHGE\WKHIDLOXUHRI
UHJXODWLRQVDQGVXSHUYLVLRQRQQDQFLDOLQVWLWXWLRQV7KXVWKHLQLWLDOSROLF\UHDFWLRQVLQWKH
LQWHUQDWLRQDOFRPPXQLW\VXFKDVWKH*IRFXVHGRQVWUHQJWKHQLQJQDQFLDOUHJXODWLRQV
But from the beginning of 2009, the root cause of the global crisis started to be
challenged. ome countries asserted that the global imbalances, partly due to excessive
current account surpluses in merging Asia, allowed the funding costs to remain low for
a prolonged period of time in the and therefore fueled housing market bubbles andWKHJURZWKRIJOREDOQDQFLDOPDUNHWV7KHH[SRUWRULHQWHGVWUXFWXUHRI$VLDQHFRQRPLHV
became an easy target for this criticism.
o the orean government, this doomsday scenario for ast Asian countries was
PXFKKDUGHUWRGHIHQGQWKHUVWSKDVHRIWKHFULVLVWKHORVVRIFRQGHQFHLQWKH
orean economy was by nature, a short-term problem and stemmed from, in part,
misunderstanding and distrust of foreign investors on the transparency of the orean
government. n contrast, the concern raised in the second phase was a long-term and
structural problem.
ndeed, the orean and ast Asian economies witnessed a collapse in exports from'HFHPEHU7KH\HDURQ\HDUJURZWKUDWHRIRUHDQH[SRUWVSOXPPHWHGIURP
in the rdTXDUWHURIWRLQWKH thTXDUWHUDQGIXUWKHUSOXQJHGWR
in the 1stTXDUWHURI7KHVKDUSGURSLQH[SRUWVRIRWKHU(DVW$VLDQFRXQWULHV
LQFOXGLQJDSDQZDVHTXDOO\VKRFNLQJ9 he danger of the crash in exports leading to
UHFHVVLRQDQGWKHWKUHDWRIDEDQNLQJFULVLVEHFDPHUHDOLQ$VLDDQGUHTXLUHGQHZSROLF\
UHVSRQVHV7KHJRYHUQPHQWKDGWRDJJUHVVLYHO\UHO\RQH[SDQVLRQDU\PRQHWDU\DQGVFDO
SROLFLHVWRERRVWWKHUHDOHFRQRP\DQGWRSURWHFWWKHYXOQHUDEOHQDQFLDOVHFWRUQWKH
epublic of orea, construction, shipbuilding, and the export sectors were heavily hit and
the government needed to accelerate corporate restructuring in order to prevent further
VSLOORYHUVRIFRUSRUDWHGLIFXOWLHVWRWKHEDQNLQJVHFWRU3URWHFWLQJWKHEDQNLQJVHFWRU
IURPHPHUJLQJFUHGLWULVNVQRWXVWIURPDOLTXLGLW\FULVLVEHFDPHDQXUJHQWWDVN7KHeffectiveness of policy measures in responding to the crisis in the second phase were
8 In act, there exists a clear negative relationship between the share o durables in exports and the growth rate oexports during the ourth quarter o 2008 till the rst quarter o 2009. See Lee (2010) and Kawai and Takagi (2009).
9 In the 1st quarter o 2009, the year-on-year growth rates o exports were 40.6% or Japan and 19.7% or thePeoples Republic o China.
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largely owed to the experiences gained during the 199 crisis and the institutions that
were created to deal with it sutsumi, ones, and Cargill 2010).
B. Macroeconomic Policies
1. Monetary Policy
ust like many other central banks in the world, the Bank of orea conducted an
aggressive expansionary monetary policy by cutting the base interest rate. he base rate
ZDVORZHUHGIURPWRLQVL[VWHSVEHWZHHQFWREHUDQGHEUXDU\
7KHPRQHWDU\HDVLQJLQDQGXQGRXEWHGO\FRQWULEXWHGWRSURPRWLQJQDQFLDO
market stability and supporting economic recovery.
n addition to monetary easing, the Bank of orea broadened the eligible securities and
counterparties for open market operations. n ovember and ecember 2008, it made
bank debentures and some government agency bonds eligible for use in open marketoperations. At the same time, 12 security companies were additionally selected as the
central banks counterparties for repo operations. Moreover, in ecember 2008, the Bank
RIRUHDSDLGWKHEDQNVDRQHRIILQWHUHVWRI:ELOOLRQRQWKHLUUHTXLUHGUHVHUYH
deposits to immediately improve bank balance sheets.
2. Fiscal Policy
o invigorate the domestic economy, the orean government also carried out a massive
VFDOVWLPXOXVSDFNDJH7RJHWKHUZLWKWKHVXSSOHPHQWDU\EXGJHWSODQWKHVL]HRIVFDO
expansion in the epublic of orea turned out to be larger than those in many other
countries. According to the M 2009), the size of crisis-related discretionary measuresLQWKHHSXEOLFRIRUHDDPRXQWHGWRRI*'3LQZKLFKZDVWKHODUJHVWVFDO
expansion among 20 countries. t should be also noted that the implementation lag of
VFDOSROLF\ZDVPXFKVKRUWHULQWKHHSXEOLFRIRUHDWKDQLQDGYDQFHGHFRQRPLHV
7KHJRYHUQPHQWH[HFXWHGDERXWRIWKHFRPELQHGDQQXDORULJLQDODQGVXSSOHPHQWDU\
EXGJHWVE\WKHUVWKDOIRIWKH\HDULQRUGHUWRPD[LPL]HWKHVFDOHIIHFWVRQWKHHFRQRP\
LQDWLPHO\PDQQHU7RH[SHGLWHWKHLPSOHPHQWDWLRQRIWKHVFDOVWLPXOXVWKHRUHDQ
JRYHUQPHQWHYHQDGYDQFHGLWVQHZ\HDUDQQXDORSHUDWLRQSODQEULHQJIRUHDFKPLQLVWU\
to mid-ecember in 2009, instead of the usual schedule of late anuary to ebruary in
the new year.
$OWKRXJKWKHFHQWUDOJRYHUQPHQWGHEWLQFUHDVHGIURPOHVVWKDQRI*'3LQWRLQLWVVRXQGVFDOSRVLWLRQUHODWLYHWRRWKHUPDRUFRXQWULHVHQDEOHGWKH
HSXEOLFRIRUHDWRLPSOHPHQWDODUJHVFDOHVFDOVWLPXOXVLQUHVSRQVHWRWKHJOREDO
QDQFLDOFULVLV10QGHVLJQLQJWKHVFDOVWLPXOXVSODQWKHRUHDQJRYHUQPHQWWULHGQRW
10 Using new data on 44 countries spanning about 200 years, Reinhart and Rogof (2010) nd that the relationshipbetween government debt and real GDP growth is weak or debt/GDP ratios below a threshold o 90% o GDP.Above 90%, median growth rates all by 1%, and average growth alls considerably more.
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WRFRPPLWLUUHYHUVLEOHVFDOVSHQGLQJVXFKDVLQFUHDVLQJHQWLWOHPHQWSURJUDPVLQRUGHUWR
PDLQWDLQLWVORQJUXQVRXQGVWUXFWXUDOVFDOVWDQFH
C. Recapitalization o Banks
$IWHUWKHRQVHWRIWKHJOREDOQDQFLDOFULVLVWKHUHZDVPDVVLYHEDQNUHFDSLWDOL]DWLRQ LQ
advanced economies in the process of bailing out and bank restructuring. As economic
conditions worsened, the orean government was also pressured by the media and the
PDUNHWVWRUHFDSLWDOL]HGRPHVWLFEDQNVHYHQWKRXJKRUHDQEDQNVZHUHDGHTXDWHO\
FDSLWDOL]HGZLWKWKHLUDYHUDJH%6FDSLWDODGHTXDF\UDWLRUHJLVWHUHGDWDWWKHHQG
of 2008. he argument for further enhancing their capital basis was underpinned by
three reasons.11 irst is to prevent reverse discrimination, since all troubled banks in the
est were recapitalized or publicly owned. ithout government support, orean banks
would not be able to secure foreign funding in international markets. econd, in return for
injecting more capital, the government could encourage domestic banks to extend loans
to small and medium enterprises more aggressively to ease the credit crunch. hird,given the increasing uncertainty, preemptive policy measures were called for in order
to safeguard the soundness of the banking sector. ince loan losses resulting from a
deep recession could cause a substantial fall in bank capital, additional bank capital was
UHTXLUHGIRUDSUHFDXWLRQDU\SXUSRVH
owever, injecting public money involuntarily to normally operating private banks was not
OHJDOO\IHDVLEOHDQGHFRQRPLFDOO\GHVLUDEOH7KHLU%6UDWLRVZHUHDERYHHYHQDWWKH
end of 2009. t was unlike the case of 199 and the case of advanced economies after
the subprime crisis whose banks either de facto defaulted or were asking for voluntary
FDSLWDOLQHFWLRQ7RFLUFXPYHQWWKHVHGLIFXOWLHVWKHRUHDQJRYHUQPHQWGHFLGHGWR
create a fund that can provide banks with credit lines. n ecember 2009, the Bankecapitalization und was launched with a size of 20 trillion, which was expected to
LQFUHDVHWKHDYHUDJH%6UDWLRE\SRLQWV
igure 1 describes the structure of the Bank ecapitalization und. n voluntary capital
call basis, banks can access the Bank ecapitalization und by issuing preferred shares,
hybrid bonds, or subordinated bonds to the und whenever they need to raise capital.
n order to minimize the possible stigma effect, the government assigned a credit limit
per bank that depended on their asset sizes irrespective of their credit ratings. he
orean government expected that the und would help domestic commercial banks
UDLVHWKHLU%6FDSLWDODGHTXDF\UDWLRZKHQQHHGHG7KH%DQNHFDSLWDOL]DWLRQXQG
DLPHGWRVXSSRUWEDQNVWRPDNHORDQVPRUHDJJUHVVLYHO\UDWKHUWKDQWRSXUVXHQDQFLDOrestructuring as in the case of the troubled banks with large nonperforming loans in
advanced countries. By enhancing the soundness of the banking sector, the und was
intended to provide a safety net to prevent bank panics and encourage banks to keep on
lending during times of crises.
11 The nationwide banks accounted or 90% o deposits and loans in the domestic banking sector.
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Figure 1: Bank Recapitalization Fund
Bank o Korea(W10 trillion)
Institutional Investors(W8 trillion)
Korea Development Bank(W2 trillion)
Bank Recapitalization Fund
Securitization
Credit GuaranteeCorporationCreditenhancement
Bank A Bank B Bank DBank C
Loan
Subordinatedsecuritized
securities
Preerred shares,hybrid bonds,
subordinated bonds
Recapitalization
Source: Financial Services Commission.
7KH%DQNHFDSLWDOL]DWLRQXQGZDVQDQFHGE\D:WULOOLRQORDQH[WHQGHGE\WKH
Bank of orea along with 2 trillion from the orea evelopment Bank. he und would
securitize its investment on bank debentures and raise 8 trillion from institutional
investors. he structure of the Bank ecapitalization und was carefully designed to
minimize the concerns about the use of taxpayers money that would inevitably invite
debate on government control over the normally run private banks. hanks to the legal
DQGQDQFLDOLQVWLWXWLRQDOLQIUDVWUXFWXUHVXFKDVWKHLQWURGXFWLRQRIWKHVHFXULWL]DWLRQODZV
WKDWWKHRUHDQJRYHUQPHQWGHYHORSHGDIWHUWKHQDQFLDOFULVLVLQWKHLQWURGXFWLRQ
of the und was made possible.
n retrospect, the Bank ecapitalization und was a success story. t provided a
safeguard to banks against possible substantial losses, yet the safeguard was never
XVHGDQGGLGQRWFDXVHDQ\VFDOEXUGHQ+RZHYHUIURPDQXDU\WKHPHGLDZURQJO\
categorized the policy as a failure on the ground that banks seldom utilized the und.
WZDVGLIFXOWWRH[SODLQWKDWWKHEHVWLQVXUDQFHSROLF\LVWKHRQHWKDWLVQRWXVHG
nfortunately, the government could not stand public criticism and mandated the banks to
use the und, urging them to extend loans to small and medium enterprises and the poor.
he policy to protect the soundness of the banking system thus turned to be part of the
expansionary and redistribution policy packages.
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D. Corporate Restructuring
QHRIWKHPDQ\YLWDOOHVVRQVWKHHSXEOLFRIRUHDOHDUQHGIURPWKHQDQFLDO
FULVLVLVWKDWSUHHPSWLYHFRUSRUDWHUHVWUXFWXULQJLVFUXFLDOWRPLQLPL]HWKHFRVWRIQDQFLDO
restructuring and employment adjustment. As economic conditions deteriorated further,problems in the construction and shipbuilding industries got worse from ecember. n
IDFWHYHQEHIRUHWKHRQVHWRIWKHFULVLVPDQ\FRQVWUXFWLRQFRPSDQLHVKDGQDQFLDO
GLIFXOWLHVGXHWRWKHLURYHUH[SDQVLRQGXULQJWKHKRXVLQJERRPSHULRGV6KLSEXLOGLQJ
companies were severely hit by the rapid drop of logistics transactions due to the
FROODSVHLQZRUOGWUDGHWKHVLJQLFDQWFDSLWDOORVVGXHWRH[FKDQJHUDWHGHSUHFLDWLRQDQG
their high leverage in foreign currency-denominated debts.
owever, many troubled companies were still muddling through, barely surviving the
GLUHFRQGLWLRQV\HWKDGQRWOHGIRUEDQNUXSWF\7KH\ZHUHFUHDWLQJXQFHUWDLQWLHVLQWKH
PDUNHWDQGDEVRUELQJOLTXLGLW\IXUWKHUDJJUDYDWLQJWKHFUHGLWFUXQFK%XWXQOLNHWKHFDVH
in 199, the government could not initiate direct corporate restructuring as most of theUPVZHUHQRWRIFLDOO\QRQYLDEOHQVWHDGWKHJRYHUQPHQWKDGWRIDFLOLWDWHWKHFRUSRUDWH
UHVWUXFWXULQJSURFHVVWKURXJKFUHGLWRUQDQFLDOLQVWLWXWLRQV&UHGLWRUQDQFLDOLQVWLWXWLRQV
were asked to jointly evaluate the credit risks of corporations in the struggling industries
VXFKDVFRQVWUXFWLRQDQGVKLSEXLOGLQJ7KHFRUSRUDWLRQVZHUHFODVVLHGLQWRIRXUJURXSV
DFFRUGLQJWRWKHLUIXWXUHYLDELOLWLHVJURXS$QRUPDOJURXS%WHPSRUDU\OLTXLGLW\
VKRUWDJHJURXS&VKRZLQJVLJQVRILQVROYHQF\EXWYLDEOHDQGJURXS'QRQYLDEOH
'LIIHUHQWDFWLRQVZHUHWKHQWDNHQIRUHDFKJURXS&RUSRUDWLRQVFODVVLHGDVJURXS$DQG
JURXS%FDQUHFHLYHIXUWKHUOLTXLGLW\VXSSRUWZKLOHFRUSRUDWLRQVLQJURXS&DQGJURXS
are placed under workout programs and bankruptcy procedures, respectively. he
JRYHUQPHQWHYHQHQDFWHGWKHDVW7UDFNVHUYLFHWRH[SHGLWHWKHFODVVLFDWLRQSURFHVV
&RUSRUDWLRQVFDQYROXQWHHUWREHFODVVLHGE\WKHFUHGLWRUQDQFLDOLQVWLWXWLRQVVRWKDWWKH\FRXOGEHSODFHGXQGHUUHVWUXFWXULQJSURJUDPVRUUHFHLYHSURSHUOLTXLGLW\VXSSRUW
expeditiously. ne of the lessons that the orean government learned from the 199
crisis was the importance of coordinating creditor institutions joint decisions in order to
DYRLGGHOD\VLQFRUSRUDWHUHVWUXFWXULQJDQGWKHFRQVHTXHQWODUJHUVRFLDOFRVWV
IV. Lessons rom the 1997 and 2008 Crises
A. Comparison o Macro Policy Responses
1. Monetary Policy
he monetary policy stance taken by advanced economies in the recent global crisis was
TXLWHGLIIHUHQWIURPWKRVHSUHVFULEHGWRWKHHSXEOLFRIRUHDE\WKHGXULQJWKH
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crisis. n 199, the Bank of orea had to raise the base interest rates from approximately
WRDOPRVWDVSDUWRIWKHDGXVWPHQWSURJUDPDQ\RUHDQVWKHQEHOLHYHG
that the higher interest rates ultimately aggravated the banking crisis and led to deep
FRQWUDFWLRQVLQHFRQRPLFDFWLYLW\7KH\TXHVWLRQHGZK\DGYDQFHGHFRQRPLHVGLGQRW
adopt the same tight monetary policy in 2008.
WKHUWKLQJVEHLQJHTXDOZKHQDFXUUHQF\FULVLVLVWULJJHUHGE\DSOXPPHWLQJYDOXHRI
the currency, central banks in emerging market economies are faced with a dilemma of
monetary policy directions. f the central bank raises interest rates to encourage capital
LQRZVLWPD\EHDEOHWRGHIHQGWKHFXUUHQF\+RZHYHUKLJKHULQWHUHVWUDWHVZRXOG
deteriorate the balance sheets of banks and corporations, leading to a severe economic
downturn and possibly banking crisis. n the other hand, if the central bank lowers
interest rates, it may not be able to maintain the value of its currency.
QWKHEHOLHYHGWKDWWKHWRSSROLF\SULRULW\VKRXOGEHWRUHVWRUHFRQGHQFHLQ
the currency market in the epublic of orea and insisted that interest rates be raised toUHVXPHFDSLWDOLQRZVGHVSLWHLWVQHJDWLYHHIIHFWVRQWKHEDQNLQJDQGFRUSRUDWHVHFWRUV
n fact, the 199 crisis was regional while the 2008 crisis was truly global. o global
investor could afford to invest abroad at this time as they had to take care of their internal
SUREOHPVUVW7KXVLQOLQHZLWKPRQHWDU\HDVLQJLQRWKHUFRXQWULHVWKH%DQNRIRUHD
ZDVDEOHWRFXWLQWHUHVWUDWHVZLWKRXWDVLJQLFDQWLPSDFWRQFDSLWDORZV
arge foreign reserves and the lessons learned in 199 in foreign reserve management
played an important role in 2008. Cho 2010) argues that the most important factor that
led to different foreign reserve situations was the governments approach to the foreign
exchange market. n 199, the government misunderstood that it could, probably should,
control the foreign exchange market, and actually attempted to engineer a smooth andorderly depreciation from the beginning of 199. his approach, however, only invited
currency speculations and catalyzed reserve depletion in the end. n 2008, in contrast,
the government let the exchange rate adjust to the shock rather than waste foreign
UHVHUYHVZKLFKHYHQWXDOO\VDYHGWKHH[LELOLW\RIPRQHWDU\SROLF\
he high interest rate policy contributed to corporate restructuring after 199. n 199,
major corporations in the epublic of orea were heavily indebted and their average
GHEWWRFDSLWDOUDWLRZDVZHOODERYH6XEVWDQWLDOIRUHLJQDQGGRPHVWLFFXUUHQF\
debts made them vulnerable to a sharp depreciation in exchange rates and a sharp
increase in domestic interest rates. owever, in 2008, corporate sector debt was not a
serious risk factor. t was household liability that caused more concern.
2. Fiscal Policy
7KHH[SDQVLRQDU\VFDOVWDQFHGXULQJWKHFULVLVLVSDUDOOHOWRWKHSROLF\UHDFWLRQV
during the 199 crisis, ex postCho 2010). owever, in terms of timeliness, there is a
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noteworthy difference. ollowing the Ms recommendation, the orean government
initially maintained a balanced budget when the currency crisis was triggered in 199.
$IWHUDVHYHUHUHFHVVLRQHPHUJHG LQPLG WKHEXGJHWGHFLWZDVDOORZHGDQG
gradually expanded as the recession deepened. n the 2008 crisis, in contrast, the
RUHDQJRYHUQPHQWDQQRXQFHGVFDOH[SDQVLRQDVVRRQDVWKHJOREDOFULVLVZDVXQGHUZD\DQGFDUULHGRXWDVFDOVWLPXOXVSDFNDJHLPPHGLDWHO\$VXSSOHPHQWDU\EXGJHWRI
10 trillion was implemented in ovember 2008, and an additional supplementary budget
of 28.4 trillion was drawn up by March 2009. Considering the time lags common to
VFDOSROLF\HIIHFWVWKHHDUO\H[HFXWLRQRIVFDOVSHQGLQJLQPXVWKDYHFRQWULEXWHG
to economic stabilization. n this sense, the orean experience in 2008 demonstrated that
PRUHSURPSWH[SDQVLRQDU\VFDOSURJUDPVLQVKRXOGKDYHEHHQLPSOHPHQWHGZKHQ
they were needed most in order to offset the inevitable slowdown in economic growth.
he orean case in 199 was different from the peripheral countries in urope in 2008.
7KHHSXEOLFRIRUHDLQKDGPRUHVFDOVSDFHWRXWLOL]H
B. Bilateral Swaps, Foreign Reserves,and Global Financial Saety Nets
3UREDEO\WKHPRVWGLIFXOWOHVVRQWKDWPDQ\HPHUJLQJHFRQRPLHVLQ$VLDOHDUQHGIURPWKH
WZRFULVHVLVWRUHFRQUPWKHEHOLHIWKDWPRUHIRUHLJQH[FKDQJHUHVHUYHVLVEHWWHU$IWHU
H[SHULHQFLQJVXGGHQUHYHUVDOVRIFDSLWDORZVDQGWKHFRQVHTXHQWVRFLDOORVVLQ
Asian emerging economies started to accumulate foreign reserves aggressively. n the
SDVWVXGGHQUHYHUVDOVRIFDSLWDORZVZHUHW\SLFDOO\DVVRFLDWHGZLWKSUREOHPVLQWHUQDO
to the emerging market countries, such as mismanagement of the macroeconomy and
ZHDNQDQFLDOUHJXODWRU\V\VWHPV$FFXPXODWLQJIRUHLJQUHVHUYHVLVLQWHQGHGWREHD
SDUWRISUHFDXWLRQDU\SROLFLHVWRFRYHUXQH[SHFWHGRXWRZVLQWLPHVRIFULVHV7KH
FULVLVKRZHYHUGUDPDWLFDOO\GHPRQVWUDWHGWKDWWKHUHFRXOGEHRWKHUFDXVHVRIFDSLWDORZ
UHYHUVDOVDJDLQVWZKLFKSXUHO\GRPHVWLFVDIHJXDUGVGRQRWSURYLGHVXIFLHQWGHIHQVH
he 2008 crisis had its origins in advanced economies against the backdrop of the
VXESULPHFULVLV7KHVHHYHQWVUHVXOWHGLQWLJKWHQHGOLTXLGLW\FRQGLWLRQVLQLWLDOO\LQWKH
QDQFLDOFHQWHUVRIDGYDQFHGFRXQWULHVDQGWKHQHYHQWXDOO\LQHPHUJLQJPDUNHWV$VD
result, Asian policy makers came to the conclusion that countries need to keep even
larger amounts of foreign exchange reserves. he fact that countries with larger reserves
generally fared better in the recent crisis may have further strengthened their belief.
n particular, small open economies, which are highly dependent upon international trade
IRUWKHLUHFRQRPLFJURZWKDUHPRVWOLNHO\WRQHHGVXIFLHQWO\ODUJHIRUHLJQH[FKDQJH
UHVHUYHVWRVKLHOGWKHLUHFRQRPLHVIURPDGYHUVHH[WHUQDOVKRFNV:KHQH[WHUQDOQDQFH
LVQRORQJHUDYDLODEOHWKHFRXQWULHVFRXOGVXIIHUIURPGU\LQJXSRIWUDGHQDQFHZKLFK
in turn may lead to a severe downturn of exports and imports, and ultimately, of the
whole economy. aced with extreme uncertainties about the duration of the global crisis,
therefore, the epublic of orea could not afford to actively use its foreign exchange
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reserves, which would be its last resort to guard against constrained external trade
QDQFLQJLQWKHZRUVWFDVH
+RZHYHUKROGLQJODUJHDQGH[FHVVLYHUHVHUYHVLVTXLWHFRVWO\GRPHVWLFDOO\DQGJOREDOO\
he reserves are often held in safe assets that yield low returns, thus the opportunitycosts are not negligible. t is important to note that the costs of such policies are not
only borne by the individual countries holding them. After all, holding excess reserves in
safe assets diverts resources from other productive uses with potentially higher returns,
which could contribute to global growth. t also contributes to widening global imbalances,
LQHYLWDEO\LQWHQVLI\LQJLQWHUQDWLRQDOWUDGHFRQLFWV
o reduce the excessive precautionary motive for accumulating large reserves, countries
whose currencies are international reserves have to bear more responsibility in providing
JOREDOOLTXLGLW\LQSDUWLFXODUIRUWUDGHQDQFHDWOHDVWLQFDVHVZKHUHWKHRULJLQVRI
shocks start from the center. hat is why the epublic of orea promoted the agenda
RIVWUHQJWKHQLQJ*OREDOLQDQFLDO6DIHW\HWVLQWKH*6XPPLWLQ$WUVWWKHepublic of orea wanted to institutionalize the bilateral swap arrangements with the
HGHUDOHVHUYH(YHQWKRXJKWKH\ZHUHYHULHGWREHYHU\HIIHFWLYHGXULQJWKH
crisis, bilateral swap arrangements have limitations as credible and secure sources of
IRUHLJQFXUUHQF\OLTXLGLW\GXHWRWKHLUWHPSRUDU\DGKRFDQGSROLWLFDOQDWXUHQGHHG
most major central banks were resistant to this idea, pointing out that bilateral swaps can
cause serious moral hazard problems. As a politically feasible second best option, the
20 focused on the Ms new ex ante crisis-prevention lending toolkit by establishing
the multicountry lexible Credit ine and the recautionary Credit ine. owever, in
the future, in order to effectively reduce excess reserve accumulation by emerging
economies, the role of central banks with reserve currencies should be reexamined
DQGWKHLUFROODERUDWLRQZLWKWKHVQHZOHQGLQJIDFLOLWLHVDQGWKHUHJLRQDOQDQFLDOarrangements such as the Multilateralized Chiang Mai nitiative Mechanism should be
further explored.
C. Banking versus Capital Market Development
6LQFHWKHFULVLVZDVWULJJHUHGE\QDQFLDOH[FHVVHVLQFDSLWDOPDUNHWVLQDGYDQFHG
countries, capital market development, including investment banking, derivatives, and
securitization, suddenly became bad words. he ashington consensus and free
capitalism came under attack even in advanced economies. here were loud calls for
VWURQJHUQDQFLDOUHJXODWLRQDUHWXUQWREDVLFEDQNLQJDQGDQDYHUVLRQWRFRPSOH[
instruments in the capital market.
But these were inconsistent with the message that Asian countries heard after the
199 crisis. Back then, policy prescriptions emphasized capital market development,
GHUHJXODWLRQDQGSULYDWL]DWLRQQHRIWKHIUHTXHQWO\VXJJHVWHGXQGHUO\LQJFDXVHVRI
WKHFULVLVZDVWKHGRXEOHPLVPDWFKSUREOHPFXUUHQF\PLVPDWFKDQGPDWXULW\
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mismatch between assets and liabilities in the bank balance sheets. As the epublic of
RUHDDQGPRVWRIWKHRWKHU$VLDQFRXQWULHVKDGEDQNGRPLQDWHGQDQFLDOV\VWHPVWKH
maturity mismatch was inevitable since banks made long-term loans and funded them
by issuing short-term deposits. he 199 experience highlighted that the social costs of
such a system were unnecessarily large, and the necessity of developing capital marketsbecame an important policy task. t is better to have a bicycle rather than a monocycle for
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necessary for longer maturity options and wider risk sharing by the market.
ince the 199 crisis, Asian countries have attempted to reduce their dependence on
banks and to develop capital markets, particularly local currency bond markets. his is
demonstrated by the Asian bond market initiatives of the AA. ndeed, although
$VLDQQDQFLDOPDUNHWVDUHFXUUHQWO\VWLOOEDQNGRPLQDWHG FDSLWDOPDUNHWVDQGQRQEDQN
QDQFLDOLQVWLWXWLRQVKDYHJURZQVLJQLFDQWO\WKDQNVWRJRYHUQPHQWVHIIRUWVWRLQWURGXFH
OHJDODQGQDQFLDOLQIUDVWUXFWXUHVIRUFDSLWDOPDUNHWGHYHORSPHQWDQGWRODUJHVDYLQJV
DQGSHQVLRQIXQGVLQWKHUHJLRQRULQVWDQFHDVVHWVL]HRIQRQEDQNQDQFLDOLQVWLWXWLRQVURVHIURPRI*'3LQWRLQ6WRFNPDUNHWFDSLWDOL]DWLRQDOVR
LQFUHDVHGIURPWRRI*'3DQGWRWDOERQGVRXWVWDQGLQJJUHZIURP
WRRI*'3GXULQJWKHVDPHSHULRG7KRXJKVWLOOUHODWLYHO\VPDOOFRPSDUHGWR
DGYDQFHGHFRQRPLHVWKHPDUNHWKDVDFKLHYHGVLJQLFDQWJURZWKVLQFH
After the crisis in 2008, Asian policy makers were at a loss. hould Asia continue to
develop its capital market or should its small local banking system be regarded as a
virtue to keep? But this may not be the right lesson for Asia to take away from the global
QDQFLDOFULVLVIZHGRQRWOHDUQKRZWR\WKHUHZLOOEHQRSODQHFUDVKHV
n efforts to avoid the middle income trap, Asias industrial structure will need to becomePRUHFRPSOH[UHTXLULQJPRUHULVN\SURHFWVI$VLDGRHVQRWGHYHORSFDSLWDOPDUNHWV
banks will inevitably be responsible for supplying funds to high value-added industries
such as information technology, biotechnology, and green growth industries, which
intrinsically carry higher risks and greater uncertainties. overnments will be hard-
pressed to provide guarantees, in effect transferring the risks to the public sector. Capital
market development in the region will diversify risk concentration in banking sectors,
SURPRWHHIFLHQWULVNDOORFDWLRQDQGWKXVFDQVXSSRUWIXWXUHHFRQRPLFJURZWKHYHQ
though it intrinsically carries more risks.
n fact, efforts in the last decade to develop the capital market in the epublic of orea
contributed a lot to its recovery from the crisis in 2008. n 199, capital in the epublic ofRUHDVQDQFLDOPDUNHWZDVPRVWO\VDIHW\VHHNLQJEDQNFDSLWDO$VDUHVXOWWKHRXWEUHDN
RIWKH$VLDQQDQFLDOFULVLVOHGWRUDSLGZLWKGUDZDORIH[LVWLQJOLTXLGLW\%XWLQ
QRQEDQNQDQFLDOLQVWLWXWLRQVVXFKDVSHQVLRQIXQGVYDULDEOHLQVXUDQFHFRPSDQLHVDQG
SULYDWHHTXLW\IXQGVVHUYHGDVDSURSDJDLQVWDVXGGHQGHFOLQHLQWKHFDSLWDOPDUNHWV
GHVSLWHDPDVVLYHIRUHLJQFDSLWDOLJKWWKHUHE\PDNLQJWKHVWRFNPDUNHWVPRUHUHVLOLHQW
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Also, as explained in the previous section, the introduction of the Bank ecapitalization
und was possible because the epublic of oreas capital markets have grown
VLJQLFDQWO\VLQFH
o, should Asia revert to a bank-dominated system? At this point, there is no consensus\HWEXW$VLDQHHGVWRQGLWVRZQDQVZHU:KDWLVWKHULJKWOHYHORIFDSLWDOPDUNHW
development and how should regulation be enhanced to avoid the mistakes that
advanced economies committed, which eventually led to the global crisis of 2008?
robably, the lesson that we have to learn from the global crisis is that we need better
QDQFLDOUHJXODWLRQQRWXVWPRUHDQGVWULFWHUUHJXODWLRQIZHEOLQGO\UDLVHUHJXODWLRQ
levels on Asias banks that mainly focus on commercial banking activities, the Asian
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D. Financial Regulation rom Emerging Market Perspectives
7KHJOREDOQDQFLDOFULVLVXQGHUOLQHGWKHZHDNQHVVHVRIWKHJOREDOQDQFLDOPDUNHWDQGKDVOHGWRFDOOVIRUHQKDQFHGQDQFLDOPDUNHWUHJXODWLRQ+RZHYHU$VLDKDVJHQHUDOO\
EHHQDE\VWDQGHUUDWKHUWKDQDQDFWLYHSDUWLFLSDQWLQWKHGLVFXVVLRQVRQJOREDOQDQFLDO
UHJXODWRU\UHIRUPWRGHVLJQQHZVWDQGDUGVIRUQDQFLDOUHJXODWLRQ3DUWO\EHFDXVHLWV
QDQFLDOLQVWLWXWLRQVZHUHOHVVDIIHFWHGE\WKHJOREDOFULVLVDQGLWVFDSLWDOPDUNHWVZHUH
less developed, the current discussions on most of the topical global issues such as
UHJXODWLQJV\VWHPLFDOO\LPSRUWDQWQDQFLDOLQVWLWXWLRQVDQGUDLVLQJFDSLWDODGHTXDFLHVGR
not seem currently relevant for them.
owever, Asia must decide to more actively engage in the discussions for two reasons.
irst, what is decided today will affect the region in the next decade or so. econd, even
DWWKLVVWDJHWKHUHDUHPDQ\LPSRUWDQWXQLTXHDVSHFWVWKDWKDYHDODUJHULPSDFWRQAsia, but may not be properly discussed by advanced economies. ne example is how
to regulate the foreign exchange liabilities of branches of foreign banks in Asia. his
LVUHODWHGWRWKHFURVVERUGHUUHVROXWLRQPHFKDQLVPRIV\VWHPLFDOO\LPSRUWDQWQDQFLDO
institutions. Another example is the accounting issue due to exchange rate volatility.
he use of historical value versus market value accounting is one of the hot issues in
redesigning international accounting standards, but the current focus in international
discussions is more on stock price volatility. n Asia, however, volatility due to exchange
rate changes can be more devastating in some countries. he regions experience during
the 199 crisis and the epublic of oreas experience during the recent global crisis are
other key examples of why Asian policy makers have to pay attention to this issue.
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V. Conclusion
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crisis and how the government responded to the crisis. he paper also highlights many
GLIIHUHQFHVLQWKHRUHDQVLWXDWLRQLQDQGDQGWKHFRQVHTXHQWLPSOLFDWLRQVRQFULVLVPDQDJHPHQWLQWHUPVRIPDFURHFRQRPLFSROLFLHVQDQFLDOSROLFLHVDQGFRUSRUDWH
restructuring. Based on the orean experiences during the two crises, the paper raised
several policy issues that might have regional implications for Asia. e argue that the role
RIFHQWUDOEDQNVZLWKUHVHUYHFXUUHQFLHVVKRXOGEHUHH[DPLQHGDQGWKDWUHJLRQDOQDQFLDO
safety nets such as the Multilateralized Chiang Mai nitiative should be strengthened. e
also believe that Asia needs to continue its capital market development plans such as the
$VLDQ%RQGDUNHWVQLWLDWLYH LQRUGHUWRXSJUDGH LWVQDQFLDOPDUNHWVGHVSLWHWKHUHFHQW
JOREDOWUHQGWRZDUGVWURQJHUQDQFLDOUHJXODWLRQRQFDSLWDOPDUNHWVDIWHUWKHVXESULPH
FULVLV:HVXJJHVWWKDW$VLDVKRXOGDFWLYHO\SDUWLFLSDWHLQJOREDOGLVFXVVLRQVRQQDQFLDO
regulations, incorporate regional perspectives in global rule-setting, and emphasize the
EDODQFHGDSSURDFKEHWZHHQVWDELOLW\DQGJURZWKRIQDQFLDOPDUNHWVDQGLQGXVWULHVFRQVLGHULQJWKHVWLOOXQGHUGHYHORSHGVWDJHRI$VLDQQDQFLDOPDUNHWV
uring the 199 crisis, Asia was devastated and had to comply with estern policy
prescriptions, even if it was not in total agreement with their recommendations. n
the recent global crisis, Asia was relatively immune. ndeed, the region led the global
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SRVLWLRQWRTXHVWLRQWKHWUDGLWLRQDOZLVGRPLPSRVHGRQWKHPE\DGYDQFHGHFRQRPLHV
in the past. n fact, advanced economies themselves did not use the old prescriptions
signed off to Asia in 199.
he positive side to this is that Asia can contribute to global knowledge from its
own experience during the two crises. owever, Asia has not developed an Asian
consensus yet. his paper suggests some areas where Asia needs to develop its own
stance, whether it is consistent with old wisdom or not, in many issues such as crisis
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regulation. n 199, Asia adopted voluntarily and involuntarily the estern textbook. After
2008, it recognized the problems of that prescription. But we still do not know which part
is right and which part we have to abandon as we have never written our own textbook.
erhaps now is the right time to do so.
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About the PaperHangyong Lee and Changyong Rhee describe how the 2008 global crisis spilled overto the economy of the Republic of Korea and how the government responded to thefinancial turmoil. They also provide the background and rationale for the governmentsdecisions to adopt specific policy measures. Based on Korean experiences during the1997 and 2008 crises, they document the lessons learned and identify several important
policy issues that might have regional implications for Asia.
About the Asian Development BankADBs vision is an Asia and Pacific region free of poverty. Its mission is to help itsdeveloping member countries reduce poverty and improve the quality of life of theirpeople. Despite the regions many successes, it remains home to two-thirds of theworlds poor: 1.8 billion people who live on less than $2 a day, with 903 millionstruggling on less than $1.25 a day. ADB is committed to reducing poverty throughinclusive economic growth, environmentally sustainable growth, and regionalintegration.
Based in Manila, ADB is owned by 67 members, including 48 from the region. Its
main instruments for helping its developing member countries are policy dialogue, loans,equity investments, guarantees, grants, and technical assistance.
Asian Development Bank6 ADB Avenue, Mandaluyong City1550 Metro Manila, Philippineswww.adb.org/economicsISSN: 1655-5252Publication Stock No. WPS124433
January 2012
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